Micron Technology, Inc. (MU) Q3 2021 Earnings Report, Transcript and Summary

Good afternoon. My name is Josh, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron’s Third Quarter 2021 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 session. [Operator Instructions] Thank you. It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Vice President of Investor Relations. You may begin your conference.

Thank you, and welcome to Micron Technology’s fiscal third quarter 2021 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 may 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 may cause actual results to differ materially from statements made today. We refer you to the Form 10-K and 10-Q that we file with the SEC, 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, everyone. We delivered outstanding results in FQ3. Our strong execution enabled us to achieve the largest sequential EPS improvement in our history and to set multiple revenue records. NAND hit record revenue, propelled by a record mobile MCP, consumer SSD, and client SSD revenues. Our embedded business exceeded $1 billion for the first time, with record revenue across automotive and industrial markets. We also achieved key technology and product milestones, with our industry-leading 1-alpha DRAM and 176-layer NAND, reaching a meaningful portion of our bit production and QLC NAND accounting for a majority of our client SSD bit shipments. We expect DRAM and NAND supply to remain tight into calendar 2022 as the global economy rebounds. The strong demand for memory and storage across the data center, intelligent edge and user devices puts Micron in the best position ever to fully capitalize on these exciting opportunities. We continue to make solid progress on our goals to deliver industry-leading technology and improve our cost structure, to bring differentiated products to market and improve our product mix, and to grow our share of industry profits while maintaining stable bit share. I will start with an update on our operations. Despite shortages across the semiconductor ecosystem in various assembly materials and assembly capacity, Micron delivered record assembly output this quarter, which helped fuel our strong revenue performance. Our assembly and test success was the result of a strategic decision we made several years ago to increase our captive footprint and strengthen relationships with suppliers and partners. We successfully mitigated the impacts of the drought in Taiwan with no reduction in our production output. Taiwan’s rainy season has begun, bringing with it sufficient water supply to support our manufacturing requirements. While the drought in Taiwan is behind us, the rise in COVID-19 cases in Malaysia, India, and Taiwan are a risk to our manufacturing operations and R&D activities in these regions. We are also working with local governments to facilitate on-site testing and vaccination for Micron team members where possible. Additionally, in order to protect Micron team members at our Muar, Malaysia back-end facility, we temporarily reduced our on-site workforce early in FQ4, which reduced output levels. We have since started bringing back team members to the site as the situation has improved. While we ramp back toward full production levels in Muar, we will utilize our global supply chain, including subcontractor partners, to meet our customer commitments and minimize any disruption to delivery schedules. Earlier this year, we announced our decision to exit 3D XPoint development and manufacturing and to reprioritize our R&D investments toward new CXL-enabled memory solutions. CXL, or Compute Express Link, is a new industry standard interface that will significantly change data center architecture through high-performance connectivity between compute, memory and storage. We are developing exciting CXL-enabled products and will have more to share on our roadmap in the future. As part of our exit from the 3D XPoint business, we announced our intent to sell our Lehi, Utah, fab. Today, I’m pleased to report that Micron has reached an agreement to sell the fab to Texas Instruments in a transaction that we expect to close later this calendar year. We see this transaction as positive for our team members, the Lehi community and our shareholders. The Lehi site has been an important part of the Micron network and responsible for many technology and manufacturing innovations across NAND and 3D XPoint products. Texas Instruments will offer all Lehi team members the opportunity to become TI employees at the Lehi site upon closing. After the sale closes, we will be able to eliminate the remaining underloading costs we were incurring at Lehi, enhancing our efficiency and strengthening our profitability. Dave will provide additional details. Now for an update on technology and products. Our industry-leading 1-alpha DRAM and 176-layer NAND process technologies are now in production and ramping according to plan. These nodes accounted for a meaningful portion of our bit production in FQ3 and are on track to become a meaningful portion of our revenue in FQ4. We expect that, by end of calendar 2021, the combination of 1-alpha and 1z DRAM nodes will represent the majority of our DRAM bit production, and at the same time, 176-layer NAND will be the majority of our NAND bit production. In fiscal year 2022, we expect these workhorse nodes to fuel bit growth and provide us with good front-end cost reduction on a like-for-like basis. However, there are two factors that will create cost headwinds for us next fiscal year. The first is driven by our strategic portfolio migration toward more advanced and higher-value products such as DDR5 memory, high-density server modules and SSDs. While this portfolio shift helps us increase profit share, it will also impact our costs next fiscal year. The second cost headwind is driven by several actions we have taken in our supply chain to increase resilience and provide business continuity to our customers across all product lines. While these actions will allow us to capitalize on robust market demand, they will also impact our costs. We are on track to support customers as they begin to introduce DDR5-enabled platforms in the second half of calendar 2021. DDR5 was designed to meet modern data center requirements, including improved performance through doubling of memory bandwidth and improved reliability and efficiency through integration of on-die ECC. DDR5 features a larger die size compared to DDR4, limiting DRAM industry supply growth and cost reduction as it ramps, starting from the second half of calendar 2021. In storage, we introduced the industry’s first UFS 3.1 solution for automotive applications this quarter. We also announced volume production of client PCIe Gen4 SSDs