Good afternoon. My name is Sherry, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron’s Fourth 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-and-answer period. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Farhan Ahmad, Head of Investor Relations. You may begin your conference.

Thank you, and welcome to Micron Technology's fourth 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 the audio and slides, is also being webcast from our Investor Relations website at investors.micron.com. In addition, our website contains the earnings press release and the prepared remarks filed a short while ago. Today’s discussion of financial results will be presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures can be found on our website, along with a convertible debt and capped call dilution table. As a reminder, a webcast replay will be available on our website later today. We encourage you to monitor our website at Micron.com throughout the quarter for the most current information on the Company, including information on the various financial conferences that we will be attending. You can follow us on Twitter at MicronTech. As a reminder, the matters we will be discussing today include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer you to the documents we file with the SEC, specifically our most recent Form 10-K and 10-Q, for a discussion of 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 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. Fiscal 2019 was another solid year of execution as we continue to transform the new Micron. Despite the challenging industry environment, we achieved the second-best year in our history for revenue, free cash flow and earnings, which underscores the strength of the new Micron. We improved structural profitability by further reducing the technology gap with competitors and by strengthening our product portfolio. We also made progress on our $10 billion share repurchase program by returning $2.7 billion to our shareholders. In the fiscal fourth quarter, the Micron team’s strong execution resulted in financial performance exceeding our guidance ranges. Market trends were broadly consistent with our expectations discussed on the last earnings call. DRAM demand bounced back as the factors that impacted calendar first half demand largely dissipated. NAND elasticity is driving robust demand growth, causing industry inventories to improve rapidly. While the demand recovery in DRAM and NAND is encouraging, we remain mindful of ongoing macroeconomic and trade uncertainties. I will provide more color on our view of the market after a review of progress on our key strategic objectives. Since 2016, the actions we have taken to reduce our cost structure, increase our mix of high-value solutions, and enhance our customer engagement and go-to-market strategy have significantly improved our profitability relative to our peers. In fiscal 2019, our DRAM cost per bit declines led the industry and exceeded our internal plans, despite the headwinds from our announced reduction in wafer starts. In the fiscal fourth quarter, we began mass production and volume shipments of the industry’s first 1Z products, giving Micron feature size leadership for DRAM. We are also making good progress migrating more of our production to leading-edge nodes. While we entered fiscal 2019 with more than half of our bit production on…

Thanks Sanjay. As Sanjay mentioned, Micron delivered resilient performance throughout a challenging year for the industry, highlighted by fiscal Q4 results that exceeded our guided ranges for revenue and earnings. As market conditions evolved during the year, we curtailed our planned operating expenses and capital expenditures, allowing us to preserve margins and generate healthy free cash flow. We achieved our first corporate investment grade rating, strengthened our balance sheet, and meaningfully reduced our share count. All-in-all, fiscal 2019 was a year of stellar progress that sets Micron up for attractive growth as industry conditions recover. Turning to our recent financial results. Total fiscal Q4 revenue was approximately $4.9 billion. Revenue was up 2% sequentially and down 42% year-over-year. Revenue exceeded our guidance range largely due to better-than-expected demand. Full fiscal 2019 revenue totaled $23.4 billion, down 23% year-over-year. Fiscal Q4 DRAM revenue was $3.1 billion, representing 63% of total revenue. DRAM revenue increased 1% sequentially and declined 48% year-on-year. Bit shipments grew approximately 30% sequentially and in the mid-teens percent range year-on-year, as customer inventories improved significantly. ASP declined approximately 20% sequentially. For full fiscal 2019, DRAM revenue was $15.2 billion, down 28% from fiscal 2018 as bits grew in the low single-digit percent range and ASP declined approximately 30%. Fiscal Q4 NAND revenue was approximately $1.5 billion, or 31% of total revenue. Revenue was up 5% sequentially, but declined 32% year-on-year. Bit shipments grew in the low-to-mid-teens percent range sequentially. ASP declined in the upper single-digit percent range. We are starting to see supply tightness in portions of the NAND market, and prices are beginning to increase. Full fiscal 2019 NAND revenue was $6.9 billion, down 12% from fiscal 2018, as ASP declines of mid-40% range more than offset strong bit shipment growth. Now turning to our revenue trends…

