Thank you for standing by, and welcome to Micron's Fiscal Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program may be recorded. And now, I'd like to introduce your host for today's program Farhan Ahmad, Vice President, Investor Relations. Please go ahead, sir.

Thank you, and welcome to Micron Technology's fiscal fourth quarter 2022 financial conference call. On the call with me today are Sanjay Mehrotra, our President and CEO; and Mark Murphy, our CFO. Today's call is being webcast from our Investor Relations site at investors.micron.com, including audio and slides. In addition, the press release detailing our quarterly results has been posted on the website along with the prepared remarks for this call. Today's discussion of financial results is presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of the GAAP to non-GAAP financial measures may be found on our website. We encourage you to visit our website at micron.com throughout the quarter for the most current information on the company, including information on the financial conferences, which we may be attending. You can also follow us on Twitter at MicronTech. As a reminder, the matters we are discussing today includes forward-looking statements regarding market demand and supply, our expected results and other matters. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. We refer you to the documents we file with the SEC, including our most recent Form 10-K and 10-Q for a discussion of the risks that may affect our future results. Although, we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements to conform these statements to actual results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon, everyone. Micron delivered record annual revenue in fiscal 2022 with solid profitability and free cash flow, despite the challenging environment in the latter part of the year. In 2022, we ramped our industry-leading 1-alpha DRAM and 176-layer NAND nodes across our portfolio and returned a record amount of cash to shareholders. We strengthened our product portfolio significantly during the year, as evidenced by record revenue in mobile, auto, industrial and networking end markets. Our share gains in client and data center SSDs contributed to record revenue in SSDs and also in our consolidated NAND business. We also ramped new product categories like high-bandwidth HBM2e memory and GDDR6X. In addition, a record number of customers recognized Micron as the industry leader in product quality. Our fiscal Q4 financial results were impacted by rapidly weakening consumer demand and significant customer inventory adjustments across all end markets. We are responding decisively to this weak environment, by decreasing supply growth through significant cuts to fiscal 2023 CapEx and by reducing utilization in our fabs. We are confident that the memory industry supply-demand balance will be restored, as a result of reduced industry supply growth combined with the long-term demand growth drivers for memory. Micron's technology and manufacturing leadership, deep customer relationships, diverse product portfolio and strong balance sheet put us on a solid footing to navigate this industry down cycle and position the company for strong long-term growth. Our industry-leading 1-alpha DRAM and 176-layer NAND nodes drove strong cost reductions in fiscal 2022. In fiscal Q4, we led the industry again in introducing our 232-layer NAND, becoming the first company to enter volume production on a node with more than 200 layers. We also remain on track to begin the ramp of our 1-beta DRAM node in manufacturing by…

Thanks, Sanjay. Our fiscal Q4 revenues came in consistent with our August 9 update, while EPS was within the original guidance range. Fiscal Q4 capped off a strong fiscal year in which we set a record for total revenue, generated substantial free cash flow and returned $2.9 billion to shareholders. Total fiscal Q4 revenue was $6.6 billion, down 23% sequentially and down 20% year-over-year. Fiscal 2022 total revenue was a record at $30.8 billion, up 11% year-over-year. Fiscal Q4 DRAM revenue was $4.8 billion, representing 72% of total revenue. DRAM revenue declined 23% sequentially and was down 21% year-over-year. Sequentially, bit shipments decreased by roughly 10% while ASPs declined in the low-teens percent range. For the fiscal year, DRAM revenue increased 12% year-over-year to $22.4 billion, representing 73% of total fiscal year revenue. Fiscal Q4 NAND revenue was $1.7 billion, representing 25% of Micron's total revenue. NAND revenue declined 26% sequentially and was down 14% year-over-year. Sequential bit shipments declined in the low 20% -- percentage range and ASPs declined in the mid- to high-single digit percentage range. For the fiscal year, NAND revenue increased 11% year-over-year to a record $7.8 billion, representing 25% of total fiscal year revenue. Turning to our fiscal Q4 revenue trends by business unit, revenue for the Compute and Networking Business Unit was $2.9 billion, down 25% sequentially and down 23% year-over-year. The sequential decline was primarily driven by client, while declines in server and graphics were less pronounced. Networking revenue hit a new record in fiscal 2022. Revenue for the Mobile Business Unit was approximately $1.5 billion, down 23% sequentially and down 20% year-over-year. Mobile revenue for fiscal 2022 to set a new record. Revenue for the Storage Business Unit was $891 million, down 34% sequentially and down 26% year-over-year. For the fiscal year,…

