Micron Technology, Inc. (MU) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to Micron Technology's Fiscal Second Quarter 2020 Financial Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host, Head of Investor Relations at Micron Technologies, Farhan Ahmad. Sir, please go ahead.

Thank you, and welcome to Micron Technology's fiscal second quarter 2020 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. 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 can cause actual results to differ materially from the statements made today. We refer you to the documents we file with the SEC, specifically our most recent Form 10-K and 10-Q, for a discussion of risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after today’s date to conform these statements to actual results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon. I hope all of you and your families are safe. These are unprecedented times, and I am calling from home today. In Micron’s fiscal second quarter, we delivered strong results, including revenue at the high end of our guided range, even as the COVID-19 crisis began to unfold halfway through our quarter. We have now achieved positive free cash flow for 13 consecutive quarters. This performance represents a marked improvement from historical cycles and is evidence of the strength of the new Micron. The emergence of the COVID-19 pandemic has created both operational challenges and macroeconomic concerns. Micron has more than 37,000 team members in 18 countries around the world. Since the earliest signs of the outbreak in China, we have taken proactive measures to safeguard our employees. Where possible, Micron employees are working from home, and we have suspended all local and international business travel globally. We implemented health screenings at all Micron locations. We were among the first in the industry to implement physical separation protocols at all our manufacturing sites globally to mitigate the risk of community spread, with blue teams and red teams that operate on alternate schedules. We have been requiring self-declaration and self-quarantine measures as this crisis has spread, whereby team members, contractors, and their immediate families observe 14 days of work-from-home after any air or sea travel. As of yesterday, we have two employees who have tested positive for the novel coronavirus and are receiving appropriate medical attention. At the two sites where we have confirmed cases, we have used contact tracing to quarantine individuals who were in close contact with either infected team member. We have also implemented more restrictive controls of on-site access, social distancing, and service protocols. As a result of stringent preventative measures in place, these events have not impacted our manufacturing operations thus far. We have also taken measures to protect our raw materials supply and increase our supply chain flexibility. First, we have been in close ongoing communication with our suppliers to ensure continuity and identify supply gaps. Second, we have increased our on-hand inventory of raw materials and have begun to store more of that supply on our sites to minimize the impact of any logistics delays. Third, we have increased our focus on multi-sourcing of parts to reduce supplier dependence risk. And fourth, we have added assembly and test capacity at both our captive and contract manufacturing sites to provide redundant manufacturing capability in multiple regions. As COVID-19 spreads, we are complying with all government orders at our global sites. These orders may result in a temporary or prolonged shutdown of our sites, which could impact our shipments this quarter. For example, on March 16th, the Malaysian government issued a Restriction of Movement Order, resulting in the closure of borders and most businesses in Malaysia. Subsequently, the Malaysian government added semiconductors to the list of essential services, and we were able to resume operations. Our assembly and test facilities in Muar and Penang, primarily used for packaging high-value NAND, were briefly shut down and have since been able to return to production on a very limited basis, in compliance with local regulations. We are using our global supply chain network and increased flexibility to try and mitigate this production impact, and we are working to keep our commitments to our customers. Turning now to COVID-19 effect on demand. COVID-19 is significantly impacting China’s economic growth in the calendar first quarter, reflected in the sharp decline of smartphone and automobile unit sales. Weaker sell-through of consumer electronics and our customers’ factory shutdowns in China were headwinds for us late in our fiscal second quarter. In China, lower consumer demand was offset by stronger data center demand due to increased gaming, e-commerce, and remote-work activity. Looking to the third quarter, as these trends also take shape worldwide, data center demand in all regions looks strong and is leading to supply shortages. In addition, we are seeing a recent increase in demand for notebooks used in the commercial and educational segments to support work-from-home and virtual learning initiatives occurring in many parts of the world. We are also encouraged to see manufacturers in China increasingly returning to full production, and we have recently started to see China smartphone manufacturing volumes recover. Nevertheless, as the world deals with the outbreak of COVID-19, we expect that overall demand for smartphones, consumer electronics, and automobiles will be below our prior expectations for the second half of our fiscal 2020. Once the U.S. and other major economies have demonstrated containment of the virus’ spread, we expect a rebound in economic activity. Much depends on potential government stimulus and the rate, pace, and effectiveness of containment efforts. We are modeling an improvement in the trajectory of economic activity later into the second half of calendar 2020, with a further rebound in economic momentum into 2021. This is a very fluid situation, and we will learn more about the virus, its spread, and its economic impact over the next few weeks and months. Anticipating changes to our customer demand, we have been moving supply from smartphone to service the strength in data center markets for both DRAM modules as well as SSDs. Just like we have increased our raw materials inventory in these uncertain times, it is possible that certain customers are similarly increasing their inventory of DRAM and NAND products. We will manage our business with prudent and proactive action and continue to work closely with customers to understand their latest demand outlook. We are evaluating our production levels and CapEx plans for calendar 2020 and will adjust to the most recent demand requirements. Once we emerge from this low-visibility environment that is impacted by COVID-19, we expect the industry to resume its long-term growth trajectory with a DRAM demand growth CAGR in the mid-to-high teens and NAND in the 30% range. For both DRAM and NAND, we expect our multiyear supply growth CAGR to be in line with the industry’s demand growth CAGR. Focusing on 2020, we returned our DRAM operations to full utilization at the beginning of the calendar