Thank you, Dave. Fiscal 2019 has been a solid year of accomplishments for the New Micron, as we continue to focus on structural improvements across a range of functions in the Company, to take our performance to new heights. While we have made dramatic progress over the last couple of years, there is significant opportunity ahead of us to further improve our operations, drive product cost reductions, further improve engineering execution, build on our go-to-market strategy and initiatives, deepen customer engagements, and enhance the core competitiveness of the Company to best-in-class levels. As we look ahead, the long-term opportunities are exciting, and we are extremely enthusiastic about the momentum we have established at the New Micron. On October 24th, we’ll be hosting our Second Annual Micron Insight event, which will bring together leaders from across the industry to discuss how a world activated by data can transform the way we use information to enrich life and how memory and storage are vital to these efforts. We will be webcasting Micron Insight live from San Francisco, and I encourage you all to tune in. We will now open for questions.

[Operator Instructions] Our first question comes from Mark Delaney with Goldman Sachs.

Yes. Good afternoon, and thanks for taking the questions. So I'm going to talk a little bit about your customers' inventory levels. And one of the big concerns or debates in the financial community at the moment is whether the pickup in memory volumes that I think Micron seeing, is that mostly being driven by fundamentals? Or is it just potential inventory stocking because of some of the trade concerns? And Sanjay, I think you maybe talked about a bit of both factors in your prepared comments and some potential inventory stock, but also inventory coming down in some important markets like data center. So maybe you can just kind of level set and put those things together and do you think the pickup in your business is it primarily been driven by fundamentals or how much of this is maybe some of that inventory stocking because of trade concerns? Thank you.

I think certainly the pickup in business is being driven by the industry fundamentals. I would just like to remind you that in the first half of calendar 2019 because of the inventory that the customers had built up the demand to the producers was low, yet the end market demand for all applications continue to be robust. And now as the customers have worked down their inventory to normal levels, the demand is coming back to the producers and as a result, you saw in our calendar – I mean fiscal Q4 results a strong growth in DRAM bit as well as NAND. And second half is the demand is back – the customer demand is back. And yes, there maybe some level of inventory build in China, due to the reasons that I mentioned by certain customers. But I'll tell you that we do not think that that inventory build is anywhere close to the kind of inventory build that had gone on in the second half of last year, so no where materially close to that level. So overall, the industry environment in terms of demand return is certainly solid. Certainly in DRAM, there is still some excess supply with the producers. But the inventory is improving fast; we talked about our inventory actually improving faster than would we perhaps anticipated some time ago and overall we even see some shortages in some leading-edge products particularly on the DRAM side. So overall we think that industry, inventory at the producers is being consumed at a rapid clip. The demand trends are back to normal levels. And especially when you look at the trends of through next year 5G, you look at smartphone average capacity is continuing to increase both for NAND and DRAM, and cloud demand drivers continuing to be solid, new platforms, new CP architectures being used that allow greater use and higher use of DRAM capacities as well as AI applications driving more DRAM and NAND. So the demand trends, when I look at 2020 I believe that the industry demand/supply environment will be in a lot healthier place. Yes, maybe calendar Q1 may have some cyclicality, but the industry fundamentals overall from demand/supply point of view, I think in 2020 will be in a much healthier place.

Another way to look at this and kind of back it up mathematically is if you look at the year-over-year bit growth in the fourth quarter it's only in the kind of 14% kind of range. So that kind of backs up the idea that this is really about industry fundamentals, more so than it is about stocking inventory.

Thank you. Our next question comes from John Pitzer with Credit Suisse.