built on the world’s first 176-layer NAND and available in a variety of form factors. We are delivering 176-layer NAND in volume to OEM and channel customers across multiple markets and have several products in customer qualifications. We are also driving an increased mix of QLC NAND, which brings down the cost of SSDs, accelerating the replacement of hard drives. QLC SSD adoption continues to grow, and we delivered record QLC SSD revenue and bit mix in FQ3. Turning to end markets. In the data center, integration of AI into data-centric workloads will drive long-term growth, with memory and storage becoming an increasing portion of server BOM cost. Propelled by the transition to DDR5, strong capabilities in graphics memory and the introduction of HBM and NVMe SSD product offerings, Micron’s strong product roadmap across DRAM and NAND positions us for success in the data center. We will enhance our NVMe SSD portfolio with the introduction of new products with internally designed controllers in the coming months. In FQ3, data center DRAM revenue grew quarter-over-quarter, driven by strong demand from cloud customers and increases in module density. Data center SSD bit shipments and revenue grew sequentially, driven by both cloud and enterprise. Data center demand is expected to be strong in the second half of calendar 2021 as cloud demand picks up and enterprise demand improves due to broad economic recovery. In addition, we expect that the new CPUs featuring more memory channels will accelerate server memory demand starting later this year and continuing into 2022. The PC market continues to benefit from the trend toward greater mobility as people embrace a work or learn-from-anywhere culture. Industry expectations for calendar 2021 PC unit demand growth have increased to the high teens, driven by robust notebook sales and a recovery in the desktop market. In the fiscal third quarter, we achieved several customer qualifications for our 1-alpha-based DDR4 products across various PC platforms. Our client SSD bit shipments were up sharply quarter-over-quarter and year-over-year. In graphics, bit shipments increased sequentially and year-over-year, driven by strong next-generation game console and graphics card shipments. Micron has an excellent position in the graphics market, with a broad product portfolio and deep customer partnerships. Mobile business achieved record MCP quarterly revenue. We made strong progress with our 1-alpha LPDRAM products and 176-layer UFS 3.1-enabled solutions. We have already completed customer qualifications for some of these products. While COVID-19 has softened mobile demand in parts of Asia, supply shifts to address stronger demand in other regions are keeping the global market in tight supply-demand balance. Mobile unit sales are expected to show healthy growth this year, with some variability across geographies, driven by an expected doubling of 5G units in calendar 2021 to more than 500 million units. These 5G phones also feature rich content demanding significantly higher DRAM and NAND. We are also encouraged to see bold OEM innovation in new devices like gaming smartphones featuring 18 gigabyte of DRAM. Our automotive business delivered a third consecutive record quarter, driven by continued manufacturing recovery and increased LPDDR4 and eMMC content for in-vehicle infotainment and driver assistance applications. Auto unit sales are expected to grow significantly from last year. Auto memory and storage content growth trends remain strong, particularly as EVs, which have significantly higher memory and storage content requirements, grow much faster than the broader auto market. We are continuing to see record automotive and industrial segment demand, yet despite our best efforts, we may be unable to meet all the demand from these customers over the next few months due to certain non-memory semiconductor component shortages in our supply chain. Turning to our market outlook. While the pandemic remains a risk factor, calendar 2021 is shaping up to be a strong year fueled by the macroeconomic recovery combined with secular drivers, such as AI and 5G, that are creating sustained demand increases across broad end markets. As a result, our expectations for calendar 2021 DRAM and NAND bit growth have increased since our last earnings call, and we now expect calendar 2021 DRAM bit demand growth to be somewhat above 20% and NAND bit demand growth in the mid 30% range. There is currently unmet demand for DRAM and NAND due to end market strength. This unmet demand would have been even larger had it not been for the non-memory component shortages influencing our customers’ ability to manufacture their products, particularly in the PC, automotive and industrial markets. These shortages can cause variability in demand patterns as customers experience challenges sourcing matched sets of non-memory components. We are hopeful that foundry capacity coming online can begin to alleviate some of the component shortages in the second half of calendar 2021 and support robust memory and storage growth. Additionally, as a result of strong end market demand trends, the lessons of the pandemic and ongoing geopolitical uncertainty, some customers will change their inventory management strategy from just-in-time to just-in-case and increase the target level of what they consider normal inventory levels. Long term, we see a DRAM bit demand growth CAGR of mid to high teens and a NAND bit demand growth CAGR of approximately 30%. Turning to Micron supply, we are targeting to align our long-term bit supply growth CAGR with the industry bit demand growth CAGR across DRAM and NAND. However, we expect year-to-year variability caused by node-transition timing. In both DRAM and NAND, we expect our calendar 2021 bit supply growth to be below the industry bit demand growth, and we have used our inventory to add to our bit shipment growth this year. Before handing over to Dave, I have one more important announcement to share regarding our DRAM technology and manufacturing strategy. Based on our assessment of the progress EUV has been making and aligned with our technology strategy and industry-leading DRAM scaling roadmap, we plan to insert EUV into our DRAM roadmap starting in the 2024 timeframe. Micron has placed purchase orders for multiple EUV tools from ASML as part of a long-term volume agreement. The pre-payments for these systems will contribute towards the fiscal year 2021 and fiscal year 2022 CapEx. We have increased our fiscal year 2021 CapEx to be somewhat above $9.5 billion, mostly from areas that do not impact calendar 2021 and fiscal year 2022 bit growth, such as these EUV pre-payments, construction spending and other R&D and corporate items. I will now turn it over to Dave.