year, and our NAND operations continue to run with reduced wafer starts as we deploy capital efficiently through our conversion to replacement gate. While we returned our DRAM utilization to full production, we remain flexible to adjusting these levels depending on the near-term demand environment. Node transitions and industry supply growth in calendar 2020 could be impacted by disruptions to equipment companies’ operations, including travel restrictions hindering field service and engineering support. Recently, some equipment companies have also indicated delays in equipment deliveries due to the impact of various government actions to combat COVID-19. The situation with coronavirus is rapidly evolving, and disruptions could be much larger than we can see today. However, our continued focus on innovation and execution, combined with our rock-solid balance sheet puts us in an excellent position to navigate this period of uncertainty and capitalize on the long-term opportunities driving our industry once conditions eventually normalize. Stepping away from the COVID-19 discussion, I want to spend a few minutes talking about the tremendous progress we have made on our technology and products. This progress is contributing to the underlying strength of a new Micron and is a source of excitement for us as we look to the future. The new Micron is undergoing a dramatic transformation to combine product leadership with technology, manufacturing and supply chain excellence. Our objective is to have leading process technology so that we can deliver differentiated products to our customers and maintain a competitive cost structure. We are making good progress on this front in both DRAM and NAND. In DRAM, we were the first to introduce 1Z in volume production and expect over half of our bit production to be on 1Y and 1Z by the summer of 2020. We are managing the construction schedule of our new Taiwan cleanroom expansion carefully and currently remain on target for first output in calendar 2021. In the fiscal second quarter, we began sampling 1Z-based DDR5 modules and are on track to introduce high-bandwidth memory in calendar 2020. We are also making good progress on our 1-alpha node. In NAND, we made significant progress on our replacement gate, or RG, transition and expect to begin volume production in our current quarter, with revenue shipments to follow in our fiscal fourth quarter. We expect replacement gate production to be a meaningful portion of our total NAND supply by the end of this calendar year. Micron continues to lead on QLC NAND, which lowers costs for SSDs and helps us target market segments that are currently served by HDDs. QLC SSD bit shipments rose by 60% sequentially in our fiscal second quarter, with a meaningful portion of our consumer SSDs now shipping with our QLC technology. We expect QLC to continue growing in the second half of the fiscal year as market adoption increases. In the fiscal second quarter, we made significant progress on increasing the mix of high-value NAND bits to over 70% of total NAND bits, and we remain on track to drive this figure to around 80% in fiscal 2021. Despite normal seasonal weakness and COVID-19, mobile MCP products had record revenue in the quarter and showed strong sequential growth. SSD revenue also grew approximately 20% sequentially, led by greater than 50% growth in data center SSDs. The resolution of the assembly and test constraints we experienced in the fiscal first quarter, combined with market share gains, drove strong growth in these product lines. This mix improvement increases our profitability and reduces the volatility in our margins. Now let's turn to 3D XPoint. As the only company in the world with a portfolio of DRAM, NAND and 3D XPoint technologies, Micron is uniquely positioned in the marketplace. We are encouraged by the customer reception of our first 3D XPoint product, the X100, which is the fastest storage device in the world. It is a great start to our portfolio of differentiated 3D XPoint products built in collaboration with our customers. As we mature this X100 solution, we look forward to engaging a broader set of customers this year and delivering the value of 3D XPoint to the data center market. Early in March, we entered into a new 3D XPoint wafer sale agreement with Intel that replaces previous agreements. Intel has been an important partner over the years, and this new agreement ensures a continuation of our close relationship. Now, turning to highlights by products and markets. In SSDs, we had record consumer SSD revenue assisted by growth of our QLC NVMe consumer SSDs. We expect strong sequential bit growth in our NVMe product portfolio in fiscal third quarter as we continue the transition from SATA to NVMe. In SATA, we achieved several customer qualifications for our newest 96-layer SATA-based data center SSD. In the fiscal second quarter, we became the first company to deliver LP5 mobile DRAM products to customers, including Xiaomi, which is using our LP5 in its 5G-capable Mi 10 smartphones in 8GB and 12GB configurations. More recently, we have begun sampling the world's first LP5 DRAM-based UFS MCPs. These LP5 DRAM products will enable longer smartphone battery life and high-performance image processing. They are great examples of how Micron is innovating for our customers to enhance the end-user experience. We are encouraged that LP5 and UFS will become even more important as 5G adoption accelerates, reigniting smartphone unit sales and driving content growth. In just two short years, we have gone from trailing the competition in our mobile product portfolio to leading the industry with innovative, first-of-a-kind products, consistent with our new Micron strategy. In the data center market, we benefitted from strong demand for our products from key cloud and enterprise customers, driven in part by ongoing strength in cloud markets, increased use of online properties such as e-commerce, and the surge in remote-work requirements due to COVID-19 containment measures. In the graphics market, GDDR6 bit shipments increased more than 40% quarter-over-quarter, and we anticipate strong growth with the launch of new gaming consoles that are expected to feature 16 gigabyte of GDDR6. These new consoles will also deploy SSDs in place of hard drives for the first time. In the PC market, DRAM bit shipments and revenue declined sequentially, driven by slow seasonal demand and continued CPU shortages. Our client SSD sales also declined sequentially. In the automotive market, we delivered record DRAM and NAND revenue despite soft global automobile unit sales, as content growth remains strong in this market. Micron continues to lead the auto market with the industry’s highest-quality products. Power efficiency is increasingly important in the auto market, creating an opportunity for Micron to leverage our strength in low-power DRAM. LPDRAM now makes up approximately half of our auto DRAM revenue. In the industrial market, we had record bit shipments for both DRAM and NAND. In the longer term, we expect secular growth in the industrial IoT market as 5G rolls out and increases the importance of AI, machine learning and compute at the edge. I’ll now turn it over to Dave to provide our financial results and guidance.

