Earnings Call Transcript - MU Q1 2024

Operator, Operator

Thank you for standing by, and welcome to Micron Technology's First Quarter 2024 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Operator instructions. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Satya Kumar, Investor Relations. Please go ahead.

Satya Kumar, Investor Relations

Thank you, and welcome to Micron Technology's Fiscal First Quarter 2024 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 can 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 X at MicronTech. As a reminder, the matters we are discussing today include forward-looking statements regarding market demand and supply, market trends and drivers, our expected results and guidance, and other matters. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer you to the documents we file with the SEC, including our most recent Form 10-K and upcoming 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 to conform these statements to actual results. I'll now turn the call over to Sanjay.

Sanjay Mehrotra, President and CEO

Thank you, Satya. Good afternoon, everyone. In fiscal Q1, Micron delivered revenue, gross margin, and EPS above the high-end of the guidance ranges we provided at the last earnings call, reflecting Micron's strong execution combined with improved pricing. We are in the very early stages of a multi-year growth phase catalyzed and driven by generative AI, and this disruptive technology will eventually transform every aspect of business and society. Memory is at the heart of GPU-enabled AI servers, and we are already seeing strong demand driven by early deployment of AI solutions, which will only accelerate over time. Micron is well positioned to leverage this growth, having executed the most robust set of new technology and product introductions in our 45-year history. The improved supply-demand environment in the current calendar quarter gives us additional confidence in the trajectory of our business. We have driven a strong inflection in industry pricing this calendar quarter, which will allow us to benefit from higher prices earlier in our fiscal year compared to our prior plans. We intend to stay very disciplined with our supply and capacity investments as our pricing is still far from levels associated with necessary ROI. We expect our pricing to continue to strengthen through the course of calendar 2024. We expect improved margins and financial performance throughout 2024 and record industry TAM in calendar 2025. We have made significant progress with our industry-leading technology roadmap. Micron is at the forefront of ramping the industry's most advanced technology nodes in both DRAM and NAND. The vast majority of our bits are on leading-edge nodes: 1-alpha and 1-beta in DRAM and 176-layer and 232-layer in NAND. As previously stated, both 1-beta DRAM and 232-layer NAND nodes have reached mature yields faster than the prior nodes. We expect fiscal 2024 front-end cost reductions to track in line with our long-term expectations of mid- to high-single-digits in DRAM and low-teens in NAND. We are on track for volume production in 1-gamma DRAM using EUV in calendar 2025. Now turning to our end markets. Inventories for memory and storage are at or near normal levels for most customers across PC, mobile, auto, and industrial end markets. Consequently, the demand that we see from customers in these markets is closer to their end-market demand. Data center customer inventory of memory and storage is improving, and we continue to expect customer inventory to approach normal levels in this market sometime in the first half of calendar 2024. Across our data center and PC markets, we are ahead of the industry in our transition to D5 and we expect to cross over our D5 volume from D4 in early calendar 2024. Generative AI use cases are expanding from the data center to the edge, with several recent announcements of AI-enabled PCs, smartphones with on-device AI capabilities, as well as embedded AI in the auto and industrial end markets. The proliferation of on-device AI at the edge offers a host of benefits such as enhanced privacy, lower latency, improved performance, greater personalization and competitive costs for a wide range of use cases, from content creation to productivity. We see a rapid evolution in our customer product roadmaps enabling and leveraging this AI market expansion, which in turn is driving higher capacity, lower power, and increased performance requirements for memory and storage. We expect to increasingly benefit from content growth as these trends in AI gain momentum. In data center, total server unit shipments are expected to increase by a mid-single-digit percentage in calendar 2024, following a year of low-double-digit percentage decline in calendar 2023. Demand for AI servers has been strong as data center infrastructure operators shift budgets from traditional servers to more content-rich AI servers. Also, in response