Good afternoon. My name is Brian and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Micron's First Quarter 2019 Financial Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-answer period. [Operator Instructions] Thank you. It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Head of Investor Relations. You may begin your conference.

Thank you and welcome to Micron Technology's first fiscal quarter 2019 financial conference call. On the call with me today are Sanjay Mehrotra, President and CEO and Dave Zinsner, Chief Financial Officer. Today's call will be approximately 60 minutes in length. This call, including audio and slides, is also being webcast from our Investor Relations website at investors.micron.com. In addition, our website contains the earnings press release filed a short while ago. Today's discussion of financial results will be presented on a non-GAAP financial basis, unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures can be found on our website along with the convertible debt and capped call dilution table. As a reminder, the prepared remarks from this call and webcast replay will be available on our website later today. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on various financial conferences that will -- we will be attending. We can also -- you can also follow us on Twitter, @MicronTech. As a reminder, the matters we will be discussing today include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer you to the documents we filed with the SEC, specifically, our most recent Form 10-K and Form 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 can't -- 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. In the first quarter, we demonstrated solid execution, further improved our balance sheet, and began executing on our $10 billion share buyback program. We delivered strong profitability despite revenue headwinds from the inventory adjustments at several customers, and industry-wide CPU shortages. Our results also reflect our success in further diversifying our business as evidenced by record sales in our mobile, automotive, and industrial businesses in the quarter. As we enter calendar 2019, we are seeing weakening demand from our customers. As a result, we are taking decisive actions, including a meaningful reduction in our fiscal 2019 CapEx plan, in both DRAM and NAND that will materially reduce our supply bit growth. I'll provide more details on these items later in the call after first reviewing the highlights of the quarter. I'll start with our execution progress. We are focused on improving our cost structure and increasing the mix of high-value solutions in our portfolio, both of which provide immediate benefits and strengthen Micron's ability to drive long term profitable growth. Our cost reductions in DRAM and NAND have meaningfully outpaced the industry over the last three years. Our progress on advanced technology gives us confidence that we will deliver healthy year-over-year cost declines in DRAM and NAND in fiscal 2019, even after taking into account the supply and CapEx changes, which I referenced earlier. In the first quarter, we achieved crossover of 1X nanometer DRAM shipments, and started revenue shipments of 1Y nanometer products. Our 1Y year ramp is ahead of schedule, and we remain on track for meaningful production by the fiscal third quarter. We're also making excellent progress on our 1Z technology, which leverages our leadership in advanced materials and cost effective lithography techniques. In NAND, we continue to lead with our…

Thanks Sanjay. Micron delivered strong results in our fiscal first quarter, including double-digit year-over-year growth in revenue, gross profits, and earnings per share. While our near-term outlook has become more challenging, the actions taken to improve our cost structure and increase our mix of high-value solutions will ensure that our profitability profile remains strong. Moreover, Micron's financial position remains healthy with an improved net cash position and with total liquidity reaching our target levels. Total fiscal first quarter revenue was $7.9 billion, up 16% from the prior year and down 6% from the record fiscal fourth quarter. Revenue was adversely impacted by inventory adjustments at key customers in the cloud, graphics, and enterprise markets. Offsetting these headwinds, we delivered record revenue in the mobile, industrial, and automotive markets. DRAM represented 68% of total company revenue in the fiscal first quarter. DRAM revenue increased 18% year-over-year and declined 9% from the prior quarter. On a blended basis, DRAM ASPs declines high single-digits percent compared to the prior quarter, while shipment quantities were relatively flat. Trade NAND revenue represented 28% of total company revenue in the fiscal first quarter. Trade NAND revenue increased 17% year-over-year and declined 2% quarter-over-quarter. Our overall NAND ASP declined in the low to mid-teens percent and shipment quantities increased in the low to mid-teens percent compared to the prior quarter. Now, turning to our revenue trends by business unit. Revenue for the compute and networking business unit was $3.6 billion, up 12% year-on-year and down 17% quarter-on-quarter. The sequential decline was driven by the impact of inventory adjustments at some of our customers in the graphics, enterprise and cloud markets. The mobile business unit delivered a strong quarter with record revenue of $2.2 billion, revenue increased 62% year-over-year and 17% from the prior quarter. Revenue growth was…