Thanks Sanjay. We executed well in fiscal second quarter, and our reported financial results largely came in at the high end of our guidance ranges, despite the uncertainty and impacts related to COVID-19. Prior to the advent of COVID-19, we had outlined our expectation that FQ2 would mark the low point of our financial performance in this cycle, and our business trajectory has been consistent with those expectations. While we still expect improvements in our financial results, these expectations now need to reflect the evolving impacts of COVID-19. As Sanjay said, the situation remains fluid, and we continue to assess our plans and make real-time changes to adapt and optimize our operations. Total FQ2 revenue was approximately $4.8 billion, the high end of the guidance we provided for the quarter. Revenue was down 7% sequentially and down 18% year-over-year. FQ2 DRAM revenue was $3.1 billion, representing 64% of total revenue. DRAM revenue declined 11% sequentially and 26% year-on-year. Bit shipments were down byapproximately10% sequentially and up more than 20% on a year-on-year basis. ASPs were flat sequentially. FQ2 NAND revenue was approximately $1.5 billion, or 32% of total revenue. Revenue increased 6% sequentially and was up 9% year-on-year. Bit shipments declined in the low-single-digit percentage range sequentially and increased approximately 20% year-on-year. ASPs increased in the upper single-digit percentage range sequentially. Now, turning to our revenue trends by business unit. Revenue for the Compute & Networking Business Unit was approximately $2 billion, down approximately1% sequentially and down 17% year-over-year. We have now started to include all 3D XPoint revenue in CNBU reporting, as the use cases for 3D XPoint technology are more closely aligned with memory expansion and this business is being managed by CNBU. Excluding 3D XPoint, CNBU revenue would have been down 7% sequentially, primarily driven by weaker sales in the PC market. Revenue for the Mobile Business Unit was $1.3 billion, down 14% sequentially and down 22% year-over-year. The sequential decline was primarily driven by seasonality in certain products, as well as our decision to walk away from some business due to our concerns regarding pricing. Revenue for the Storage Business Unit in FQ2 was $870 million, down 10% from FQ1 and down 15% year-over-year. Without 3D XPoint, SBU revenue was up 9% sequentially. Operating profit margins for SBU improved sharply in the quarter and were at approximately breakeven levels. And finally, revenue for the Embedded Business Unit was $696 million, down 5% sequentially and down 13% year-over-year. The consolidated gross margin for FQ2 was 29.1%, exceeding the high end of the guidance range. The quarter-over-quarter margin improvement was driven by portfolio mix improvements and NAND pricing, and approximately $50 million of benefit came from the NAND depreciable life change we made in the prior quarter. The impact of underutilization at our Lehi fab was approximately $142 million or 295 basis points in FQ2. We expect underutilization to be approximately $160 million in FQ3. We are continuing our efforts to reduce spending in our Lehi fab, which we expect will begin to materialize in fiscal 2021. Operating expenses were $856 million in FQ2. Given the increased uncertainty, we have taken additional steps to control our OpEx. These actions include freezing our near-term hiring and cutting back significantly on discretionary spending. As a result, we expect OpEx to decline sequentially in FQ3. For modeling purposes, our FQ4 will be a 14-week quarter. As a result, we expect an uptick in operating expenses for FQ4 that is consistent with the extra week in the quarter. FQ2 operating income was $542 million, representing 11% of revenue. Operating margin was nearly flat compared to the prior quarter. Net interest expense was $6 million, compared to $7 million of net interest income in the prior quarter. Since the Federal Reserve has cut short-term interest rates, we anticipate lower interest income on our cash balance for FQ3. With increased debt from the drawdown of our revolver, we expect net interest expense to be approximately $35 million in FQ3, and it will likely be modestly higher in FQ4 with a full-quarter impact of the lower interest income. Our FQ2 effective tax rate was 3.2%. For the remainder of FY20, we expect our tax rate to be approximately 5%. We expect our long-term tax rate to be in the high-single-digit to low-double-digit range. Non-GAAP earnings per share in FQ2 were $0.45, down modestly from $0.48 in FQ1 and $1.71 in the year-ago quarter. Turning to cash flows and capital spending. We generated $2 billion in cash from operations in FQ2, representing 42% of revenue. During the quarter, net capital spending was approximately $1.9 billion, up slightly quarter-over-quarter. We are continuing to project FY20 CapEx in the range of $7 billion to $8 billion, including some increases for assembly and test flexibility that Sanjay mentioned. Free cash flow in the quarter was $63 million compared to $86 million in the prior quarter. This marks the 13th consecutive quarter of positive free cash flow. Our ability to generate cash consistently through the cycle is largely the result of the structural improvements made to Micron's profitability, which has led to more than $1.5 billion of operating cash flow improvement and more than 25 percentage points of operating cash flow improvement compared to the trough quarter of the prior cycle. We repurchased approximately 785,000 shares for $44 million in FQ2. In the first half of fiscal 2020, we've returned $94 million of capital through repurchases, representing approximately 65% of our free cash flow. Ending FQ2 inventory was $5.2 billion or 134 days. The increase was expected and largely due to the seasonally weaker demand experienced in FQ2 combined with our strategy of holding more NAND inventory as we approach our transition to replacement gate later in the calendar year. We have also increased our raw material levels as a precaution, given increased uncertainty in the supply chain with these materials. As we had outlined on our prior earnings call, we continue to walk away from unfavorably priced business, which also added to our near-term inventory levels. We ended the quarter with total cash of $8.1 billion and total liquidity of approximately $10.6 billion. FQ2 ending total debt was $5.4 billion. To preserve ready access to our liquidity in a period of macroeconomic uncertainty, early this quarter, we drew $2.5 billion from our revolving credit facility. Now, turning to our outlook. Based on our conversations with our customers, the demand for our products remains strong and the pricing trends are favorable. However, it is important to note that we are a lagging indicator relative to end demand, and macro projections have significantly weakened in the near-term. It is also currently unclear the extent to which inventory builds related to COVID supply concerns might be masking weakness in end demand. In addition, we also face the continued risk of production and logistics disruptions due to government actions, labor and material shortages, and to travel and border restrictions. Given these unusual uncertainties, our guidance ranges are wider than usual. However, these wider ranges do not reflect the magnitude of all the risks, and results could vary significantly from these ranges. Our guidance ranges also include expenses for COVID-19 mitigation efforts. With all these factors in mind, our non-GAAP guidance for FQ3 is as follows. We expect revenue to be in the range of $4.6 billion to $5.2 billion, gross margin to be in the range of 31%, plus or minus 150 basis points, and operating expenses to be approximately $825 million, plus or minus $25 million. Finally, based on a share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $0.55, plus or minus $0.15. In closing, notwithstanding the near-term uncertainty, we are pleased with Micron's financial execution exiting this cyclical downturn. FQ2 revenue was approximately 65% higher and gross margins 11 percentage points higher than in the prior trough, which occurred in FQ3 of 2016. This revenue growth far outpaced the growth of the overall semiconductor industry in this period. As we assess our cross-cycle performance from the last trough to this trough, we have delivered average returns as follows: Gross margins of more than 40%; EBITDA margins of 50%; CapEx to revenue in the 30s; and return on invested capital exceeding 20%. While the near-term business environment is uncertain, we believe that long-term demand trends for Micron remain robust. Our focus on execution, our strong product portfolio and our solid balance sheet ensure that Micron is in the best position to capitalize on the secular trends driving our business. I’ll now turn the call over to Sanjay for closing remarks.