Yes. Good afternoon, guys. Congratulations on the solid results given the macro uncertainty. I guess I have several questions, just around the guidance gross margins for the fiscal first quarter. If you look at the incremental, you think you're getting from IMFT that's more than offset by kind of the change in depreciation and yet you still kind of getting sort of a 400 basis point drop sequentially in gross margin on kind of flattish to up revenue. And I know you guys don't comment about future pricing, but can you talk about other puts and takes around mix that might be negatively impacting kind of the gross margin and I guess given that the incremental cost of IMFT is probably driven by you taking receipt of the whole joint venture in the month of November why wouldn't that hit get higher as you go into the fiscal second quarter and have it for the full quarter.

Okay. So yes, let me kind of walk through a little bit of the puts and takes. Obviously pricing is a factor in the expectations around gross margins for the first fiscal quarter. And of course, we don't talk necessarily about forward pricing. But the second piece is cost. And as Sanjay mentioned, our cost declines for fiscal 2020 in total will be kind of high-single digits that's lower than the cost declines we got in fiscal 2019 versus fiscal 2018. And so we are seeing a slower rate of cost declines for DRAM, and that's of course something we've indicated was coming given the complexities that we face in as we migrate nodes. And as we talked about obviously on the NAND side, we're going to have very minimal cost declines as we kind of transition to replacement gate. So those are certainly factors in that, and I would tell you that the first quarter cost declines are very minimal. The third piece is mix. If you look at the mix from just a move to high value solutions, that of course is positive, but what is overshadowing that is the mix of NAND and DRAM. And of course, NAND has a lower gross margin than DRAM. And we will see likely a higher mix of NAND next quarter which will affect gross margins negatively. And then as you pointed out, there's two kind of unusual items I guess in the quarter. One is the change in the useful life of NAND equipment that will be positive, but more than half of that will be offset by underutilization expenses associated with IMFT. So those are kind of all the puts and takes of gross margins. I think it's likely that it will be a little higher from Q1 to Q2 in terms of underutilization expenses, but it was somewhat in the noise. We might be a little bit lower than $150 million of underutilization expense in fiscal Q1, and we might be a little higher than that in fiscal Q2.

Thank you. Our next question comes from Mitch Steves with RBC.

Hey, guys. Thanks for taking my question. I just wanted to kind of poke again on the gross margin question that’s asked. But one of the bigger question I have is just with your commentary about pricing getting better, but then you're talking about gross margin is going down on a higher revenue base. So if you offset that with depreciation as well, I mean does that imply that November quarter should be the bottom for gross margins? Or are you guys implying that February could also be down sequentially?

Well, I think clearly we're talking about NAND getting better. And we are seeing the early signs in DRAM of kind of the fundamentals getting better, demand is coming back, inventories on our balance sheet and the industry's balance sheets are coming down. Of course that hasn't gotten completely to where it needs to be. And also as Sanjay mentioned in his prepared remarks, the market continues to be a bit competitive and so we'll have to see when that all those things come together and supply kind of aligns with demand to drive more healthy market or healthier market for DRAM.

Thank you. Our next question comes from Harlan Sur with JPM.

Good afternoon. Thank you for taking my question. On your fiscal 2020 DRAM outlook for high-single digits cost reductions versus fiscal 2019, is that how we should think about your longer-term annualized cost down profile given the higher complexity capital intensity that you are aligned? Or are there some impacts from the pullback in utilizations, drawdown of your own inventories and/or maybe a slower 1Z transition that's impacting the cost down profile as well?

We definitely have some underutilization expenses in DRAM. Certainly we have that built into our expectations for the first fiscal quarter. It may last into the second fiscal quarter. And so that certainly is an impact, but I would tell you that over time as complexity of these nodes goes up and as capital intensity goes up, the cost declines are going to become more challenging. So the high single-digit will probably not be something we can routinely do year-to-year.