Thanks, Sanjay. Micron delivered outstanding FQ3 results. Revenue and EPS grew by a record amount sequentially on an organic basis, and we generated over $1.5 billion in free cash flow in the quarter. Total FQ3 revenue was approximately $7.4 billion, up 19% quarter-over-quarter and up 36% year-over-year. Revenue growth was driven by stronger DRAM and NAND pricing and by robust customer demand for Micron’s products. FQ3 DRAM revenue was $5.4 billion, representing 73% of total revenue. DRAM revenue increased 23% sequentially and was up 52% year-over-year. Bit shipments increased in the low single-digit range sequentially, and ASPs were up approximately 20% quarter-over-quarter. FQ3 NAND revenue was approximately $1.8 billion, representing 24% of total revenue and an all-time high for the Company. NAND revenue increased 10% sequentially and was up 9% year-over-year. Bit shipments increased by low single digits sequentially while ASPs increased in the high single-digit percentage range quarter-over-quarter. Now turning to our revenue trends by business unit. Revenue for the Compute and Networking Business Unit was approximately $3.3 billion, up approximately 25% sequentially and 49% year-over-year. CNBU revenue growth was driven by broad-based sequential pricing increases. Revenue for the Mobile Business Unit was $2 billion, up 10% sequentially and 31% year-over-year. Mobile demand remained healthy as 5G handset sales continue to ramp. Revenue for the Storage Business Unit was $1 billion, up approximately 19% from the prior quarter and approximately flat year-over-year. Both client and consumer SSD revenues set records. And finally, the Embedded Business Unit generated record revenue of $1.1 billion, which was up 18% sequentially and 64% year-over-year. Automotive and industrial revenues were at an all-time high for the Company. The consolidated gross margin for FQ3 was 42.9%, up 10 percentage points from the prior quarter. DRAM and NAND price increases helped drive the margin expansion in FQ3. Gross margins also benefited by 100 basis points from $75 million less depreciation at our Lehi fab, which is classified as “assets held for sale.” Operating expenses were $821 million in FQ3, which we continue to tightly manage. Operating expenses also benefited from approximately $21 million of gains from the sales of certain assets. FQ3 operating income was $2.4 billion, resulting in an operating margin of 32%, compared to 20% in the prior quarter and 18% in the prior year’s quarter. FQ3 EBITDA was $4 billion, resulting in an EBITDA margin of 53%, compared to 45% in the prior quarter and 44% in the prior year. Net interest expense was $31 million in FQ3, and we expect it to be roughly flat going forward. Our FQ3 effective tax rate was 8.4%. We expect our tax rate to be in the high single digits for FQ4. Non-GAAP earnings per share in FQ3 were $1.88, up from $0.98 in FQ2. The $0.90 sequential improvement was the largest in Micron’s history. EPS included approximately $0.05 from the sale of certain assets, investment gains from Micron Ventures and one-time tax items. Turning to cash flows and capital spending. We generated approximately $3.6 billion in cash from operations in FQ3, representing 48% of revenue. Net capital spending was approximately $2 billion during the quarter. As Sanjay mentioned, we now expect our FY21 capital spending to be somewhat higher than $9.5 billion. Most of this CapEx increase that we are highlighting today will not increase our CY21 and CY22 bit supply. We expect that while we invest in the EUV infrastructure and initial deployment, our capital intensity will increase to mid-30% of revenues. Once we get past the investment period of EUV adoption, we expect that these tools will boost our competitiveness and help drive productivity of our fabs. As a result of the strong market environment and Micron’s extraordinary execution, we generated positive free cash flow of $1.5 billion in FQ3. The increased cash flow was driven by strong revenue growth, higher margins and efficient working capital management. We expect free cash flow to continue to improve in the fourth quarter, driven by continuing growth in revenue and earnings. We completed share repurchases of $150 million, or approximately 1.7 million shares, in FQ3. From the inception of the share repurchase program, we have repurchased $3 billion worth of Micron stock, representing 55% of our cumulative free cash flow. In addition, since FY19, we have used approximately $2 billion in cash to settle conversions of our convertible notes, including approximately $800 million to settle the convert premiums. Combining the share repurchases and convert premiums, we have used $3.8 billion or 69% of our cumulative free cash flow toward reducing our share count. We plan to continue repurchasing shares in FQ4. Ending FQ3 inventory was $4.5 billion or 98 days. We remain in a very lean inventory position as demand continues to outstrip our supply. We ended the quarter with total cash and investments of $9.8 billion and total liquidity of approximately $12.3 billion. FQ3 ending total debt was $6.7 billion. Our balance sheet is rock solid, with investment-grade ratings from all three rating agencies. In the last three months, Fitch and Standard & Poor’s both raised their outlook from stable to positive for Micron debt. These upgrades to the outlook for our debt ratings are further evidence of the financial transformation underway at Micron. Before providing the financial outlook, I want to cover the financial implications of the sale of our Lehi fab. We are pleased with this transaction and believe that it is good for our shareholders, as it frees up capital and enhances our ongoing profitability. The economic value for Micron from the sale is $1.5 billion, comprised of $900 million in cash resulting from the sales transaction and approximately $600 million in value for select tools and other assets that Micron will retain for redeployment to its other manufacturing sites, or that are sold to other buyers. We are taking an impairment charge of approximately $435 million, or approximately $330 million on an after-tax basis, as the $900 million sale price is below our book value of the assets being sold. Note that the tools that we are keeping have largely been depreciated but have substantial future value in our manufacturing network. As we have previously disclosed, we stopped depreciation of the Lehi fab assets last quarter and this benefited our costs by approximately $75 million in FQ3. Once the sale is completed, we will further improve our profitability by entirely eliminating our underload charges. Now turning to our near-term outlook. Both DRAM and NAND markets are tight, and we expect pricing increases for both markets in the fiscal fourth quarter. In FQ4, we’re qualifying 1-alpha and 176-layer nodes with several customers. We expect these nodes to support a modest level of bit growth and face cost headwinds that are common at this stage of the ramp. Additionally, we also expect cost headwinds from product mix and COVID mitigation. Despite cost headwinds, we expect strong improvement in our financial performance in FQ4. Our growth opportunity is healthy, and market momentum heading into fiscal year 2022 is strong. With all these factors in mind, our non-GAAP guidance for FQ4 is as follows: We expect revenue to be $8.2 billion, plus or minus $200 million; gross margin to be in the range of 47%, plus or minus 100 basis points; and operating expenses to be approximately $900 million, plus or minus $25 million. Finally, based on a share count of approximately 1.15 billion fully diluted shares, we expect EPS to be $2.30, plus or minus $0.10. Micron’s relentless focus on execution positions us well to generate solid returns for our shareholders. Measuring our performance trough to trough across the cycle from FY16 to FY20, we substantially improved our EBITDA margin, and our revenue grew by more than 70%. During this time, we delivered average gross margins of 40%, EBITDA margins of 50% and return on invested capital of 20%. We believe Micron’s strong financial performance will continue cross-cycle, and over the long term, our revenue growth will outperform the broader semiconductor industry. Our industry-leading technology, dramatically improved product portfolio and financial strength position us well to capitalize on the long-running demand trends driving the memory and storage industry. I will now turn it back to Sanjay.