Thank you, Mark. The current macroeconomic environment presents an unprecedented challenge for the industry. Our rapid actions to both moderate utilization and sharply reduced CapEx illustrate our commitment to supply discipline and our focus on bringing our supply and demand back into balance. The Micron team continues to execute with agility to changing business conditions. We remain committed to our strategy of maintaining stable bit share and growing profitability with a portfolio of higher value solutions and we are confident in the long-term technology drivers for memory. New data centric applications and technologies will drive long-term memory demand on the trajectory that outpaces growth in other semiconductor categories. Our strategic investments underscore this confidence and will ensure Micron is able to capitalize on these long-term trends in the decade ahead. Thanks for joining us today. We will now open for questions.

[Operator Instructions] The first question comes from the line of C.J. Muse from Evercore ISI. Your question please.

Yeah. Good afternoon. Thank you for taking the question. I guess first question, can you provide a little bit more detail on the magnitude of utilization cuts and how we should be taking about any underutilization charges to gross margins in November and February quarters?

So I think I can answer the first part and then Mark can take on the second part on the margins. So with respect to the utilization cuts, they are across NAND and DRAM and approximately in the mid-single-digit range. And of course, these cuts are for the products that have been in high inventory. And so we are cutting production of those products and using the equipment that is freed up and the space that is freed up to deploy it toward the new technology transitions. So that actually helps us with CapEx efficiency. And Mark can comment on the gross margin impact.

Yeah. C.J., as you mentioned, it's going to hit us not in the first quarter, but later in the year and it would be between 1 points and 2 points of impact at this point. And of course, depending on market conditions, we would either dial that back or bringing utilization lower.

Very helpful. And as a quick follow-up, considering your strong net cash position, but your guidance for free cash flow -- free cash flow negative, well, what's your near-term philosophy around buybacks?

Well, I think I'll state -- really no change around, we're going to continue to focus on returning 100% of free cash flow to shareholders. We did repurchase in the first quarter and so we will opportunistically repurchase. As you pointed out C.J., we are a cash flow challenged in the first quarter. It's been an unprecedented downturn, sharp and sudden and it has of course associated inventory builds, it's suppressed our income of course and then we've got elevated CapEx as it happened so quickly. So we expect $1.5 billion negative in the first. What we challenge in the second as well as we deal with, with elevated inventory levels and then the revenues that we guided or the bit shipments we talked about. And then the CapEx will take time to work down. We expect it to be weighted in the first half more heavily. We do expect a volume recovery in the back half of the year and lower CapEx and inventories coming down. We do expect to return to free cash flow generation in the second half. And of course, we're working -- continue to work CapEx, continue to work expenses down, working cap -- working our -- managing our working capital best we can to improve from this first quarter projection we have.

Thank you.

Thank you. One moment for the next question. And our next question comes from the line of Timothy Arcuri from UBS. Your question please.

Thanks a lot. Mark, so it sounds like you're basically calling sort of February as the bottom in the earnings. It sounds like revenue is going to be about flat, but obviously, gross margin is probably going to move lower because you said pricing is going to come down and it sounds like costs are going to go up. But I guess my question is more sort of around the behavior from these cloud customers in light of what's happening to supply. I mean DRAM supply is -- as you said, up only mid-singles, next year most of that has to be coming out of inventory, so production is probably pretty flat across the industry, if not down. So these are pretty sophisticated customers, so I would think that they're going to come back to the table pretty early next year, such that you can see a pretty sharp recovery in pricing. So I'm just sort of wondering if maybe Sanjay or Mark, you can talk about sort of the behavior from these cloud customers and sort of how you think this plays out through the year as you've sort of called February as the bottom? Thanks.