And I’ll just add that we are certainly narrowing the cost gap in terms of DRAM production cost overall. 1Z node is a good example of Micron’s leadership being the first one to introduce the 1Z node with the smallest feature size in the industry. And the result of cost improvements that we are making on DRAM as well as of course the high value solutions that are driving higher mix on the NAND side is a major improvement. 2,500 plus basis point improvement in our EBITDA margins versus the competition compared to the past 2016 timeframe.

Thank you. Our next question comes from Mark Newman with Bernstein.

Hi. Thanks for taking my question. You talked about inventory down quite a bit Q-on-Q. You gave some numbers on that. Do you have a bit more breakdown on how that compares DRAM versus NAND? And then looking forward to next-gen technology, you've obviously got – it's quite difficult to transition to the replacement gate to NAND. Can you give an update on the timing for that where you are on the 96 layers or where are your current generation [indiscernible] and where – can you give little bit details in the timing to the demand replacement there. Thanks very much.

So Dave will comment on your inventory part of the question, but let me just address your question on the 96-layers. As we had said before, 96-layer execution has gone very well with the Company in terms of yield ramp. 96-layer technology has given us the fastest yield ramp of any other NAND technologies in the past. So we are very proud of that accomplishment and 96-layer is continuing to ramp during the course of our fiscal year 2020. In fact, 96-layer will be the major driver of our NAND bit growth in fiscal year 2020. As I mentioned in my prepared remarks, with respect to replacement gate, we have seen now functionality and yielding dies. We are certainly quite encouraged by that and continue to work on technology and product development. In fiscal year 2020, 64-layer and 96-layer will continue to be the workhorse technologies and our replacement gate technology of course will have a small mix in fiscal year 2020 for us as well. Keep in mind, our first replacement gate node, which will have small production in fiscal year 2020 will be a rather limited node because we'll be deploying it across select set of products. It's our second generation node, which will of course come in the subsequent fiscal year that will give us – position us well and resume the year-over-year strong cost reductions for us. But basically the 96-layer will continue to ramp during fiscal year 2020 for us.

Okay. So on the inventory question, if you – so we had 143 days of inventory in the third quarter that came down to 131 days in the fourth fiscal quarter. If you kind of break that out between DRAM and NAND, DRAM was meaningfully below that and NAND was meaningfully above that. I would say in terms of days, obviously in absolute dollars, DRAM has more inventory than NAND. I would say that was – you got to remember there are two reasons why inventory was building for NAND. It was building as we kind of slowed down our supply, but customers were working down their inventory. Now the adjustments we've made to our supply both in terms of capital spending reductions and in terms of utilization adjustments, we have brought our inventory down pretty meaningfully this quarter. We expect to bring it down again meaningfully next quarter. On the NAND side, we have elevated levels of inventory, but that's more strategic. What we're trying to do is, have some built up inventory in fiscal 2019 that we can use in fiscal 2020 to support the RG transition because the replacement gate transition will not drive a lot of bit growth. And so in order to support the increased demand next year, we will have to utilize this inventory for that purpose.

Thank you. Our next question comes from C.J. Muse with Evercore.

Yes. Good afternoon. Thanks for taking the question. I just want to hit on your commentary around DRAM and on the ongoing industry in calendar 2019. Within that, is that largely driven by Huawei, perhaps more aggressive competitors in certain markets, change in mix? I love to hear your thoughts on that. And then as we move into calendar 2020, what are your expectations vis-à-vis the market – for your market share? Thank you.

So in terms of overall bits, with respect to DRAM growth in terms of revenue, I mean it has primarily been impacted by the customer inventories that were built up last year for the first half. And our overall DRAM shipments are in line with overall, the industry, in this regard. And I think what we said is that the industry demand mid-teens and our overall supply growth during the calendar 2019 to be slightly below the industry of course as a result of some of the underutilization actions that we have taken. And of course, there is an impact of Huawei in terms of our overall business. We had said before that compared to the levels that we anticipated before Huawei's placement on the Entity Listing, our revenue is lower. And of course, we are very much focused on continuing to diversify our revenue base. But yes, I mean, the Huawei Entity Listing does have an effect on some of our shipments to the customer. I mean, some of our overall shipments in the market.