Thank you, Dave. Micron’s fiscal third quarter results demonstrate the strength of our business, and we expect to achieve continued strong results in the future. Demand for memory and storage is solid across market segments, and industry trends like artificial intelligence, edge computing and 5G continue to create new opportunities for Micron. Our team is building on our technology leadership to deliver bold new solutions that offer valuable differentiation for our customers. Micron’s business is healthier and more robust than ever, and we’re energized to seize the opportunities ahead at a truly exciting time in the semiconductor industry. We are also leveraging our success to deliver results for all our stakeholders. In April, we released our sixth annual sustainability report, highlighting progress towards our environmental, social and governance goals. I am pleased to report that we are on track to achieve the environmental and sustainability goals we set last year, despite the challenges posed by the pandemic. In fact, our ESG risk scores have improved to the top 10% of the semiconductor industry according to the third-party rating agency Sustainalytics. We are also making good progress on achieving 100% renewable energy consumption in the U.S. by the end of 2025. In calendar 2021, we continue to focus on emissions abatement, transition to renewable sources, water restoration and increased efforts to reduce, reuse or recycle waste. We will pursue these goals with the same focus with which we have created sustained momentum in the business, and I look forward to providing updates on our progress on future calls. We will now open for questions.

Thank you. [Operator Instructions] Our first question comes from C.J. Muse with Evercore. You may proceed with your question.