Thank you, Dave. I want to close by thanking our extraordinary Micron team around the globe. These recent weeks have placed unforeseen challenges on businesses, but more importantly on people and families. Micron’s team has responded with professionalism and care during this period, and our team members are the reason we can execute our business plan and deliver the strong results we have reported today. To assist during this period, we are offering U.S. team members earning less than $100,000 per year a special onetime payment of $1,000. These figures are adjusted for market rates worldwide and 68% of our team is eligible. In addition, we are establishing an emergency relief fund for employees facing financial hardship. We are also focused on assisting the communities in which we operate through this difficult time. As part of that effort, we are contributing an additional $10 million through the Micron Foundation to address the impact of COVID-19, on top of what we have already donated in China, Italy and the U.S. We are also working with local officials to make space in our facilities available if needed for emergency services, as well as providing support through our supply chain operations to help source needed screening and protective equipment. Finally, we are accelerating our payment terms to our small business vendors to help with their liquidity. I’ve said many times that the new Micron is stronger than ever, and we are showing that strength today. Micron is leveraging our core expertise to drive leadership in technology, products and manufacturing, delivering differentiated solutions that enrich life for end-customers around the world. While the near-term environment creates uncertainty for all of us in our daily lives, the long-term fundamentals of our industry are strengthening and opportunities are expanding. With these opportunities in front of us, we will continue to execute with tenacity and resilience as we make demonstrable progress towards our vision. We will now open for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Joe Moore of Morgan Stanley. Your line is open.