to AI-driven data center demand, several customers have announced aggressive roadmaps for new GPU and AI accelerator ASIC product introductions with increasing requirements for HBM capacity, performance, and power. Micron is addressing these exciting opportunities brought on by the proliferation of AI with an industry-leading portfolio of data center solutions, including HBM3E, D5, several types of high-capacity server memory modules, LPDRAM, and data center SSDs. We have received very positive customer feedback on our HBM3E, which has approximately 10% better performance and about 30% lower power consumption compared to competitive offerings of HBM3E. In fiscal Q1, we shipped samples of HBM3E to a number of key partners and are making good progress in our qualifications. Micron is in the final stages of qualifying our industry-leading HBM3E to be used in NVIDIA's next-generation Grace Hopper GH200 and H200 platforms. In addition, our LP5x is being used for the Grace CPU, driving a new use case for LP memory in the data center for accelerated computing. We are on track to begin our HBM3E volume production ramp in early calendar 2024 and to generate several hundred millions of dollars of HBM revenue in fiscal 2024. We expect continued HBM revenue growth in 2025, and we continue to expect that our HBM market share will match our overall DRAM bit share sometime in calendar 2025. Last month we introduced the industry's fastest and lowest latency 128GB high-capacity modules built on our industry-leading 1-beta node and using a monolithic die, which does not require 3D stacking and thus enables a simpler process flow for assembly. Featuring best-in-class performance, our solution will support customers' memory-intensive data center workloads today and into the future. Additionally, leading CPU vendors have confirmed validation support for our monolithic-die-based 128GB modules on existing platforms released in 2022 and 2023 as well as upcoming new platforms. This ensures that our offering has a significant TAM that we can address immediately. We expect volume production to start next quarter, with significant growth in fiscal 2025 and beyond. A testament to our solid execution and superior offerings, Micron ended the third calendar quarter with record-high revenue share in data center SSDs based on independent industry assessments. This marks the second consecutive quarter of record revenue share in data center SSDs, and we look to build on this revenue momentum through fiscal 2024. In PCs, we forecast unit volumes to grow by a low- to mid-single-digit percentage in calendar 2024, after two years of double-digit percentage PC unit volume declines. We expect PC OEMs to start ramping AI-on-device PCs in the second half of calendar 2024, with an additional capacity of 4GB to 8GB of DRAM per unit, and we see average SSD capacities increasing as well. We also completed qualifications for our industry-leading 1-beta-based 16GB D5 at several PC customers in fiscal Q1. In fiscal Q1, we achieved record bit shipments in both client and consumer SSDs, as customers adopted our industry-leading solutions. Building upon our QLC leadership, our client SSD QLC bit shipments also reached a new record in fiscal Q1. QLC now comprises the majority of our bit shipment mix for both client and consumer SSD. This month, we also announced that we are shipping the Micron 3500 NVMe SSD, the world's first performance client SSD with 200-plus layer NAND. Built on our industry-leading 232-layer NAND, the 3500 will help our customers handle demanding workloads for business applications, scientific computing, gaming, and content creation. In mobile, smartphone demand is showing signs of recovery, and we forecast smartphone unit shipments to grow modestly in calendar 2024. Leading chipset vendors have announced powerful new products supporting on-device large language models with 10 billion or more parameters. We expect smartphone OEMs to start ramping AI-enabled smartphones in 2024, with an additional capacity of 4GB to 8GB of DRAM per unit. Longer-term, many popular generative AI applications will be on smartphones, and our leading product portfolio is poised to capture this memory and storage opportunity. Our new industry-leading 9.6Gbps LP5x will address the bandwidth requirements of the most demanding AI-based mobile applications. We also began sampling our next-generation 232-layer NAND UFS 3.1 and our 1-beta DRAM 24Gb LP5x to support the memory needs of emerging AI foundational models. Last, I'll cover auto and industrial, which are end markets we value as part of the portfolio due to their relatively more predictable revenue and profitability and long-term growth opportunity. The proliferation of AI at the edge continues to increase in the industrial and auto markets. For memory, this translates to content growth in a host of AI-enabled edge devices. For example, AI-enabled industrial PCs have 3x to 5x more memory than standard