Yes. Good afternoon. Thank you for taking the question. I guess, end-market demand question. There’s clearly fears out there around PC speaking volatility around handsets and –whether there’s any inventory build on the cloud side. Yet here, you’re talking about DRAM and NAND remaining tight into calendar 2022. So, I guess, can you walk through what you’re seeing out there from a demand perspective? And then also, I think very importantly, particularly to the DRAM side, how you’re thinking about supply, which clearly seems to be constrained both this year and next year?

Thanks, C.J. So, on the demand side, we certainly see strong demand across almost all end markets. PC, on a year-over-year basis in calendar year 2021, the growth is in high-teens. And, of course, the SSD attach rate average content continues to increase on the NAND side and continue -- PC continues to drive healthy demand for DRAM as well. Our data center, after the digestion period earlier in the year in the second half, driving strong demand for us as well. Smartphone, 5G trends driving unit sales as well as average content growth. Automotive, we can’t meet the supply. We can’t meet the demand that is strong there. Industrial markets, the demand is strong. So, across the Board, almost across all end markets, we are seeing strong demand. In fact, in the industry, there is unmet demand. And you know that there is semiconductor shortage across the technology ecosystem. And as that semiconductor shortage gets alleviated over time, that actually is going to create more demand for memory and storage because every end application today, whether it’s analog IC-related or memory, CPU cores-related, all of them actually required memory and storage. So semiconductor shortage, which is actually impacting some of the demand, as that gets alleviated over the course of next seven quarters, that too will bring about increased demand. So, demand trends are strong. The supply, as we see through the year, through the end of the year and into calendar year 2022, is tight as well. And you know that CapEx in the industry has been on the DRAM side, extremely disciplined. The producer inventories, the supplier inventories are running extremely lean as well. I can certainly speak for our inventory. Our days of inventory are at 98, extremely low as well. And capital intensity is increasing as well in the industry, and that all bodes well for disciplined supply growth as well. We talked about that how DDR5 as a spec that is there in the industry, as a JEDEC spec, actually requires more on chip ECC that results in bigger die sizes for everybody in the industry for DDR5 over DDR4. So that, again, as you can well understand, as the industry transitions to DDR5 over the course of next several quarters in 2022 as well as in 2023, that too means less supply growth availability from the wafers, even with technology transitions, and so, all of those trends from the demand side as well as from the supply side bode well for our industry.

That’s very helpful. If I could follow-up on the gross margin side, Dave, you talked in the prepared remarks around higher cost mix and investment in the supply chain. Can you walk through the moving parts there for fiscal 2022 gross margins?

So obviously, one of the bigger components of the margins for fiscal 2022 is going to be around pricing. And we don’t provide pricing beyond the next fiscal -- beyond this quarter, other than to say that we think pricing will be up next quarter, and we are suggesting that it would be tight at least into 2022. So, that’s as much as I can give you on the pricing side. On the cost front, when you look at the front-end cost reductions that we’ll see next year on a like-for-like basis, driven by, as Sanjay mentioned in the prepared remarks, the ramp of 1-alpha and the ramp of 176 on the NAND front, we do feel like those costs will be good. The only counter to that is we will see a higher mix of products that carry higher costs. Sanjay mentioned like DDR5, higher density server modules, as more SSDs, all those things will be a bit of a headwind on the cost front. And we will likely go into the year with some COVID mitigation costs. That also will be a bit of a headwind. Now hopefully, that over the course of the year, alleviates and that starts to help on the margin front. The only other factor is we will have a little bit of a lift in Q4 from Lehi as the full amount of depreciation goes away in the fiscal fourth quarter. And then, once we close on the sale, all the underload charges will also go away. The way I think I’d model it is maybe about $20 million of benefit in the fourth quarter and probably another $20 million in the first fiscal quarter and assuming we close somewhere close towards the end of the first fiscal quarter, we should be -- that should be behind us.

Thank you.

Thank you. Our next question comes from John Pitzer with Credit Suisse. You may proceed with your question.

Yes, guys. Just two quick questions. Dave, maybe to follow-up on C.J.’s questions about cost. I want to make sure I understand the messaging here. I get that these higher value-added parts have higher costs, but should they also have higher gross margins, or am I thinking about that incorrectly? And then, I have a follow-up.

It somewhat depends on the product itself. But I would say, in general, we are trying to drive towards higher value products, which arguably on a like-for-like -- or at least on a comparable basis to other products would carry better gross margins.

Perfect. And then, as my follow-up, two quarters ago, Dave, you didn’t buy back any stock. This quarter, it was $150 million, which was I think 10% of free cash flow, notwithstanding what you’ve done over multiple quarters. I’m just kind of curious as to the message you’re trying to give us here, especially if you look at sort of the cross-cycle risk reward in the stock, why not be more aggressive with the buyback here? And does that portend something about next fiscal year’s CapEx? And as you’ve talked about that CapEx, is next fiscal year a year that you should outgrow bits relative to the industry?