Thank you, Dave. While we end calendar 2018 on the heels of unprecedented profitability and revenue for both Micron and the industry, we do believe we are entering a period of weaker market conditions. We are taking prudent actions to adapt our manufacturing plans to the changing demand environment. While we are implementing expense controls, we are also continuing to invest in our technology and cost competitiveness as well as strengthening our portfolio of high-value solutions. Memory and storage have become essential ingredients to the value created by the data economy and it is this added value that is driving a virtual cycle of long-term growth and innovation. We continue to believe that the memory industry is structurally stronger with more diversified demand drivers and moderating supply growth capability. Micron is better positioned than ever before to win in this environment with our strong balance sheet and the structural improvements we have made to our operating model in the past several years. We believe 2019 will be a year of solid profitability and I look forward to sharing our results over the quarters ahead. We will now open for questions.

Thank you, sir. [Operator Instructions] And our first question will come from Timothy Arcuri with UBS. Your line is now open.

Thank you. Sanjay, I was wondering if you could help quantify the inventory at your big hyper scale customers. It sounds like in aggregate its maybe two months. So, I'm wondering if you can help with that number. Thank you.

So, inventory at our customers and this is -- customers in various segments of our market, some of those customers are carrying higher levels of inventory, and that inventory level varies from customer to customer we believe. And our assessment is that inventory adjustments will take couple of quarters for it to be corrected, for it to work through the system entirely and, of course, we continue to work with our customers in the meantime, in terms of understanding their longer term demand requirements. And certainly, our customers are indicating optimism towards the demand requirements in the second half of the year. And especially, as inventory adjustments work through the system and as supply cuts, the effect of those come through the industry, as well as second half of the calendar year tends to be seasonally stronger compared to the first half of the year, we do expect that by the second half of the year, we'll have an environment that will be improved stronger compared to the first half of the year. And just keep in mind that the long-term demand trends in our end markets of cloud, client, enterprise, graphics all of these end markets, the trends continue to be strong, needing more memory and more storage ultimately. We're just going through an air pocket here related to primarily inventory adjustments as well as some seasonal, weak mobile demand, including mobile demand on the high end smartphones that is impacting some of our near-term visibility as well as the near-term outlook.

Thank you for that. And then I guess just as a quick follow-up, Dave. So, I think maybe the surprise in the guidance that the bit shipments are down, I think you said, meaningfully for both NAND and DRAM. I'm wondering, what that means for inventories? Are you going to ship out of inventory? Or are you cutting utilization? Can you sort of walk us through that? Thank you.

So, we are reducing our production for both DRAM and NAND. As Sanjay indicated, from a DRAM perspective, we're bringing bit supply growth down to 15% approximately in calendar year 2019. For NAND, we're also bringing the production down meaningfully and we did indicate that we would ship close to demand for NAND and we think that demand is about 35%. So, obviously, there will be periods of time, where we do have inventory increasing for some period of time and then, of course, it will adjust down through the years as we -- as those demand and supply numbers get more aligned. In the first quarter, we had days of inventory up to 107 days, I'm very comfortable with 107 days. This is very low cost product that we're putting on the balance sheet. There is no risk around obsolescence, it's part -- it's very likely that we'll go up again next quarter; again, I'm very comfortable with that. But I think over the long-term, we'll have it more aligned with ultimately where we want it to be.

Thank you, Dave.

Thank you. And our next question will come from the line of John Pitzer with Credit Suisse. Your line is now open.