PCs and there is an 8x increase in memory content for AI-enabled edge video security cameras compared to standard non-AI video cameras. Our automotive business achieved a new quarterly revenue record in fiscal Q1, driven by better demand and volume ramps of new vehicle platforms. As a leader in automotive market share and quality, Micron will benefit from memory and storage content growth as automotive OEMs expand features in ADAS and in-cabin applications. Our automotive design win trajectory remains strong. Our industrial business saw double-digit sequential growth in fiscal Q1 as the industrial market continued to recover. Inventory levels for memory and storage continued to improve at distribution partners and are at normal levels at the majority of our customers. Industry fundamentals remain strong for memory and storage as the widespread adoption of IoT, AI, and machine learning solutions creates new growth opportunities for us. Now turning to our market outlook, starting with demand. We expect calendar 2023 DRAM bit demand to grow in the high-single-digit percentage range, up from prior expectations for mid-single-digit growth. In NAND, we continue to expect calendar 2023 bit demand growth in the high-teens percentage range. Looking forward, over the next few years, we expect bit demand growth CAGRs of mid-teens in DRAM and low-20s percentage range in NAND. We forecast calendar 2024 bit demand growth for the industry to be near the long-term CAGR for DRAM and somewhat below the long-term CAGR for NAND. Turning to supply, significant supply reductions across the industry have enabled the recovery that is now underway. An extended period of supply growth less than demand growth would strengthen the pace of recovery. Micron will continue to exercise supply and CapEx discipline, aligned with our strategy to maintain our long-term bit market share for DRAM and NAND. Micron's fiscal 2024 CapEx is projected to be between $7.5 billion and $8 billion, slightly higher than last year's levels and prior plans, primarily to support the HBM3E production ramp. We continue to expect WFE CapEx in fiscal 2024 to be down year-over-year. As we have discussed previously, the ramp of HBM production will constrain supply growth in non-HBM products and will help improve the overall DRAM industry supply-demand balance. Across the industry, the HBM3E die is roughly twice the size of equivalent capacity D5. Additionally, the HBM product includes a logic interface die and has a substantially more complex packaging stack that impacts yields. These factors result in HBM consuming more than 2 times the wafer supply as D5 to produce a given number of bits. In last quarter's earnings call, we communicated that we strategically diverted underutilized equipment toward ramping new technology nodes, which will help us increase leading-edge production in a capital-efficient manner. Since the number of wafer processing steps is higher for leading-edge nodes, this approach of diverting underutilized tools to the leading edge meaningfully reduces our overall wafer capacity. Thus, underutilization in our fabs early this fiscal year transitions to structurally lower wafer capacity at higher utilization rates as we move through the fiscal year. Reports indicate that this redeployment of underutilized tools at the leading edge is an industry-wide practice that is likely to constrain industry supply in 2024. Taking all these factors into account, Micron's bit supply growth in fiscal 2024 is planned to be well below demand growth for both DRAM and NAND, and we expect to decrease our days of inventory in fiscal year 2024. We expect calendar 2024 industry supply to be below demand for both DRAM and NAND, which will result in a contraction of industry inventory levels. As we have highlighted before, we continue to work with the US government and CHIPS grants are assumed in our CapEx plans for fiscal 2024. The viability and global competitiveness of our Idaho and New York projects depends on Micron receiving CHIPS grants to address the cost difference compared to overseas expansion. To better support our customers around the globe, we have opened state-of-the-art assembly and test facilities in Malaysia and Taiwan. We are proceeding with our previously announced expansion of our Xi'an facility, having received approval from Chinese authorities for our planned investment. In fiscal Q1, we achieved the first mobile customer qualification of LPDRAM assembled at our Xi'an site, furthering our strong commitment to serve our mobile customers in China. Our broad, diverse network of global operations remains a key element of our strategy to address customer demand in a reliable and resilient fashion. Our leading technology, strengthening product portfolio, strong manufacturing capabilities, and our dedicated team members position us well to capture the opportunities ahead. I will now turn it over to Mark for our financial results and outlook.