Thank you. Our next question comes from Raji Gill with Needham & Co.

Yes. Thanks for taking my questions. You had mentioned that you did see some elevated inventory levels in the lower process nodes. I was wondering if you could kind of elaborate on that particular comment.

This is really related to some of our overall production and mix and if some of the older nodes have lower demand compared to our total supply available, and therefore that's where we are primarily running underutilization on the DRAM side. So it really is about the overall demand and this is good inventory that overall will get consumed over time.

Thank you. Our next question comes from Aaron Rakers with Wells Fargo.

Yes. Thanks for taking the questions. I was wondering if you could help me parse out the CapEx guidance a little bit more in detail. I know last quarter relative to the $9.1 billion you did for the full-year, you talked about roughly $2 billion for kind of cleanroom and facility kind of CapEx. Was that the case? And I think on the basis of that, what is that kind of CapEx spend specifically embedded into your fiscal 2020 guidance?

Yes. It was a little bit lower than the $2 billion number, but certainly a meaningful part of our spend. And you could probably parse out from what Sanjay said. We expect that number to increase in fiscal 2020, and the opposite is we expect the front-end equipment spend to decrease in fiscal 2020 versus fiscal 2019. We also – we'll obviously make another investment in the back-end and we're expecting that to be roughly similar to what we're spending and what would be spent in fiscal 2019.

Thank you. Our next question comes from Vijay Rakesh with Mizuho.

Yes. Hi, guys. Just wondering on the same CapEx line, I know you guys talked about equipment CapEx being down 30%, so it looks like close to $5 billion for fiscal 2020. Just wondering what the spit could be on NAND and DRAM? Thanks.

We don't tend to break that out. But I guess I would just tell you that our plan is to reduce front-end equipment spend in both DRAM and NAND next year.

Thank you. And our next question comes from Mehdi Hosseini with SIG.

Yes. Thank you for taking my question. Two follow-ups. We talked about the demand trends are positive, but I want to get a better assessment of how do you see data centers. There has been some conversation in industry that data center demand is seasonal. Some argue that it is better than seasonal. And Sanjay, I want to get your view, how do you see the data center demand for both SSDs and DRAM is tracking. And in that context, I'm surprised with your NAND bit demand projection for next year. This is well below a historical trend of near 40%. What do you attribute this NAND demand trend into 2020, which in my opinion is well below a trend line?

So with respect to the NAND demand trend in calendar year 2020, I mean, just keep in mind that in calendar 2018 the industry grew by approximately 45%, in calendar year 2019, again, by about 45% or so, low 40s to 45%. And that, then definitely, I mean, when you look at a multiyear CAGR, I think, it does lead to calendar year 2020 to be approximately in low-30s or in that range, high-20s to low-30s kind of range in terms of calendar year 2020. And I think what you have to realize is that with such aggressive pricing decline that had occurred in NAND over 2018 and 2019 timeframe, elasticity definitely has kicked in substantially, and as we said, pricing environment actually has started improving in NAND. And some of the average capacity growth that you perhaps would have seen, next year actually has been pulled in faster into this year as a result of some of these aggressive price declines that have occurred and have driven the usage of higher capacities in terms of increasing average capacities of SSDs, increasing the attach rate of SSDs, as well as continuing to drive higher average capacities in the smartphone market as well. So these are some of the factors that are absolutely playing an important role in terms of our assessment that for calendar year 2020 the year-over-year bit growth will be high-20s to low-30s range. Again, keep in mind that we still are few months away from next calendar year and we, of course, will continue to assess the overall industry demand trend, but this is our latest projection on that. Your first question was around cloud, and let me just point out that, cloud definitely demand grew nicely for us on the DRAM side in FQ4. Strong demand increases. And yes, the cloud demand from time-to-time can be somewhat lumpy. However, overall demand growth trends on the cloud side continue to be solid. In fact, we see cloud demand consumption both for DRAM as well as for SSDs continue to be higher than the average of the respective DRAM and the NAND industries. So overall, cloud again, new architectures, new CPU platforms that are really enabling more channels, as well as usage of higher density of DRAMs, as well as again, as I spoke earlier, the trend of AI applications all of this is driving greater usage of memory and storage in cloud. So cloud, we see as absolutely strong. Cloud customers inventories have normalized and it's back to normal levels. Other than any aspects perhaps in China, as I talked about, of maybe some element of strategic inventory build by certain customers. But overall the cloud demand trends are solid.