Yes, good afternoon guys. Thanks for letting me ask the question. Dave, just relative to the guidance for OpEx in February quarter of $800 million, plus or minus $25 million, does that now reflect, what we should think about as a fully burdened OpEx as you kind of move away from the shared cost with Intel? And relative to the $6 billion of operational efficiency gains, you talked about at the Analyst Day, this past summer, how does that fit in with this OpEx guide? Because this is about $200 million more OpEx per quarter than we saw at similar revenue levels back in sort of 2016, 2017, and it's about $300 million above per quarter what we saw kind of in the 2015 sort of correction?

Yes, good question. So, we did guide $800 million for OpEx in the second quarter, plus or minus $25 million. That's probably -- that's certainly not fully burdened. We had about $30 million of benefit in the first fiscal quarter related to Intel's contribution through R&D expenses. It will be a little bit less in the second quarter, but over the course of the rest of the year will kind of phase down. So, that certainly will elevate the OpEx in the third and fourth quarter relative to the second quarter. And also, we're not -- while we are certainly managing expenses prudently and we are taking steps in terms of reducing discretionary spending and just monitoring our headcount very closely, we still are making the necessary investments on the product side and the technology side. This is, as Sanjay mentioned, an air pocket, we don't want to in any way, impact our long-term strategy for some sort of near-term event. So, OpEx will likely go up a little bit. It's a fair point on the OpEx. I would say, if you look at the guidance for the second quarter or even with the revenue guidance we gave relative to what the first quarter was like, if you take the kind of midpoint of the earnings number, and the midpoint of the revenue guidance number, you'll get kind of 38% plus operating margin. So, that is a really good number obviously. It's a number of, in my previous company; we were kind of aspirationally trying to get to. So, it's a very good operation -- operating margin number. And I think it reflects the fact that we achieved the $6 billion of improvements that we said we would make at the Analyst Day. We still think we have more work to do in terms of driving the mix towards high-value solutions in terms of improving our cost competitiveness, both on the front-end and on the back-end side. So, there is more to come, there is another $3 billion that we committed and we feel very good about that.

And then as my follow-up for Sanjay, can you just walk us through the strategic puts and takes of building inventory into the February quarter as opposed to trying to let those bits out into the marketplace and let elasticity sort of take over? Is this sort of intangible reflection of your view that this will be relatively short-lived a couple of quarters? And what would you need to see before you would think that inventory build was too risky?

So, I think our inventory, our cost structure is very good, both on DRAM as well as on the NAND side. And so we are definitely prepared that in terms of managing our overall profitability, which is absolutely our primary focus, that we'll manage pricing and manage inventory accordingly as necessary. If inventory has to be carried over, we will carry it over because the demand in NAND will kick-in with elasticity. In DRAM, the inventory consumption with our customers will occur; supply cuts will be driving return to stronger demand environment compared to -- in the second half compared to first half. So, we will be using inventory as a lever to ultimately manage for the best profitability of the company. And certainly, be prepared, use that inventory as necessary to also capitalize on the second half opportunities. And our focus really will also remain that in terms of our CAGR, in terms of output growth to be aligned with demand CAGR, and we'll of course from time-to-time use inventory as a lever to manage the profitability of our business and, of course, manage our customers' requirements as well.

Thank you.

Thank you, John.

Thank you.

And our next question will come from C.J. Muse with Evercore. Your line is now open.

Yes, good afternoon. Thank you for taking my question. I guess first question, can you talk about what you're thinking in terms of cost down efforts both for DRAM and NAND, particularly as you move to higher-value solutions changing mix, including 1Y, 1Z as well as 96 layers in the 2019 timeframe?

With respect to the cost structure, we continue to be in very good position, as we said that for our fiscal year 2019, we'll have healthy cost reductions, both for NAND as well as DRAM. And you're of course right to note that as we increase the mix of our high-value solutions, for example, over the longer term as we increase our SSD mix or increase our managed NAND solutions, those do tend to incur higher costs. But they also bring higher margins, higher profitability, higher pricing associated with them as well. So, cost wise, we are in good shape.