Mark Murphy, CFO

Thanks, Sanjay, and good afternoon, everyone. Micron delivered strong results in fiscal Q1 with revenue, gross margin, and EPS higher than the upper end of the guidance range we provided in our last earnings call. During the quarter, an improving supply-demand environment and our team's strong execution resulted in higher prices across DRAM and NAND. The current pricing trajectory has improved our financial outlook for the second quarter and full fiscal year. Total fiscal Q1 revenue was approximately $4.7 billion, up 18% sequentially and up 16% year-over-year. Fiscal Q1 DRAM revenue was $3.4 billion, representing 73% of total revenue. DRAM revenue increased 24% sequentially, with bit shipments increasing in the low-20s percentage range and prices increasing in the low-single-digit percentage range. Robust bookings entering the quarter, including customer strategic buys that occurred in prior quarters for fiscal Q1 shipment, limited our reported fiscal Q1 DRAM price increases despite Micron's strong execution on calendar Q4 pricing. Our strong calendar Q4 price execution contributes to our solid sequential growth in fiscal Q2, even with the effect of seasonality. Fiscal Q1 NAND revenue was $1.2 billion, representing 26% of Micron's total revenue. NAND revenue increased 2% sequentially with pricing more than offsetting an expected and communicated decline in volumes. Bit shipments declined in the mid-teens percentage range after record shipments in the prior quarter, and prices increased by approximately 20%. Portfolio mix improvements in NAND contributed to the increase. Now turning to revenue by business unit. Compute and Networking Business Unit revenue was $1.7 billion, up 45% sequentially. Data center and client shipments strengthened in the quarter. AI-related shipments increased in the data center market and normalized inventory at client customers enabled bit shipment growth. Revenue for the Mobile Business Unit was $1.3 billion, up 7% sequentially. Mobile revenue continued to show strength as customer inventories normalized and smartphone units and average memory and storage capacity growth at customers drove demand. Our mobile fiscal Q1 revenue almost doubled from year-ago levels. Embedded Business Unit revenue was $1 billion, up 21% sequentially. Growth was strong across most end markets. Revenue for the Storage Business Unit was $653 million, down 12% sequentially due to sharply lower consumer component sales, partially offset by strong growth in SSD revenue. The consolidated gross margin for fiscal Q1 was near 1%, improving 10 percentage points sequentially and driven by higher prices and a greater mix of DRAM products. Operating expenses in fiscal Q1 were $992 million, up $150 million sequentially and in line with our late November update. OpEx increased on higher R&D expenditures and the reinstatement of certain compensation programs suspended in the prior fiscal year including short-term incentive compensation. We had an operating loss of $955 million in fiscal Q1, resulting in an operating margin of negative 20%, improved from negative 30% in the prior quarter. Fiscal Q1 taxes were $59 million, lower than the anticipated $80 million based on an updated view of projected taxes across the year, driven by our improved fiscal 2024 outlook. The non-GAAP loss per share in fiscal Q1 was $0.95 compared to a non-GAAP loss per share of $1.07 in the prior quarter and a non-GAAP loss per share of $0.04 in the year-ago quarter. Turning to cash flows and capital spending, our operating cash flows were approximately $1.4 billion in fiscal Q1 representing 30% of revenue. During the quarter, we received $600 million in customer prepayments to secure supply for leading-edge memory products. Capital expenditures were $1.7 billion during the quarter resulting in free cash flow of negative $333 million in the quarter. Our fiscal Q1 ending inventory was $8.3 billion or 159 days, down from 170 days in the prior quarter. As mentioned in prior quarters, we hold strategic inventory stock associated with build ahead of products for cost optimization and risk mitigation. Excluding strategic stock, our fiscal Q1 ending inventory days would be approximately 142 days, only 22 days higher than our target inventory level. On the balance sheet, we held $9.8 billion of cash and investments at quarter end and maintained $12.3 billion of liquidity when including our untapped credit facility. We ended the quarter with $13.5 billion in total debt, low net leverage, and a weighted average maturity on our debt of 2030. Now turning to our outlook for the fiscal second quarter. While we remain mindful of macroeconomic risks, the memory and storage market environment is improving. We expect supply-demand balance to tighten in both DRAM and NAND throughout 2024. Our leading-edge DRAM and NAND nodes are oversubscribed for the full year. Consequently, we expect prices to increase through calendar 2024, driving improvements in our financial performance. Our leading-edge inventory is very tight, and we are also working to minimize pull-in of customer demand in response to higher pricing. As a result, our sequential growth in the near term will be driven primarily by pricing rather than a sequential increase in bit shipments. Both DRAM and NAND bit shipments are expected to decline somewhat in the fiscal second quarter. We expect our fiscal Q2 gross margin to benefit from sequential price increases and reduced impact from underutilization. We project the balance of previously written-down inventories to clear in fiscal Q2. We forecast operating expenses to decline in the fiscal second quarter on lower R&D program expenses and an asset sale previously expected to occur in the first quarter. For the fiscal year, due to some higher R&D expenses including what we saw in Q1 and higher short-term incentive compensation from an improved outlook, we now project OpEx to be over $3.9 billion. We forecast a much reduced operating loss in fiscal Q2 and project a return to operating income in Q3. Our tax forecast for the year has increased from under $200 million to over $300 million based on an updated taxable income outlook. We project the allocation of tax expense across the year to be heaviest in the fourth quarter driven by profitability and other factors. As we've mentioned previously, at current levels of profitability, tax estimates and the distribution of taxes across the year are highly sensitive to changes in the outlook. We plan fiscal Q2 capital expenditures to be in line with first quarter levels. We see operating cash flows improving substantially in the second-half of the fiscal year and are now forecasting positive free cash flow in the fiscal fourth quarter. With all these factors in mind, our non-GAAP guidance for fiscal Q2 is as follows. We expect revenue to be $5.3 billion, plus or minus $200 million; gross margin to be in the range of 13%, plus or minus 150 basis points; and operating expenses to be approximately $950 million, plus or minus $15 million. We expect tax expenses of approximately $45 million. Based on a share count of approximately 1.1 billion shares, we expect a loss of $0.28 per share, plus or minus $0.07. In closing, the industry environment is improving, and our financial outlook has strengthened for the fiscal year and beyond. We will continue to take a disciplined approach to managing the business and remain focused on optimizing price, driving productivity, and controlling capital spend. With high levels of liquidity and low net leverage, we continue to operate from a position of balance sheet strength as we forecast a return to profitability and positive free cash flow. I will now turn it back over to Sanjay.