Great, thank you. Dave, in your prepared remarks, you talked about inventory accumulation potentially masking weakness of customers. Where specifically might you have that anxiety? It seems like you think conditions are pretty strong and your customers don't seem to have a lot of lease end product inventory. So is that just a precautionary remark on your side or is there something that you're seeing that creates anxiety?

I'm sorry. I was just going to say, let me address that first and then I will definitely have Dave expand on that. So, it is an environment where there can be supply shortages, and of course, underlying demand trends in the markets we are participating continue to be strong. There can be supply shortages given the fluid situation related to the spread of coronavirus in various countries, the rate and pace is different. And ultimately, it will depend upon the rules and regulations that different governments may impose, that can potentially impact supply in the industry. So, just like we are accumulating some inventory ourselves to make sure that we don't have supply disruptions, it is legitimate to think that our customers can also be building some inventory to make sure that their supply chain is under control. So, I think this is the part that we are just mindful of. Although, when you look at work-from-home economy and study-from-home economy for students, that is certainly driving greater demands in the enterprise PC side and certainly placing – addresses quite a bit of constraints and stress on the infrastructure. So, the cloud infrastructure, the enterprise infrastructure definitely is driving increased demand as well. So, in that backdrop, I think, we are just being mindful in terms of making those comments, but I will let Dave further elaborate on this.

Yes. I think what you covered, Sanjay, is good. The only thing I'd add is, I think, we believe the strength in the data center market is real, and the inventory levels are normal in that market.

Thank you. Next question comes from Timothy Arcuri of UBS.

Thanks a lot. I guess Sanjay, there was some language in the release that you guys have talked about the fact that you're lagging indicator relative to demand. Can you just help parse through that? I guess, it sounds like maybe you're suggesting that the fiscal fourth quarter could be maybe down sequentially, which is typically up. I know that it's very difficult to tell what's going on right now, but maybe can you just help us walk through what the puts and takes look like into Q4? I know you don't want a guide Q4, but it sounds like it's possibly down. So, can you just help us think about that? Thanks.

So, certainl,y as you know, Tim, we are not guiding to Q4 here. And of course, the environment is fluid. These are unprecedented times in terms of anybody dealing any business, any vertical, or any country dealing with the situation and the spread and containment of coronavirus. But what I would say here is that with respect to our own assessment of the demand trends, I think underlying demand trends definitely continue to be healthy. And when we look at what we supply to our customers, customers build it into the product if there has to be any macroeconomic weakness, and we know that in the environment of coronavirus pandemic, there will be some impact on some aspects of the consumer demand. The consumer demand, there's a lag between the consumer demand getting impacted to the demand from our customers who are building the product in their supply chain is getting impacted. So, that's what we mean that sometimes there can be a lag between what we are supplying to our customers versus the impact on the demand in the marketplace. So, we are not guiding to fourth quarter. I think what's important is that it will depend on the spread of the virus, the containment of virus. Different countries may have their containment at different rates. So, while we have seen, for example, last fiscal quarter, our FQ2, demand in China and the consumer demand and the smartphone demand declined, we have also seen that China has contained this; and in fact, production is coming back in China and the demand is being restored in China. Same thing will happen in other parts of the world as well, but while there may be some impact on smartphone demand in different countries, eventually as the containment happens, the consumer demand will be back. And the long-term trends, certainly for our business are strong. The trends of 5G driving greater content in smartphone. When we come back on the other side of this pandemic, there will be -- the demand drivers will reassert themselves. Similarly, cloud demand continues to do well. As I mentioned, the COVID-19 scenario may actually be accelerating some of that demand in cloud that is driving greater demand for memory and storage. So, point is, the situation is fluid and we are really not prepared to guide you to FQ4 at this point.

Next question comes from John Pitzer of Credit Suisse.

Thanks for all the details, especially given how uncertain the environment is. I'm just kind of curious, Sanjay and Dave, is it possible to quantify what the impact of COVID was in the February quarter? And more importantly, is there a number in mind for May? It's clear, the uncertainty is increasing the range for the May guide, but is it also bringing down the midpoint? Any sort of guidance of how you're thinking through that would be very helpful.

So, I will let Dave address that.