That's helpful. And I guess, as a follow-up, a question for you Dave. I think in the past you've talked about wanting to have liquidity including gross cash and revolver of roughly one year CapEx, which would basically put you on the screws here. So, the question is how to think about incremental free cash flow generation? And what percentage of that would be used for buybacks?

Yes, good question C.J. So, we contribute -- let's start with the -- we're at about $9.7 billion of liquidity when you count the cash that we have on the balance sheet, plus the $2.5 billion revolver we have. So, we're in, as you point out, very good shape relative to where our target liquidity would be. You saw a pretty healthy return of cash to shareholders in the first quarter. About 80% of our free cash flow went to shareholders in the form of the buyback, and really, the rest went to further deleverage the balance sheet. There's not a ton of deleveraging that will go on through the rest of the year, quite honestly. And so I would expect us to be -- continue to be good buyers of the stock, so to speak, through the next three quarters and contribute a high portion of our free cash flow in the form of a buyback.

Very helpful. Thank you.

Thank you. And our next question will come from Mark Newman with Bernstein. Your line is now open.

Yes, thanks for taking my question. First question really, I'd like to ask on the supply adjustments you're making, you're taking down the guidance for both DRAM and NAND reduction. You mentioned about some of that being inventory, but you also mentioned some of that being some reduction adjustments. It would be useful to understand a bit more about that. For example, is that reduction of utilization? Is that a no more capacity additions or what is that? Because some of your competitors have been pushing out some of their capacity additions and so it would be useful to understand what Micron is doing here, on the capacity adjustments to get this slightly lower bit growth that you are forecasting for calendar 2019?

So, certainly, we are taking actions, a range of actions and we won't really get into any specifics here in terms of what actions we are taking to reduce our output. You earlier mentioned about inventory. I mean, of course, we will carry inventory as necessary to manage the profitability. But important thing to understand is that we are taking decisive actions in terms of reducing our production output both in NAND as well as in DRAM. And that's the contributor to the $1.25 billion reduction in CapEx compared to our prior guidance. And of course, our intention here is to align our supply output in line with the industry demand trends and we feel very good about the actions we have taken. In DRAM, we've pointed out that compared to our prior expectations of 20% supply bit growth in calendar 2019; we have taken actions now to reduce our output to provide a 15% supply output growth on a year-over-year basis. And in DRAM as well, we have taken actions to adjust our output so that our shipments will match with our demand that we expect to be around 35% in 2019. And just want to be very clear as we have always said, that we are not adding any new wafer capacity. We are -- the CapEx that we discussed today, the lowered CapEx that we discussed, which on a wafer equipment basis is a reduction from fiscal year 2018 CapEx is all going towards technology transitions only. And that of course is the best way to achieve the ROI on those investments.

So, does that mean slower technology migration or does it perhaps mean slightly lower utilization for temporary period?

So, Mark, I'm not going to get into the specifics. Most important thing is, we have managed our CapEx lower and we continue to take actions to manage our production output lower to align our supply with our demand expectations. And I think the effect of these actions will in fact -- some of these actions will start showing as early as this quarter.

And if you look at--

Thanks Sanjay and then--

Go ahead. Sorry Mark.

I'm sorry, you go ahead Dave.

I was just going to say, if you look at our gross margin, it would reflect that we have a very good cost structure for our products.

And the reduction of these outputs that we are talking about, our cost structure will remain in very good shape even with that. And in fact, in terms of cost, on a year-over-year basis, we actually, our cost reductions we believe both in DRAM and NAND will be above the industry. Cost reductions remain above the industry, yes.