Okay. A lot of questions on pack. Okay. So, on the buyback, I wouldn’t read anything into the $150 million. Some quarters, we’ll have higher levels of buyback than others. We were -- we did have an eye on our net cash position. And so, that was something that we were trying to move in the right direction. I think you’ll find in the fourth fiscal quarter that our buybacks are meaningfully higher than our third fiscal quarter. So, nothing to read there. We do feel like this price is obviously a good price to be buying the stock back. And we are committed to what we’ve talked about previously, which is to return at least 50% of our free cash flow in the form of buybacks. And as we -- as I talked about on the prepared remarks, I think the metric we’ve hit so far is 55%. So, we’ve done pretty well. And that doesn’t even account for the converts, which I think by the end of this fiscal quarter, that is the fourth fiscal quarter, will be completely done with converged, conversions will be completely off the balance sheet, and we will remove that dilution as well. As it relates -- no message on the CapEx as it relates to buybacks, other than to say that given the EUV investments, it does appear that we will operate maybe at a little bit of a different level from a percent of sales perspective than perhaps we previously were operating. We were thinking more in the low 30s. I think with EUV, it’s safe to say that we probably are operating in the mid-30s as a percent of revenue for CapEx, at least as we build out the EUV part of the tool set.

Perfect. Thank you very much.

Thank you. Our next question comes from Shannon Cross with Cross Research.

I had a question about DRAM ASPs. 20% quarter-over-quarter growth was the highest in several years. So, you can talk -- can you talk a bit about the drivers of the growth? How much of it was like-for-like price increases given the current tight supply versus, say, benefit from mix? And how should we think about sustainability?

So, certainly, on a like-for-like basis, pricing increased across the board in the DRAM industry, and again, driven by the strong demand, as I mentioned earlier, pretty much across all of the end markets. So, we enjoyed price increases across all end markets. And as we have mentioned that even in FQ4, we see price increases not just in DRAM, but we also see that in NAND.

Okay. And then, I guess, given the conversation or comments you made about customers moving to just-in-case inventory management, can you unpack that a little bit just in terms of magnitude? I mean, is this sort of a one-off conversations you’re having with people as they’re dealing with the supply issues that are out there right now, or do you think this is something that’s going to be sort of a meaningful transition within the industry? Thanks.

So, we see it as an emerging trend in the industry. When you think about it over the course of last couple of years or even maybe a somewhat longer time frame, there have been challenges with respect to geopolitical consolidations. Certainly, COVID brought into stark relief the need for resilient, flexible supply chain. And when you look at all the acceleration of the digital transformation and the surge in demand that has occurred, and on top of it, impose semiconductor industry shortages that are leaving a lot of the unmet demand across multiple industries here, all of that is really leading the customer ecosystem as well as us, the suppliers, to really absolutely prepare for supply chain so that we can meet the demand. I mean, Micron itself has taken actions in this regard in terms of securing capacity, for example, for assembly operations and that has really enabled us, for example, when our Muar operation, we had to bring down our team members there because of the recent COVID outbreak in Malaysia. Because we had made changes to our capacity -- assembly capacity footprint, we have secured more external supply, assembly capacity that enabled us to quickly shift our production to other parts of our manufacturing footprint. These are the kind of considerations that customers, in general, and suppliers, in general, are considering to make sure that they’re able to manage their supply chains to be able to meet the end-customer demand. And that’s why, certainly, some of the just-in-time aspects of inventory management have proved to be costly over the course of last few quarters, particularly, as the world has struggled to respond to the needs during the COVID time frame. And yes, there is an emerging trend towards considering just-in-case, whether it is related to geopolitical considerations, whether it is related to acts of God, that can result in supply chain disruptions or just responding from challenges of COVID. So, this is an emerging trend. And some of the customers may have already reacted faster in terms of building stronger inventory positions. Other customers perhaps still scrambling to meet the requirements, but this is definitely a trend that we think will likely persist with companies as they think about their own supply continuity considerations in the future. Just like Micron itself has taken the steps necessary to address its own customer requirements and fulfilling their demands.

Our next question comes from Timothy Arcuri with UBS.

Thanks a lot. I had two questions, first on EUV and then on cost down. So Sanjay, I guess, the first question on EUV is sort of what’s changed on EUV? I mean, it’s not like there’s been a sea change in progress made on EUV. Is it simply maybe that there’s another big chipmaker trying to get in the queue and taking up some slots and so you felt like you had to get in the queue? So, I’m just sort of curious what changed on EUV? And then, I had a follow-up.