Okay. Yes, sure. So, maybe without throwing out a number, because it's difficult to estimate, clearly we would have been above the high-end of the range on revenue if not for COVID-19, and there were some mitigation expenses already in both cost of sales and operating expenses that impacted us a bit in fiscal second quarter as well. We would have likely been more skewed to a higher growth number for fiscal third quarter, if not for COVID-19. And of course, it’s somewhat unusual for us we widened the range by a couple of hundred million dollars also to account for the uncertainty, as it relates to what might happen not only from a demand perspective but from a supply perspective, either one has some risk to it. Additionally, we have built in more costs associated with COVID mitigations for us. Sanjay and I already talked about the fact that we're carrying higher levels of inventory of raw materials. But, we're also having to flex our supply chain back -- and have some redundancy that can drive up some expenses on the cost of sale side. In addition, we may see an increased level of tariff expense in an effort to mitigate some supply disruptions that might occur. And also, there's a fair amount of expense associated with just the work-from-home model and allow -- enabling our employees to be able to do all the work they do in the offices, now in their homes. And so, there's some expense associated with that. So, our expense might -- likely would have been likely would have been down even more, particularly with all the actions we've taken to reduce expenses, if not for the fact that we have a bit of this offset or headwind associated with the mitigation expenses in the third quarter.

Thank you. Our next question comes from C.J. Muse of Evercore. Your line is open.

Yes. Good afternoon. Thank you for taking the question. And great to hear that you're safe and well. I guess, my question is, regarding the supply side, particularly for DRAM. You talked about some issues related to equipment installation and part availability. You've also talked about switching over some of your capacity from mobility to server. So curious, as you think that through, what does bit production look like now, either for you or for the industry here in calendar '20? I think, we were all thinking kind of 6% to 8% coming in. Is that still the right number, or is there a change there? Thank you.

So, I think what we had said before the COVID-19 scenario that in calendar year '20, the DRAM demand growth would be in mid-teens around mid-teens and that supply would be somewhat less for the year -- supply growth would be somewhat less for the year than the demand growth. And, of course, as we look at the scenario of supply growth, technology transitions, the node transitions in the industry perhaps can be impacted by tool deliveries or the engineering or the service support in the industry. It’s too soon to tell this. But, the point is that there could be some impact to supply, and not just related to the wafer output, but there could be some impact to the supply, as I said before, depending upon the rules and regulations in the orders in various countries where the supply chain for memory and storage exists. If those orders impact any production, there could be some supply growth impact there as well. It's hard to tell at this point. And we certainly -- when we look at our current supply growth, our current supply growth at this point is intact, but we are mindful of the changes that could occur due to the COVID environment. And of course, we continue to watch the demand as well. And on the supply side, we will take action. Today, we have shortages in supply as we have mentioned for server, DRAM as well as for cloud. Overall, there are shortages for DRAM. And therefore, we are shifting some of the supply from mobile to the DRAM side. But of course, we continue to keep track of what the demand looks like. And as we said, we will evaluate, making reductions in our production utilization or in terms of any CapEx aspects to manage the supply growth during the calendar year '20. But, it's too soon to really give you any specific projections on that.

Thank you. And next question comes from Mehdi Hosseini of SIG. Your line is open.

Yes. Thanks for taking my question. David or Sanjay, can you please tell me how you think of the mix of revenue from China, especially going back to what Sanjay said earlier. China is resuming operation. They're also providing incentives for 5G adoption. And I'm just curious how China accounted for your revenues in the February fall and how you see it trending for the remainder of the year?

So, I will let Dave answer that.

So, I think, cumulative revenues, I’ll have to go back and look at the exact statistics, but it was somewhere in the kind of 30%, I think it was China revenue in aggregate. Clearly, as you said, there's a comeback to work kind of phenomenon going on in China and there is economic stimulus. So that certainly will benefit. But, we're -- also the customers in the U.S. are -- a lot of them are in the cloud space. And of course, that's a big driver of our business today, given as Sanjay mentioned, the move to work-from-home and e-commerce and so forth. So, I'm not sure that the mix, as we project it is likely to shift around significant, geographically.

Our next question comes from Ambrish Srivastava of BMO.

I had a question on capacity and cost per bit. What percent of your CapEx is flexible? And I appreciate that things are so fluid, it's very hard for you to tell us how much you're going to -- you expect. But just as a ballpark, what percentage? And then, is the cost down going to change based on what you know as of now versus what you told us last quarter for both NAND and for DRAM?

In terms of CapEx, we -- for our fiscal third quarter, these won’t be impacting the CapEx for fiscal third quarter. However, for the rest of the calendar year '20, we certainly will be, as I said before, evaluating our CapEx, as well as our production utilization to make sure that our supply stays in line with our demand expectations. Demand expectations, of course, we laid out, working closely with our customers. So, just like in 2019, we made changes to CapEx fairly rapidly and we reacted fast, as well as we managed our production. We will of course be doing the same thing here. Just keep in mind that the situation with respect to coronavirus escalation across the globe just has really evolved rapidly over the course of last couple of weeks. So, we will of course keep close tabs with our customers’ demand expectations, and we will make sure that we make any adjustments to our CapEx, if needed, accordingly. We are absolutely continuing to look at that. And in terms of cost reductions, of course, cost reductions are a function of technology transitions that are being made in the fabs. And so far, we are on plan with respect to the cost guidance that we have provided to you for our fiscal year '20.

