Thank you for standing by, and welcome to Micron's Third Quarter 2023 Financial Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being 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 third quarter 2023 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 our 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 GAAP to non-GAAP financial measures can 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 financial conferences that we may be attending. You can also follow us on Twitter at MicronTech. As a reminder, the matters we are discussing today include 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 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 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 fiscal third quarter revenue within our guidance range, with gross margin and EPS above the range. The ongoing improvement of customer inventories and memory content growth are driving higher industry demand, while production cuts across the industry continue to help reduce excess supply. As a result, pricing trends are improving, and we have increased confidence that the industry has passed the bottom for both quarterly revenue and year-on-year revenue growth. Our technology leadership and strengthening product portfolio position us well across diverse growth markets, including AI and memory-centric computing. Beyond this downturn, we expect to see record TAM in calendar 2025 along with a return to more normalized levels of profitability. The impact of the May 21 decision by the Cyberspace Administration of China on Micron's business remains uncertain and fluid. Several Micron customers, including mobile OEMs, have been contacted by certain critical information infrastructure operators or representatives of the government in China concerning the future use of Micron products. As discussed before, Micron's revenue with companies headquartered in mainland China and Hong Kong, including direct sales as well as indirect sales through distributors, accounts for approximately a quarter of Micron's worldwide revenue and remains the principal exposure. We currently estimate that approximately half of that China-headquartered customer revenue, which equates to a low double-digit percentage of Micron's worldwide revenue, is at risk of being impacted. This significant headwind is impacting our outlook and slowing our recovery. Micron is working to mitigate this impact over time and expects increased quarter-to-quarter revenue variability. Micron's long-term goal is to retain its worldwide DRAM and NAND share. Turning to technology. Micron continues to lead the industry in both DRAM and NAND technology. We are investing prudently to maintain our technology competitiveness while managing CapEx, node…

Thanks, Sanjay. Good afternoon, everyone. Fiscal Q3 results were in line to better than expectations, with revenue coming in above the midpoint of our guidance range and gross margin and EPS exceeding the high end of the range. Total fiscal Q3 revenue was approximately $3.8 billion, up 2% sequentially and down 57% year-over-year. Fiscal Q3 revenue included $72 million from an insurance settlement disclosed at the time we provided guidance. Fiscal Q3 DRAM revenue was $2.7 billion, representing 71% of total revenue. DRAM revenue declined 2% sequentially, with bit shipments increasing in the 10% range and prices declining by approximately 10%. Fiscal Q3 NAND revenue was $1 billion, representing 27% of Micron's total revenue. NAND revenue increased 14% sequentially, with bit shipments increasing in the upper 30% range and prices declining in the mid-teens percentage range. Now turning to revenue by business unit. Compute and Networking Business Unit revenue was $1.4 billion, up 1% sequentially. Strong sequential growth in server and graphics revenues was offset by a decline in client. Embedded Business Unit revenue was $912 million, up 5% sequentially. On a sequential basis, automotive and consumer revenues were strong. Revenue for the Mobile Business Unit was $819 million, down 13% sequentially due to timing of shipments. As Sanjay mentioned, we expect growth in mobile revenues in fiscal Q4. Revenue for the Storage Business Unit was $627 million, up 24% sequentially and driven by increased shipments across most of the portfolio. The consolidated gross margin for fiscal Q3 was negative 16%, improving 15 percentage points sequentially. This result was negatively impacted by approximately $400 million or 11 percentage points of write-downs associated with inventory produced in the quarter. Operating expenses in fiscal Q3 were $866 million, down roughly $50 million sequentially. OpEx benefited from ongoing expense-reduction initiatives and gains on…

Thank you, Mark. I am proud of the execution of the Micron team and the progress we made this quarter. The leadership products we released and qualified are strengthening Micron's portfolio across multiple key markets. While there are near-term headwinds, I am excited about the new product introductions that we have planned for the next several quarters, which will further enable us to leverage the dramatic growth in AI that is ahead of us. I am confident that this portfolio momentum, combined with our technology capability, manufacturing excellence, financial discipline, and excellent customer relationships, will position us well for the future. I also want to call attention to Micron's 2023 sustainability report, which published yesterday. The report underscores our continued commitment to innovation, the environment, our people and the communities where we operate, outlining our progress and aspirations across our environmental, social and governance programs. I encourage you to review the full report on Micron's website. Thank you for joining us today. We will now open for questions.

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

Yes, good afternoon. Thank you for taking the question. I guess first question, with inventory expected to normalize in the coming months -- quarter, how are you seeing customer purchasing behavior perhaps change given that we're clearly hitting a pricing trough very soon? We'd love to hear kind of how those discussions might be changing.