So look we are not going to project future pricing trends here, but of course, we will continue to work closely with customers, not just in cloud, but customers across all end market segments. And of course, as we noted that inventories are at our customers are high, across all end market segments and they are adjusting their inventory levels including in cloud. We will of course, most important thing is to take actions and we have taken decisive action with respect to WFE reduction by nearly 50% and reducing our supply growth. We expect the industry supply growth to be in the mid-single digit in 2023 and our supply growth will also be in line with the industry around the same for DRAM. So I think what's important is that the supply growth will be less, while the demand growth once inventory adjustments at customers have normalized or have substantially improved by our second fiscal second half, then demand will go up from customers and we expect that the DRAM demand will be in mid-teens supported by inventory, but the supply growth will be meaningfully less than demand growth and that's what will brings an improving trajectory [Technical Difficulty] of industry supply-demand balance in improving fundamentals for our business as we go through calendar year '23.

Thanks. Can I just clarify on that, Sanjay? So, your supply will be mid-single digits, but your production is actually going to be down year-over-year, correct?

What we are saying is that the supply growth will be mid-single digits and -- but the shipments will be in the mid-teens range in line with the demand recovery that we expect. And we are also saying that we expect industries supply growth to be also in the mid-single digit for DRAM next year. Remember, this is -- this would correspond to the lowest on record supply growth for DRAM.

Perfect. Thank you.

So again, the supply growth will be in the mid-single digit, inventory will be used to supply the demand, which will be higher than the supply growth. We expect the demand to be in mid-teens next year.

Thank you, Sanjay.

Yeah. Maybe -- maybe Tim just to maybe provide some color around the quarters. We do expect as we've laid out the bits in ASP will be down in the first quarter and they're down about the same volume, maybe down a little bit more. Costs are slightly up and DRAM and NAND and that's just a combination of volume mix inflation and then just node timing. In the second quarter, as Sanjay mentioned bits will be up, but they'll still be down year-over-year, and then as we said, the revenue range will be similar to the first quarter. And then in the second half, bits will be up sequentially, third to fourth quarter and then second half should be up in bits year-over-year. And then cost for the full year, we would expect DRAM cost downs to be lower than the long-term average. We do get some benefit from FX, but we get some inflation and some other factors that go against us. And then NAND, cost reductions are challenged, combination of mix and inflation and just a more difficult situation there. But I think the important takeaway, first quarter we expect things to improve versus volumes and then the market better in the second half.

Thank you. Our next question comes from the line of Karl Ackerman from BNP Paribas. Your question please.

Yes. Thank you. Good afternoon. I have two questions please. I guess the first question is just kind of a follow-up on CapEx. I know in the past you have described capital intensity being in the 30% to 35% range of sales. But it does appear that memory demand for calendar '22 and calendar '23 could still be below your long-term expectations of mid-teens DRAM demand and 20% to 30 % for NAND demand. And so I guess the question is, do you believe that the industries framework for CapEx needs to consider a lower terminal bit growth rate for DRAM and NAND. And I guess, what are your own views on managing long-term capital investment to support bit demand beyond fiscal '23? And I have a follow up please.

So our view on long-term DRAM CAGR is mid-teens and NAND CAGR approximately 28%. And we would always be managing our investments to grow our supply in line with demand. Of course, there can be variations through the cycle, but we will overall focus on making adjustments as needed, just like you have seen adjustments now. And just keep in mind that as we look ahead at CapEx considerations, we should keep in mind that the tech transitions are getting more expensive. And of course, tech transitions are taking longer as well. So the capital intensity is higher. Tech transitions and also giving actually lower bit growth, and of course, transition to DDR5 is also contributing to lower bit growth per wafer because of DDR5 die tends to be just bigger than DDR4 die because of the specifications. So our expectation is, cross-cycle on average over long term, our CapEx would be around mid-30s that we had stated earlier, mid 30% of revenue. And of course, any given year there can be variations, but that's across cycle CapEx intensity that we would be expecting.

I appreciate that, Sanjay. Thank you. I guess for my follow-up, I was curious, what portion of your unfinished goods inventory is fungible and can be repurposed to either different end markets or different customers, even within that same end markets? Is there any clarity in terms of how you can kind of repurpose on the inventory that you have would be quite helpful? Thank you.

Yeah. I think, Karl, most of it, it's designed to the way we build it, designed to be repurposed. I mean there are some limitations, of course, but -- and that, that strategy is going to -- going to yield benefit here because, this downturn was so sharp and sudden, unprecedented that inventories have grown to levels over what we thought just last quarter when we had our earnings call. We ended at 139 days. We should be down around 100, 110 ideally, but we do expect an increase again in the first quarter to be over 150 days and it will be elevated through the second quarter and stay elevated, probably through the balance of the year until the recovery is meaningful and customers replenish their own inventories. But we should see it begin to decline in days over the back half. And of course, this view shape the CapEx as well to take supply out. And -- but we're confident that over time, it's good inventory. I think it's leading node primarily and as you point out, it's fungible in a sense, so we're confident that over time, we'll be able to redeploy or use that inventory and eventually get down to our target 100, 110 days.