I would add that on the NAND front, as you seen, we've gotten a fair amount of benefit from the change in depreciation in the first half of fiscal '20. So that, in essence, kind of pulled ahead. As you remember, probably, we mentioned that as we transition the replacement gate, FY20 would show minimal cost decline and really FY21 was where we would see it. But with the depreciation change, the reality of what's happening is we're kind of pulling ahead some of that improvement into fiscal '20. So, when you look at the percentages, it's better in FY20, and maybe not as good as we originally kind of telegraphed, in FY21. And in addition, what we continue to drive is mix to the high value solutions. They generally carry higher costs. And we hope to continue that. Our goal is to get to 80%. So, that certainly will also be an impact on the cost side as well. But, if you step back and then look at how we do over a multiyear period in terms of NAND improvement, once we're really running on the second generation replacement gate and good momentum, we're up to the right yield, it’s running through the inventory and showing up in cost of sales. And you see that over a multiyear period, you'll see that arc declining costs over a multiyear period is actually very good, very healthy, very competitive.

And I would just add that due to COVID-19, as we said that we are enabling greater flexibility in our supply network, by adding captive capacity as well as adding capacity on part of our subcontractors to give us the opportunity and resiliency in the supply chain in case there are rules and regulations in various countries that impact our production. So, some of those aspects certainly do have headwinds on the cost side, but by and large, I think those are being managed well. And overall, our cost targets for fiscal year '20 at this point are on track.

Our next question comes from Aaron Rakers of Wells Fargo.

I want to go back to the customer inventory dynamics and trying to understand or appreciate how you think about that potential buildup of inventory. Can you help us understand whether you've implemented anything differently or have different lines of visibility into those customers? How you exactly plan on managing or seeing any kind of inventory build, particularly at some of the cloud customers?

I mean, we certainly work closely with those customers. Our relationships over time have only deepened with those customers. We have become more valuable partner to them, as well as we have expanded our product offering. For example, on the SSD side, we have brought out NVMe SSDs. Those are getting qualified in data center. On the DRAM side, we have been a strong partner with highest quality with those customers. And on the cloud side, still, in the very, very early innings of all the growth and for memory and storage and cloud. So, compared to the last cycle, our relationships with those customers have only expanded, have deepened. We continue to work closely with them in terms of understanding their demand requirements. And this is what the best that we can do in terms of working closely with those customers who understand the requirement. And I would like to once again point out that we are in an environment even before COVID-19 that CapEx investments in cloud were on a strong growth trajectory, a lot of that CapEx moving toward the infrastructure for memory and storage requirements. Of course, new CPU architectures with more cores in them, as well as more channels giving you greater attachment for memory and storage and of course, the workloads that are demanding more DRAM memory for memory intensive compute application, as well as for faster access, driving more SSDs. So, those demand trends pre-COVID were already strong. And with COVID if anything we have seen that work-from-home digital economy is driving greater demand on that structure and is accelerating some of that demand. So, we of course -- as we work through the memory shortages, we continue to work closely with our customers. And while the smartphone demand maybe somewhat down, for example, in China in FQ2, but that demand is coming back in China. And we will continue to monitor these trends in the other parts. And it just requires continuing to work closely with the customers, understanding the requirements, and are applying our own judgment and remaining mindful in terms of how we manage all our supply. So, it's really customer relationship in terms of managing our supply, growth and understanding the demand expectation.

Thank you. Our next question comes from Harlan Sur of JPMorgan. Please go ahead.

Good afternoon. And thank you for taking my question. Strong memory demand driver in the second half of this year, as you pointed out, is the new game console refresh. I think there's 35% to 100% more GDDR DRAM memory versus prior generations platforms and the move to SSD storage versus HDD. Given your leadership in graphics DRAM, we know that the Micron team will be participating here on these new consoles. But given your good NVMe client SSD positioning, is the team also participating in the console refresh with either your band or your SSD products?

Certainly as we expand our portfolio of SSDs, yes, we just maybe just had SATA. Now, we have NVMe SSDs as well and we're broadening our reach with those NVMe SSDs into the end market applications as well as the customers. Certainly, it is a growth market opportunity for us, not only in DRAM but also in SSDS. But as you know, these take product qualifications with the customers and then we are able to realize the benefit of sales and revenue growth in those areas. I want to highlight here that as we have expanded our product portfolio, both on the SSD side as well as in mobile on multichip packages, and bringing out discrete UFS products for mobile applications as well. That really has enabled, as I mentioned in the script, opportunity for us to gain share in the marketplace. We have gained share in NAND, managed NAND solutions in mobile, we have gained share in SSDs as well, that's enabling us to deliver healthy results in FQ2, and our gain in share and expanding product portfolio also positions us well to navigate through these choppy waters related to COVID-19. And we remain very-focused on continuing to expand the product portfolio and broaden our customer relationships in the kind of applications that you just talked about in gaming consoles, both for DRAM and NAND as we look forward to the future long-term secular demand trends and addressing those requirements by our customers.