Thank you. Our next question will come from Ambrish Srivastava with BMO.

Hi. Thank you. I just wanted to get back to NAND for fiscal 2020, and I just wanted to reconcile the comments you've made, and wanted to make sure I'm walking away with the right takeaway, is that you have limited cost down. And then you also talked about very low gross margin and then you're also selling from already built inventory. So what's the tradeoff between all these factors as I compare your profitability in NAND versus competition in fiscal 2020?

So I think in fiscal 2020 the main focus for us on NAND will be to continue to increase the mix of high value solutions. I think in mobile, you have seen us increase managed NAND solutions in terms of share gains substantially. And I’ve reported in my prepared remarks on the tremendous progress that we have made with our mobile business, and most of it is driven by the progress on the managed NAND side and we plan to continue to increase that part of the business in fiscal year 2020. I also spoke about SSDs, SSD was certainly a headwind in terms of share opportunities for us in fiscal year 2019. And as we now have expanded our portfolio of NVMe solutions actually have introduced our first NVMe solutions during fiscal year 2019. Now we can leverage those solutions to expand our opportunities in fiscal year 2020 and we certainly look forward to gaining share and assuming gaining share in SSD on fiscal year 2020. So I think those are important pieces of our strategy of continuing to drive healthier revenue mix of NAND in fiscal year 2020. And of course, we are extremely focused on cost reductions on assembly, test and non-memory [bound] as well which are important factors particularly when it comes to products like SSDs or Multichip Packages, et cetera. And we’re making good progress on cost reductions on non-memory part of the [bound] as well. So these are all opportunities for us in fiscal year 2020. But no questions that at the die levels, our cost reduction capabilities will be overall limited in terms of the cost reductions due to the RG transition that we talked about earlier.

Thank you. And our final question will come from Joe Moore with Morgan Stanley. Mr. Moore, your line is open.

Yes. Hi, can you hear me?

Yes.

Yes. I wonder if you could talk about your forecasted demand will accelerate next year on the DRAM side, can you kind of break that down between units and content and just generally, what's your expectation for DRAM content per smartphones and service next year?

I think on the smartphone side, the average DRAM content if you look at it this year, it increased by nearly 25%, slightly above three was the average – 3 gigabyte was the average capacity last year, expected to be in calendar year 2019 around 4. And pretty similar double-digit gains continuing. 5G, if you look at Mobile World Congress, phones that were introduced there were 8 gigabyte and 12 gigabyte DRAM density in those phones. So as 5G phones start selling in the marketplace, some of those phones are already introduced in the market today in some parts of the world and this will continue to build momentum during calendar year 2020 and years beyond. Those phones will also require more DRAM. And again the phones are becoming more and more feature-rich, more AI applications are being built into the smartphones today and rich video and imaging capability and lot more intelligence behind all those applications, they require more DRAM as well. So looking at next year, we will certainly be seeing continuing average capacity increases next year as well. In fact, in calendar year 2020, if you look at industry projections, average capacity is expected to increase another 20% next year going to something closer to 5 gigabyte per smartphone. But as I said before, the DRAM is not only about smartphone, its other applications related to server as well where the average content continues to increase, as well as the average content continues to increase in PCs as well with the applications such as gaming, driving higher need for more DRAM.

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