My follow-up question is on the demand. You talked about this a little bit of inventory correction amongst customers; some of your competitors have talked a bit about that as well. But you seem to be reasonably confident that demand is going to come back second half of calendar 2019, which also suggests that the inventory should have been burnt up by then. The customer's inventory should have been used up mostly by then. It would just be helpful, do you have any data points to explain how you get that confidence that demand will come back? Is it perhaps on the NAND side more about demand elasticity? Is it on the DRAM side? Anything about the kind of magnitude of the inventory level the customers have to pay to give us some kind of sense that -- confidence that would've been used up within a couple of quarters for example that'll be great -- that would be very helpful. Thanks.

So, first of all, I think we should realize that the end market demand trends, by and large, really remain quite healthy and our customers also are absolutely continuing to show to us the optimism around the long-term demand trends. And as we noted in my remarks, that in our fiscal second quarter, the bits for DRAM -- let me first talk about DRAM here, the bits for DRAM will be down on a year-over-year basis and this needs to be compared with the long-term DRAM demand CAGR of 20%, high teens to 20% range. So, then in FQ2, on a year-over-year basis, you reduction and you contrast it with the long-term demand trends of 20% kind of demand growth, then it tells you that during fiscal second quarter, a lot of the inventory adjustments will certainly be occurring. And that's why we say that it will take couple of quarters for inventory adjustments to occur. So, again, the point about year-over-year reduction in our DRAM shipments is an important point in understanding that the inventory adjustment by our customers is well underway. And all of this while the end market demand drivers of cloud, as you see from all the data, is absolutely continuing to be healthy. The end market demand driver in terms of average capacity increases of flash and smartphones as well as DRAM content and smartphones driven by AI and machine learning continues to be on the upward trend. And of course, applications like automotive and industrial IoT with more AI and more machine learning all of these are continuing to drive the demand trends towards need for more storage and more memory. And we laid out some of these opportunities at our Investor Day and all of those opportunities very much stay intact and at…

All right. Great. Thank you very much. Appreciate that.

Thank you. And our next question will come from the line of Aaron Rakers with Wells Fargo. Your line is now open.

Yes. Thank you for taking the questions. I was wondering if I could build on that last comment, you've talked a lot about your own plans in terms of curtailing your capacity expansion this year. But given that you are in off quarter, off calendar quarter, I'm just curious of how you will characterize maybe the competitive landscape? Maybe what you've seen change over the last month and a half or so relative to some of your competitors in the context of both DRAM and NAND? And I have a follow-up.

I think in that regard, you know as much as I do and over the course of last couple of months, there have been a reduction that have been discussed in the industry, the reductions that you have heard about that manufacturers have talked about, but also, several analysts have indicated those as well. And of course, the near-term outlook has also as we said, continued to weaken through the course of our FQ1 timeframe and even since our FQ2 has started, those demand weakening trends have continued as well. So, I think this is the information that is out there, is what we're using, but we can only talk about ourselves and we can -- we certainly have taken here decisive actions in terms of managing our output growth in line with our demand expectations.

Okay. And then as a quick follow-up, just thinking about your product portfolio, particularly, around the enterprise SSD market, I'm curious, it sounds like possibly you're seeing maybe even a quicker ramp towards NVMe than what you previously have seen. I mean is there a way to kind of quantify how much of maybe the enterprise SSD market is kind of moving away from you? And so you get your products into the market in the latter part of this calendar year -- or calendar year 2019?

Certainly, as we have been speaking for a while, the transition from SATA to NVMe is taking place at a fast pace, in enterprise, as well as in cloud applications. And we have been focused on developing our own products. And that's why, we have said that in calendar year -- our fiscal year 2019, as we bring out our new NVMe products to the market, our 2019 calendar year ends up being more a year of transition for us. But there is no question that the market certainly is moving from SATA to NVMe applications across the Board. And we have just introduced some of our early NVMe products for consumer SSDs and I talked about how we have introduced NVMe product for automotive, applications as well. And during the course of calendar 2019, we'll first be bringing out client NVMe products to the market and then later in the year, we'll bring enterprise and cloud NVMe SSDs. And that's why, we look at calendar year 2020 will be the one timeframe, when we start gaining share again in our SSDs -- SSD market.