So, we had always said that we monitor EUV progress. We have actually engaged in EUV evaluation. We have had EUV tool in the past. So, we had always said that we will intercept EUV in our roadmap at the right time when we see the EUV platform as well as the ecosystem becomes more mature. That’s when we plan to intercept EUV in our roadmap. And that’s what our plan is that in the 2024 timeframe, and again, aligned with our technology and leadership DRAM scaling roadmap that we’ll be implementing this in 2024 timeframe. So, it’s consistent with how we have always approached it. And of course, EUV has continued to make good progress, and we really think that with our EUV technology capability from 2024 onward timeframe, coupled with our multi-patterning expertise that Micron has a leadership in the industry, we really will have unique differentiated capabilities and absolutely feel confident about continuing to lead our DRAM scaling roadmap through our, of course, currently 1-alpha, but then 1-beta and then 1-gamma and beyond. And initially, we will deploy EUV in limited layer count in 2024 timeframe with our 1-gamma node and then we will broaden it to the 1-delta node with greater layer adoption and just keep in mind that we will combine it with our immersion multi-patterning techniques as well. And so, we really believe that we will have a very strong roadmap. And this is pretty much along the lines of how we always intended to insert EUV in our roadmap in the future, basically keeping in track of cost effectiveness, productivity as well as our overall scaling roadmap, and we feel really good about our leadership, DRAM scaling roadmap ahead.

And I guess, Dave, my follow-up is on cost downs. You sound a little more negative or a little more cautious on your fiscal 2022 cost downs than you were last quarter. I think, this year in DRAM, you’re going to be close to roughly 10% this fiscal year. And I think 1-alpha was supposed to help you next year. So, the feeling was that you could do better than 10% next year in fiscal 2022. But, it sounds like maybe some of these mix issues are going to result in you doing worse next year than you did this year? Can you sort of give us what next year is relative to the -- to sort of what you’ve done this year? Thanks.

So, I don’t think I’m ready to -- we haven’t completely finished the plans on next year. So, maybe it’s a little premature for me to talk about next year, specifically on cost downs. I would say that when you look at 1-alpha’s cost declines, they are very, very good. The timing in which the 1-alpha ramps is certainly an impact, and when it gets to its mature yield state is certainly an impact. And then, of course, it’s hard to call these mixed elements that drive some headwinds. But suffice it to say, when you kind of think about what our strategy is, we do feel that we’ll see many of these things enter into the equation. So, I think when you look at it on a front-end basis is quite good and quite comparable. I think when you look at it on a mix basis, somewhat dependent on how the market unfolds. But based on our early view into next year in terms of the x, we’d expect some headwinds.

Our next question comes from Joe Moore with Morgan Stanley.

Great. Thank you. I want to follow-up on the just-in-time to just-in-case inventory question. You’re talking about demand not being fulfilled in the short term. So, is the message here that the customers don’t really have inventory, but that they want to put that inventory into place, or are there pockets where there’s inventory kind of waiting for other components?

So, again, this really varies from customer to customer. Some customers may have reacted fast and would be carrying adequate level of inventory or inventory in line with their strategy in terms of how to cope with the current environment with respect to demand and supply for their own components, whereas some other customers may have less level of inventory. So, really, it varies from customer to customer. So, what I’m saying is that regarding just-in-time shifting towards just-in-case kind of mindset, it really is that customer focus on managing their supply chain so that they can have sufficient inventory to meet their end-market requirements, some customers may have moved more in that direction. And some other customers may have yet to move in the direction of from just-in-time mindset towards just-in-case. So for example, the car production, we are seeing that auto market has suffered through significant supply chain shortages and, of course, have incurred significant cost to that industry as well in not being able to fulfill all their supply requirements. And of course, that then drives a different mindset on how to avoid this kind of situation in the future. So, it varies from end market to end market. It varies from customer to customer. But overall, what we are saying is that with the lessons of the geopolitical consolidations, with the lessons of the pandemic and the lessons of the recent supply chain shortages, in the backdrop of digital transformation requiring more and more of semiconductor solutions, customer ecosystem, parts of the customer ecosystem likely is approaching their inventory consolidations in a different manner compared to before. And again, we look at it as an emerging trend in the industry.

Our next question comes from Chris Danely with Citi.

Hey. Thanks, guys. Just a follow-up on that previous question. If you look at the three main end markets for DRAM, PC, cellphone server and your, I guess, your best guess of inventory in each, where would you say it’s lowest? And then, when do you think that those end markets will achieve their, whatever the heck normal is, these days level of inventory?

So, we’re not going to go there in terms of trying to break it down by market by market. Of course, you sometimes see different moving parts in different parts of the market. For example, in mobile, you saw that with the India COVID situation as well as April and May in China, there was a reduction in demand in certain parts of the smartphone market. However, in other parts of the world, the smartphone suppliers moved to supply the increased demand in the other parts of the world. And of course, some of the demand because supply is in shortage, some of the supply in the industry got shifted toward other parts of the market too. So, we’re not going to break it down. I mean, I gave you mobile just as one example. And this situation can vary from customer to customer. But all-in-all, when you look at the end markets, almost all end markets are seeing shortages. And in aggregate, there is tight supply today. That’s what is resulting in increase in prices in the industry that we reported for FQ3, and we guided to it in FQ4 also for DRAM and NAND, we see price increases. And overall, we see supply tightness continuing through the year and into 2024 timeframe as well.