Sanjay Mehrotra, President and CEO

Thank you, Mark. Over the last year, our world-class technology, business, and manufacturing teams ensured ongoing leadership in foundational memory technologies and the expansion of our industry-leading product portfolio. We are encouraged by the progress we have made on pricing, and we are on track to restore profitability more commensurate with the great value our solutions provide to our customers. We expect 2024 to be a year of recovery and can see the path towards a healthy supply-demand environment along with strong growth in critical new technologies like HBM3E. From the data center to the edge, AI has emerged as a significant secular driver that will further bolster the industry towards record revenue TAM in 2025 and drive growth for years to come. Micron's broad and growing suite of leading-edge products positions us well to capitalize on the immense opportunities ahead. Thank you for joining us today. We will now open for questions.

Operator, Operator

Certainly. Operator instructions. And our first question comes from the line of Krish Sankar from TD Cowen. Your question, please.

Krish Sankar, Analyst, TD Cowen

Yes. Hi. Thanks for taking my question. Sanjay or Mark, the first question I had is kind of you spoke about sustainability of pricing in calendar '24. I'm kind of curious if you can peel the onion one layer below and say how we think about pricing through calendar '24 for DRAM and NAND, and if you can extrapolate it into 2025, that'll be very helpful. And then I had a follow-up.