Very clear. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Joseph Moore from Morgan Stanley. Your question please.

Great. Thank you. I wonder if you could talk about the November quarter. At the midpoint, it looks like your cost of sales comes down almost $900 million sequentially and I think of that is being kind of depreciation labor overheads things like that. What's happening there that the sort of fixed cost elements of that are coming down so much and is that sustainable beyond the November quarter?

Joe, we're -- I mean we're clearly, we're running the fabs and that's being absorbed into inventories. So I think that's the short answer to your question.

Okay.

And volumes down are down of course, so...

Yeah. Okay. So you built $1 billion worth of inventory in August quarter, almost that much and you had $4 billion cost of sales, and it's going down $3.1 billion next quarter. So I guess it is a pretty significant inventory build is what we would readout?

Yeah. I think as I answered in the last question, we're -- our inventory levels are high and they're going to be higher. There'll be over 150 days we believe. And again, it's a function of this unprecedented period and we're doing what we can do, affect future supply, our future capacity being in a position to work those inventories down, they're high quality inventories. So, though -- they will be usable and we're managing working capital expenses, cash flow all of them aggressively at this time.

Got it. Okay. Thank you very much.

Thank you. One moment for our next question. And our next question comes from the line of Mehdi Hosseini from SIG. Your question please.

Yes, sir. Thanks for taking my question. Mark, just a quick follow-up. You commented that February revenue could track flattish, but gross margin would at least be down 2 points, because you said the under-utilization charges would have a gross margin impact later, is that -- should I assume that that will happen in February?

Yeah. It would be -- it depends on when the inventory is clear, but yes, later in the year, Mehdi. And then you've got, gross margin of course is going to be a function, it's not just that cost element, it's going to be pricing and -- at that point in the market. We think volumes are recovering and we're just -- we're not guiding out at that point on the rest of the P&L or the elements of the P&L.

Should I spread 200 basis point of gross margin hit due to under-utilization throughout the remainder of fiscal '23?

Yeah, Mehdi. We're not -- I mean that's going to be a headwind in the back half of the year.

Got it.

But its -- but we're not guiding those quarters at this point. Just we gave a framework for how we see our business recovering along with the broader industry and what we believe will be the demand activity with our customers.

Sure. Fair. And I guess my follow-up question is also related to under-utilization rates. You've laid out a very conservative view on bit shipment for '23, especially, on the supply side, but you're also assuming demand would inflect to be after February quarter. Would there be a scenario that given actually the demand improvement is not as significant and would you be willing to take additional under-utilization like charges?

So Mehdi, I would say that we would of course continue to monitor the macro trends as well as the trends in our industry and the overall business. And of course, we will be prepared to take necessary actions as appropriate to address the short term as well as the long-term needs. So we will continue to look at, just like we have moved decisively here with respect to under-utilization, looking at products that have excess inventory and leveraging that utilization -- under-utilization as I said before toward -- using the tools towards, deferring CapEx requirements and we'll continue to look for those opportunities as needed.

Got it. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Vivek Arya from Bank of America. Your question please.

Hello. Thanks for taking my question. I think Sanjay in your prepared remarks, you mentioned calendar '23 bit demand will be in line with historical trends. I'm curious, what are your assumptions about the PC and the smartphone market next year that would support bit demand growth to be in line with historical trends?

So with respect to PC, this year, PC -- overall PC unit demand is down, as I mentioned in the script mid-teens percentage points. And next year in calendar year '23, we expect it to be flat to slightly down. And with respect to smartphones, we certainly expect that China would be opening up and China economy would be rebounding. The COVID lockdowns have had significant impact on China demand. So overall smartphone unit sales this year, down -- on a year-over-year basis down high-single digits, and we would expect that next year there would be some rebound in the smartphone unit sales. Again, I think what's important is that the content continues to be the biggest driver of growth, 5G phones need more, memory need more storage. And as we also highlighted in our prepared remarks, of course, we are extremely focused on shifting the business away from what used to be of 55% in consumer side, including PC and smartphone in fiscal year '21 towards going to 38% by fiscal year '25. So we are really marching along well on that strategy. In fact, in fiscal year '22, we reduced that percentage to 48%. So we are increasing the mix of more attractive and more stable markets such as, of course, data center and automotive, industrial, networking, graphics and we are successfully delivering on that strategy.