Thank you. Our next question comes from Mitch Steves of RBC Capital Markets Your line is open.

Yes. Thanks for taking my question. So, impressive guidance there. One of the questions I did have though, just the offset of kind of commercial PCs coming back and more people are working from home, offset by kind of the smartphone unit demand. So, how are you guys thinking about that for the rest of the calendar year? Obviously, there is a lot of moving parts, but just how do you guys track kind of the lower expected sales prices probably in the handset side versus commercial PC upgrades from people work-from-home.

So, yes, that's correct. I think, there is a near-term surge in demand with respect to commercial PCs. I mean, if you look at just Micron itself, Micron itself bought something like 5,000 notebook computers to really provide it to our team members in terms of enabling them to work-from-home and we’ve implemented those really very, very fast. So yes, surge in demand related to enterprise PCs and that bodes well for both SSDs, as well as for DRAM. And as we noted also with respect to virtual learning and students learning from home that also drives demand in notebooks. How long this trend lasts, and of course, it is global in nature. But, how long does it last? We will have to see. But overall, yes, I mean, we do see that. While there may be some smartphone, the weakness outside of China, while China is recovering on the smartphone front. Certainly, as I said, enterprise PCs and other PCs for virtual learning along with data demand in the data center world is a tailwind for us.

And next question comes from Raji Gill of Needham & Company.

Just another question on the demand conditions. I think, David mentioned in his prepared remarks that the macro conditions had weakened in the last couple of weeks. And you talked about some of the moving pieces of that. If we try to quantify that, the impact, DRAM is about 70% of your revenue, NAND is 30%. What percentage of DRAM is coming from PCs, hyperscalers, mobile and likewise on the NAND side, so we can just kind of get a sense of where the potential strengths and weaknesses could be?

So, we don't break it down specifically in terms of percentage, but I think what's important is that we are a very well diversified supplier. And we have a broad portfolio and end market applications are well diversified as well all the way from data center to PC to smartphone, networking for DRAM. And Micron is well-positioned in these markets. And certainly some of these markets are seeing some shortages today, such as on the side of data center, DRAM requirements. And while others, we are continuing to monitor overall demand spend. But we don't break it out. But, important thing is that the underlying vectors for demand are good. And as we goes through the uncertainties related to COVID-19, when he come out on the other side, I'm very confident that our broad portfolio and deep customer engagement and the technology and product capabilities, I think we will overall do just fine. By and large, our mix is fairly similar to the industry in terms of overall mix. If you look at the industry, I think you'll see that server is in the 25% to 30% range, the mobile tends to be around 25%, PC is 20% give or take some, and of course then is all the others, which we can call like specialty, which includes automotive, includes industrials and other applications. And in that you can I think put down around 20%. So, I think, roughly speaking, I think that’s the kind of mix. And as you can see, it’s well diversified across these various end market segments.

Our next question comes from Chris Danely of Citigroup.

I guess, just a follow-up on some other folks’ questions. So, you talked about the demand forecast or things changing in the last couple of weeks? Can you just give us a sense of what you've seen in the last couple of weeks? And then, also for your -- sort of your forward forecasting, whether it’s internal or what you're giving us, are you shaving down what your internal forecast is in anticipation of some more weakness, or is this kind of like, what we see is what we have?

So, I think, as Dave mentioned in his prepared remarks that we see strong demand and favorable price trends, but we are also seeing that in China, as is well known that during the timeframe of our fiscal second quarter, aligned with the COVID-19 spread in China, starting from around mid-January kind of timeframe, it had impacted smartphone demand in China, while it grew the demand in the could infrastructure structure in China. So, as now over last couple of weeks, you see the spread of coronavirus across the globe and various actions being taken in various countries to contain the spread of coronavirus, we do expect that there will be some impact on the consumer demand, but it is really too soon to quantify that. And, again, having said that, we also see increasing demand coming from the cloud side, as well as from enterprise PC applications. So we are seeing acceleration of demand on that front. So, we are continuing to really manage that. And this is all escalating over the last couple of weeks. And we will, of course, continue to work closely with our customers to understand their increases in demand, as well as their demand outlook, for example, in the consumer devices and then manage our business accordingly.

The only thing I'd add is, in the prepared remarks, leading up to it, I did say that pricing and demand trends were favorable. And that included all the way up until today, but of course, there is a higher degree of uncertainty and that's kind of why we got to the range we did.

That does end our session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.