Sanjay Mehrotra, President and CEO

Thanks, Krish, for the question. With respect to pricing, we expect pricing to continue to strengthen during calendar 2024. This is because of the healthy demand-supply balance as we discussed in the prepared remarks. There have been significant cuts in supply growth in the industry. Customer inventories have normalized, supplier inventories are improving, as we have discussed our own inventory here as well. Pricing will continue to improve as a result through the course of the year. Demand trends overall, because of improvement of customer inventories, are stronger in PCs, in smartphones, automotive and industrial, and the demand trend will continue. Sometime in the first half of calendar 2024, we expect data center inventories at customers to get normalized as well. Beyond that point, we would expect data center to become another boost in demand in 2024. So we expect pricing to continue to increase both in NAND and in DRAM. We expect a healthy demand-supply environment in 2025 as well as a healthy pricing environment in 2025. I want to point out that our leading-edge nodes are already in short supply and inventories will continue to improve for us. All of this results in overall healthy dynamics for pricing improvements, profitability improvements, and revenue opportunity growth in the backdrop of demand drivers, AI being a dominant demand driver across the end markets.

Krish Sankar, Analyst, TD Cowen

Got it. That's very helpful, Sanjay. And then just a quick follow-up on CapEx. I understand a lot of the CapEx is going towards HBM and WFE is going to be down year-over-year. Is there a way of quantifying how much of the CapEx for next year is for HBM? And at what is the catalyst for you to start investing in NAND? Is it price? Is it gross margin? Any such catalyst for NAND? That'd be very helpful. Thank you.

Sanjay Mehrotra, President and CEO

We are not breaking down the CapEx between HBM and other parts of the business, but we have noted that our WFE is down, and we are focused on supporting the growth of our HBM business. We are excited about our leading-edge product, HBM3E, which is the most advanced HBM offering in the industry. As noted in our remarks, after qualification we will start the production ramp early in calendar 2024 and drive revenue growth that will be more back-half loaded for us. We will make the necessary investments to support the demand for our HBM in 2024. Our HBM supply for calendar year 2024 is effectively sold out at this point. In terms of NAND and CapEx, what's most important is that profitability returns to the levels that are needed to justify ROI in increasing any CapEx investments. We are focused on that and will remain extremely disciplined with respect to any CapEx and supply growth considerations. Profitability in the industry is still far from the levels needed to get ROI on investments, and we plan to remain disciplined in this regard.

Operator, Operator

Thank you. Operator instructions. And our next question comes from the line of Aaron Rakers from Wells Fargo. Your question, please.

Aaron Rakers, Analyst, Wells Fargo

Yes. Thanks for taking the question. I have two as well, real quick. First, building on the HBM comment that you're basically sold out for the year. I know that you referenced in your prepared remarks that you're qualified in with the GH200 and the H200 at NVIDIA. I'm just curious, when you get qualified on HBM3E, how does that market work in terms of do these customers dual qualify? Do you have line of sight and kind of your share position within those product SKUs? I'm just curious of how the qualifications work and the visibility that you have to basically kind of double down on the fact that you expect to be comparable market share in HBM as DRAM in total as you look out into '25.

Sanjay Mehrotra, President and CEO

Our product is in qualification and qualification is progressing well. After qualification, we expect to ramp production volumes and shipments to our customers. That will yield several hundred millions of dollars of revenue for us in fiscal year 2024, with revenue more concentrated in the back half of our fiscal year. The volume ramp and the revenue opportunity will continue to build into 2025. As we have said, sometime in calendar 2025 we expect to reach a level of HBM market share that aligns with our overall DRAM bit share. HBM is higher revenue per gigabyte and higher profitability per gigabyte. It is one of the biggest growth markets in memory today. Qualification for HBM involves close integration with customers and typically takes longer than standard products. Those are factors that affect how many suppliers customers will include for any given platform for HBM.

Aaron Rakers, Analyst, Wells Fargo

Yes. And then as a quick follow-up, you said your leading-edge inventory was very tight. You also said you're focusing on minimizing any pull-in in the midst of pricing increases materializing. Can you help us appreciate what exactly you're able to do to minimize any pull-in or the visibility you have in whether customers are taking strategic inventory? Just curious how you manage that.

Sanjay Mehrotra, President and CEO

With respect to strategic inventory, we discussed in the past that certain customers made strategic purchases in our fiscal Q4 and those are completing in calendar Q4 here. Going forward, we are focused on managing our supply and demand. The pricing environment is increasing and we want to ensure that we meet the requirements of our customers in a way that maintains healthy dynamics for our business. Beyond that, we are not able to discuss further specifics.