Got it. Very helpful. And then on the range of WFE cuts for next year, are you expecting your competitors to also reduce spending by the same level? And where I'm going with that question is that at what point does it become a competitive concern, because historically most of your spending has been on technology. So if you're cutting that by 50%, at what point does that impact your competitive capabilities and impact your cost down capabilities?

So look, historically, the DRAM industry in recent years has been disciplined in terms of CapEx management and supply growth management. Of course, the current environment is unprecedented with respect to the confluence of factors that we discussed, that have impacted demand, and the unprecedented level of inventory adjustments by our customers as well. We will take the necessary actions to bring our supply in line with demand. We think it is prudent. It is important to be rational in this regard. Of course, as we highlighted that this is a headwind to costs, with respect to delaying the technology transitions for our 1-beta and for our 232-layer NAND, as well as using under-utilization. But this is the right thing to do for the business to bring supply growth in line with demand growth and this is what will restore the healthy trajectory of demand-supply balance. So this is the right thing to do and I just want to also highlight that we would, of course, maintain our share as well and that is important, but as part of that strategy, we will also continue to shift towards part of the market, as I highlighted in my prior comments, where the profit pool is greater. So we will maintain share, but we will also continue to shift towards strengthened profitability. And I think you've seen that from Micron over the course of last few years, whereas we used to be significantly behind our competitors in margins. Today, we are matching the margins, if you look at past few quarters. So I think that just shows that we remain disciplined and we remain focused on continuing to shift our portfolio towards greater pools of our profitability.

And then maybe just to add, Vivek is, I think we made the point that of the remaining spend we have, its focus is on technology. So to your point, we appreciate the need to invest in advancing the technology into business, so the remaining spend we have will be focused on that. And then, we still can maintain our position in the market with the inventories that we have -- that we talked about in the prior question, well over 150 days as we enter the next or the next quarter and we'll have that drawn for some period of time.

Thank you very much.

Thank you. One moment for our next question. And our next question comes from the line of Brian Chin from Stifel. Your question please.

Great. Good afternoon, and thanks for sneaking us in to ask a question. It is related to the last question, but -- what that is your assumption for industry memory WFE decline in 2023 -- calendar '23, that translates into a mid-single digit increase in DRAM bit supply next year?

Look, we have shared with you what we are implementing in terms of our WFE, but we certainly can't be commenting on parts of others in the industry with respect to their WFE actions. But as I pointed out, historically, the industry has been disciplined, has been prudent in terms of taking actions to manage supply growth, especially when it gets ahead of the industry demand.

Okay. Yeah. I was just curious what that is, even not knowing what company plans are, but that assumption is because there must be a particular assumption that drives sort or that mid-single-digit supply growth for DRAM bits. Maybe closer to how maybe just one follow -- quick follow-up, if start kick -- you kick start 1-beta DRAM and 232-layer NAND in the second half of this year. Just curious how long -- how many quarters do you think until that, those two products crossover 50% of bit shipments and if it's a bit slower than originally planned, how does that compare to a typical timeframe to ramp the new technologies?

So I think it's important to understand that we are delaying the ramp off 232-layer and 1-beta technologies versus our prior plans. And most of the CapEx -- the $8 billion CapEx that we have talked about or the WFE CapEx that we are talking about is actually going toward preparing those technologies for engineering learning and producing the products for new -- in production for customer qualifications. In turn, these technologies will really not be contributing to the revenue shipments through our fiscal year '23 until late in fiscal year '23, they will be the primary drivers of bit growth and revenue growth and of course, cost reductions in fiscal year '24. Because we will be again relying on using the inventory to supplement our reduced supply growth to meet the uptick in demand that we expect in fiscal year '23.

Okay. Fair enough. Thank you.

Thank you. And this does conclude the question-and-answer session as well as today's program. Thank you ladies and gentlemen for your participation. You may now disconnect. Good day.