Well said…

I meant 2022.

2024 as well. 2024 is great. 2026, I’ll take it.

We’ll definitely talk about -- we’ll definitely be talking about that one of these days too. Yes.

One quick one, Sanjay. What do you think is going to be the Chips Act impact to Micron and just the memory ecosystem in general?

So, I think, when you say chipset impact, yes -- oh, Chips Act, I see. Okay. So with respect to Chips Act, we definitely -- first of all, it’s really great that U.S. government is recognizing the importance of semiconductors and how important semiconductors are to national economic consideration as well as national security considerations. And of course, semiconductors are important to all global economies today. So, we certainly look forward to greater support for U.S. leadership in semiconductor research as well as semiconductor manufacturing in the years to come. And of course, Micron, as the only player in semiconductor memory and semiconductor storage in the industry is well engaged with the U.S. government. And I know that the U.S. government also recognizes the importance of memory and storage as a strategic part of the semiconductor industry. So we really look forward to opportunities in terms of addressing our future needs. We continue to stay engaged. We stay engaged with the governments in all global sites where we have major operations, and we look forward to the opportunities here in the U.S. as well. And we are really glad that the funding has crossed the finish line in the Senate, and we certainly hope that in the House as well, this will pass. And U.S. industry can get on with the business of really strengthening U.S. leadership in research and manufacturing in semiconductor for the years to come. And we definitely remain always committed to growing our own supply in line with the industry demand, and we remain disciplined in that regard.

Our next question comes from Toshiya Hari with Goldman Sachs.

Hi guys. Thanks a lot for taking my questions. I have one on DRAM and one on NAND. On the DRAM side, I wanted to ask about your ability to grow bits over the next, call it, four to six quarters. I think, Dave, at a couple of conferences, you talked about bits being flattish into the August quarter, just given where you are in the transition and given low inventories. But as you progress and sort of transition to 1-alpha, at what point should we expect your bit supply to accelerate in the DRAM business? And to the extent you can’t meet demand, call it, over the next couple of quarters, how should we think about your willingness to increase capacity in DRAM? And then, on the NAND side, at a very high level, I think, Sanjay, it feels like you -- to me, it feels like you sound a little bit better on NAND supply-demand or less cautious on NAND supply-demand. Curious what’s changed over the past couple of quarters? Is it purely demand being better? Is it sort of the shortages around controllers? Yields on higher layer count nodes or all of the above? Just curious what’s changed in NAND over the past couple of months, couple of quarters. Thank you.

Okay. So I’ll take the DRAM question first. I think, you would model, for sure, we are thinking pretty modest sequential growth in the fourth quarter in terms of DRAM. I think that will carry into the first fiscal quarter, quite honestly. I would expect a relatively gradual increase as we ramp 1-alpha and that there wouldn’t be necessarily an inflection point where we see a big step-up in the growth rates. We’ve been very focused on the supply-demand balance on -- from our perspective. And so, we have been investing in 1-alpha with that in mind. And then, just the follow-on question you had, I almost say the same thing. As we look at DRAM and as we -- actually, as we invest in DRAM and NAND, we take a long-range view in terms of the growth rates of DRAM and NAND. Sanjay mentioned that we think DRAM growth rates are in -- for DRAM, long-term growth rates are in the mid to high-teens, and we think NAND is growing -- should grow around 30% over the long term, and that’s how we invest our CapEx. And we’re always -- now year-to-year, things might be a little different than that, but we’re investing over the long run to grow our supply in relationship to that demand growth. And we have not deviated from that strategy.

And on the NAND front, yes, as you noted that we have increased our outlook in terms of year-over-year NAND industry growth to now mid-30s. At the prior discussion, NAND industry was somewhat in oversupply. What we have seen is that NAND certainly has stabilized, and the trends have improved. In fact, we talked about price increases that we experienced in FQ3 for NAND as well as have guided to price increase in NAND in FQ4 as well. So, overall, we see tightness in NAND as well through the remainder of this calendar year and into 2022, and NAND demand is being driven by elasticity and certainly, continuing strength in PCs and also data center and smartphone markets as well. Overall, our outlook has changed because the supply of inventories we believe are healthier. And certainly, Micron inventory in NAND also is running lean. And certainly, our 176-layer NAND industry-leading node is ramping well. And overall, we expect our long-term supply growth CAGR to be in line with the market there as well, so.

Thank you. And that concludes today’s conference call. Thank you for participating. You may now disconnect.