Operator, Operator

Thank you. Operator instructions. And our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question, please.

Toshiya Hari, Analyst, Goldman Sachs

Hi. Good afternoon. I had two questions as well. One on gross margins, maybe for Mark, and then my follow-up is for Sanjay. Mark, the gross margin profile is improving from breakeven or 1% in the prior quarter to 13%. I was hoping you could sort of break that down, the sequential change for us in terms of pricing, lower underutilization charges, and whatever else is happening from an inventory perspective. And beyond February, as we look out into May, you talked about pricing improving throughout '24, so that continues to be a tailwind. How should we think about some of the other dynamics that go into your gross margin math?

Mark Murphy, CFO

Sure. On the fourth quarter to the first quarter gross margin, we were up 10 points; about half of that was price. Most of the remainder was mix from higher DRAM volumes. We also saw some favorable cost: we had lower-cost inventories clear at $600 million and then we had some reduced idle charges that we've talked about. Moving into the second quarter, we're not seeing volume growth, but we are expecting gross margins to be up about 12 points sequentially. That is principally driven by price. There is some mix shift by customers and some seasonal effects, but again it's largely a price-driven increase. We will have lower benefits from the low-cost inventory clearing; we had $600 million clear in the first quarter and expect $400 million in the second quarter. We are also seeing cost declines occurring with the increase of leading-node production and with lower wafer starts and higher utilization. Idle charges are dropping as well. So again, principally price in the second quarter, then beginning to see some cost benefits even though we're losing some benefit from lower-cost inventory. We expect price appreciation through the year. We don't expect volume growth in the third quarter either, but do expect continued price appreciation, which will drive gross margins up. In the fourth quarter, we expect to see volume and price and some lower utilization charges. We would expect margin expansion from second quarter to third quarter and again from third quarter to fourth quarter.

Toshiya Hari, Analyst, Goldman Sachs

Okay. Great. That's super helpful. And then as my follow-up for Sanjay, you presented a cross-cycle financial model at your Investor Day last May. Clearly, the environment has changed quite a bit. When you talk about necessary ROI for your business, as you debate when to increase production and CapEx, should we look at the model from last May still as a reference point — through-cycle operating margins of 30%, free cash flow margins of 10% or higher? Is that model still relevant or have things changed since? Thank you.

Sanjay Mehrotra, President and CEO

That model is very much relevant once we get past this downturn and the recovery from this downturn. This downturn has been steep and was driven by the pandemic and related factors, which severely impacted the industry last year. 2024 will be a year of recovery, and we see pricing continuing to increase and profitability continuing to improve through the year. As we look past this recovery, the cross-cycle model we discussed in the past remains our target.

Operator, Operator

Thank you. Operator instructions. And our next question comes from the line of Timothy Arcuri from UBS. Your question, please.

Timothy Arcuri, Analyst, UBS

Thanks a lot. I had a question on these prepayments you're getting — that's $600 million, a pretty big number. Is that more of a one-time deal or should we expect these prepayments to continue? And as part of that, is that mostly related to HBM or a particular vertical like data center or is that across most of your end markets? And then I had a follow-up as well.

Sanjay Mehrotra, President and CEO

Due to the confidential nature of the agreement, we cannot provide specifics. What I will say is that it reflects the importance of our technology, our products, and our delivery capabilities. It also reflects our close relationships with partners and commitment from both sides. Beyond that, I'm not able to provide specifics, honoring confidentiality.

Timothy Arcuri, Analyst, UBS

Okay. Can you talk about limiting the bit shipments? You said you're limiting bit shipments to prevent pull-ins ahead of price increases. It sounds like bits are flat sequentially for fiscal Q2 and fiscal Q3. Can you talk about the logistics of that? Are you holding back volumes to regain pricing leverage? If competitors don't match that approach, you might risk losing share. Can you discuss the logistics of that?