Thank you.

Thank you. And our next question will come from the line of Romit Shah with Nomura. Your line is now open.

Yes. Thank you. Sanjay, I heard you indicate that you expect above average cost declines, but I guess my question is, aren't the actions that you've announced today probably more of a hit to cost per bit in 2020 versus 2019? How do we think about that?

I think what we have shown you today is that we are able to take decisive actions and we are able to take them fast. I mean, just remember that FQ4 was a record year for the company and FQ1, is when we first saw signs of inventory adjustment. During the course of FQ1, we have been able to react in terms of cutting down our CapEx as well as manage our output growth. So, point is we can react fast to the changes that are needed in the marketplace and we remain -- this is something we review very, very closely on an ongoing basis, very focused on making sure that we are maximizing the long term profitability and long-term growth opportunity for Micron. So, this is something that in terms of cost, we feel very good about our position for 2019 and beyond -- going beyond that. We of course continue to make very good progress on our technology nodes. As I discussed with you, our technology on 1Z is progressing well. We feel good about that roadmap and continue to make good progress on our NAND roadmap as well. And that will all position us well for 2019 as well as for 2020 timeframe. And I just want to point out that our focus also is on shifting our portfolio to high-value solutions and those will also strengthen our profitability profile.

I guess as my follow-up on CapEx, I mean, you are cutting your forecast for the year, but CapEx is still up on a year-on-year basis. I'm curious if this downturn ends up being longer than any of us sort of anticipate? Is there a leverage to reduce CapEx any further from its current levels?

So, I will just touch on CapEx, on your previous question on your cost, I also wanted to point out that on the cost side, we are making tremendous progress on the back-end assembly and test cost reductions as well as managing, transforming our supply chain operations, which will give us significant cost benefits as well. So, all-in all, 2019 and beyond, feel very good about our technology roadmap, manufacturing roadmap, capability as well as overall cost capabilities. In terms of, on the CapEx side, just keep in mind, that we have said that with the adjustments that we just have made, over wafer equipment CapEx actually is coming down in fiscal year 2019 versus fiscal year 2018. And as we've discussed before, Micron over the last few years have significantly underinvested in clean room shell CapEx in the facilities and the buildings that are needed to really implement ongoing future technology transition and big part of our CapEx as we have shared with you the past, actually is going towards buildings and facilities, clean room that will be needed for future technology transitions as well. All of that CapEx does not contribute to bit growth. And similarly, we have significant increase in our CapEx in fiscal year 2019 over fiscal year 2018 on back-end test and assembly operations as well. And that is again intended to reduce costs, and not -- it doesn't go towards any bit growth. And we have flexibility, as we have shown already, in terms of managing CapEx. We will continue to look at this carefully and if any factors require us to change our CapEx outlook again, we will absolutely address it in a timely and prudent fashion. We always continue to evaluate market environment as well as our own status of technology, transitions, production requirements, and we are making real-time adjustments as needed.

I mean it seems like the actions you guys are taking are very prudent, but I -- the part that's confusing for me is if you're slowing your process migration, then there should be some impact to cost per bit. And I'm just, I guess I'm just not quite -- I just don't quite understand what that impact is?

Again, in terms of cost per bit, there are a lot of details that have to be looked at. We're not going to get into all of those details here. Key message here is that we are bringing our production output in line with our demand expectations. Second, we feel very good about our technology position and our cost position, and will continue to do very well in this regard. Cost position, of course, includes wafer level, die cost position but also, includes the benefits of assembly and test cost improvements that we are making. And third, as we absolutely stay focused on our high-value solutions strategy, and we're executing well in the area, we talked about how in mobile, even in a market environment of significant NAND oversupply, we actually have delivered strong gains in our mobile high-value solutions portfolio as well.

All right. Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. Thank you for your participation on today's conference. This does conclude the program and we may all disconnect. Everybody, have a wonderful day.