Sanjay Mehrotra, President and CEO

Leading-edge supply is already tight, and that affects our shipments in fiscal Q2. Fiscal Q2 is also impacted by seasonality. Managing supply given the tight environment on the leading nodes is the primary consideration for our guidance. As we allocate supply across customers, we will manage our shipments carefully.

Operator, Operator

Thank you. Operator instructions. Our next question comes from the line of Mehdi Hosseini from Susquehanna Financial. Your question, please.

Mehdi Hosseini, Analyst, Susquehanna Financial

Thanks for taking my question. Two follow-ups. Sanjay, historically the memory industry tends to gravitate towards higher-margin products, which has historically led to margin erosion. Why is HBM any different? What are your thoughts on what can preserve the higher margin associated with these high-end products?

Sanjay Mehrotra, President and CEO

AI is in very early innings. Generative AI is barely starting and represents a major growth opportunity. Industry estimates indicate data center AI accelerator TAM CAGR could be about 70% over the next few years. As data center AI accelerators grow, the infrastructure demand, including HBM, will grow. We project HBM CAGR over 50% over the next few years, which is more than three times the DRAM industry CAGR. 2023 was the first year of meaningful HBM shipments and represented a low-single-digit percentage of bits but much higher pricing and revenue. HBM will be a key enabler of AI training and inference because larger models and more data drive demand for high bandwidth, high performance, and low-power memory. HBM also consumes more than two times the wafer supply to produce a given number of bits compared to D5, which constrains supply growth in the DRAM industry and helps strengthen supply-demand balance. This is a long-term opportunity; we are in the early stages and will prudently manage supply and demand. We are well positioned with our product and look forward to growing revenue and profit contribution from HBM over the coming years.

Mehdi Hosseini, Analyst, Susquehanna Financial

Great. Just a quick follow-up for Mark. Is there a normalized capital intensity we should think of, especially as we come off this downturn? If you don't have a normalized capital intensity, what else can help us better forecast free cash flows?

Mark Murphy, CFO

No update to the cross-cycle model we've provided. The best way to think about CapEx over time is as a percent of revenue, which we've previously given as mid-30s percent over time. HBM requires more CapEx, but it yields a price premium and accretive margin. We believe that the prior capital intensity model remains intact.

Operator, Operator

Thank you. Operator instructions. And our next question comes from the line of Harlan Sur from JPMorgan. Your question, please.

Harlan Sur, Analyst, JPMorgan

Good afternoon. Thanks for taking my question. You mentioned your leading-edge DRAM and NAND supply output is oversubscribed for the full year. Do your CapEx plans factor in conversion of capacity from mature nodes to leading-edge nodes? When do you see the ability to fully supply customers' demand profiles? Is that more likely in calendar 2025? Which end markets or applications are you seeing the largest demand-supply gap as you move through the fiscal year?

Sanjay Mehrotra, President and CEO

As we move through the fiscal year, leading-edge nodes are in tight supply. Leading-edge nodes drive demand in PCs, smartphones, and data center applications, and our portfolio is well positioned on these nodes. We will maintain supply discipline. The industry is not yet at profitability levels that justify large new investments, and we'll manage supply prudently while focusing on pricing and profitability to deliver returns on CapEx. We will allocate demand across end markets and customers to best manage supply.

Harlan Sur, Analyst, JPMorgan

Thanks. You noted record share in data center NVMe SSDs for two consecutive quarters, up significantly versus historical levels. What's been the big differentiator and how do you continue to grow share going forward?

Sanjay Mehrotra, President and CEO

Our team has built a strong data center SSD product portfolio and now we have record data center SSD market share for two consecutive quarters. For calendar Q3, our data center SSD share is in line with our NAND share in the industry. This reflects the benefit of vertical integration across device, design, firmware, and system implementation, and our close work with customers on qualifications. We transitioned from floating gate to replacement gate NAND technology some time ago, and that successful execution has been a key factor in our data center SSD strength. We are excited about Micron's market position in this market and the growth opportunities ahead.

Operator, Operator

This does conclude the question-and-answer session as well as today's program. Thank you, everyone, for participating in today's program. You may now disconnect. Good day.