Thanks, C.J., for that question. We, of course, continue to work closely with our customers. And as we said that customer inventories are improving. Except for data centers, inventories are close to normal in most of our other end markets. Data center, we said by end of this year or somewhat thereafter -- shortly thereafter, data center customer inventories we expect to improve as well. And we continue to work closely with our customers. Some of the customers definitely interested in some of the longer-term outlook for the business and other customers operate on month-to-month basis. And overall, of course, we continue to mitigate through some of the impact of the China decision as well. But the value that we are bringing to the customers for our products continues to strengthen and Micron is very much focused on navigating through the current downturn and working closely with our customers to address their future demand. And as we said in my remarks that some of the customers, given the low pricing that exists in the industry today, and before prices begin to increase substantially, some of the customers may be looking at purchasing additional volumes at this time. But in general, the trajectory is of continuing improvement in their inventory levels end-to-end across the supply chain, add the customers directly as well as third parties who may be supplying to the customers. And as you know, inventories at the suppliers are coming down as well.

Very helpful. If I could just follow-up real quickly on HBM3, you guided to meaningful revs in fiscal '24. Can you give us a sense of what that means? And over time, what size kind of could that look like for you guys looking at kind of three to five years? Thank you.

Well, with respect to HBM3, we are very excited about this product. Micron has focused on bringing an industry-leading product and HBM3 product that is in early stages of sampling and we expect to begin production volume ramp of this product in early 2024. It is a product that has significantly higher performance, bandwidth and significantly lower power. In fact, as a product, it is close to a generational leap ahead of anything else that is in the market. We have received a strong endorsement for this product in the market and we expect the volume ramp of this product for us to be rapid, to be steep ramp and this will bring in, in our fiscal year 2024, strong revenue growth opportunity for us. So we are very excited about this standout product. It will be a significant growth driver for Micron. And everything that we have done here is of course built on our industry-leading 1-beta technology and applying to it, of course, advanced packaging, differentiated packaging and TSV capabilities. So this is we believe going to be a standout product for us. And we expect -- we target a share with HBM with this kind of industry-leading product that would be higher than our average DRAM share in the industry as well.

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

Thanks a lot. I had two. Mark, the first one is for you. I was wondering if you can sort of lay out what the fiscal Q4 guidance would have looked like net of the ban. I know you said that the impact from the ban gets worse actually in the fiscal first half. So is it as simple as maybe fiscal Q4, you had said low double-digit bit impact, but it sounds like it's probably that big in fiscal Q4. So something less than that in fiscal Q4 and then you sort of expand to a number something in that range in the first half of fiscal 2025 -- '24 rather? Can you sort of handicap that for us and shape it for us?

Yes. We had a small impact -- very small in Q3. It's a more material impact in Q4. We do expect the impact to increase. However, our actions to mitigate that will help offset the effect. But really, at this time, it's a headwind, but there's -- and that's clear. However, we are taking mitigating actions and it's very uncertain, continues to evolve on what the impact will be. And again, the impact that we see in the fourth quarter, it's contemplated in our guidance.

Got it. Maybe I'll ask you in the follow-up. But my second question is for Sanjay. So, Sanjay, I asked you this last call, too. So you alluded to the smartphone customers at least wanting to kind of get out in front of what they see maybe could be some tightness and maybe they're opportunistically trying to take advantage of pricing being so low. Can you just talk more broadly about what might change in your relationship with your customers coming out of this downturn? I mean, could we be headed toward a situation where maybe the data center customers that pushed you and your peers so far during the downturn that maybe we can talk about LTAs at some point. I know that this is a ways away, given kind of where we are today. But can you just talk about maybe over the past three months, when I asked you last time, how the tone of the discussion with the data center customers in particular has changed? Thanks.

Well, our customers, of course, work with us on LTAs. And as we have said, LTAs relate to their forecast for the year, generally. And while some customers may be operating on shorter term or other customers longer term, but generally speaking, they operate on yearly LTAs and LTAs involve supply and demand commitments from the two sides. Of course, sometimes with the changing industry environment on either side, on the supply or on the demand side, there can be adjustments made to those LTAs, and we work closely with our customers in those regards. And we have had close relationships with the customers. We have a very strong product momentum. You are particularly inquiring about data center. And let me tell you that our product momentum in data center with strong portfolio of solutions, particularly addressing the growing interest in AI, in data center, generative AI, becoming a big opportunity, and we look at it for 2024 as a big year for AI and for memory and storage and Micron will be well positioned with this product. And these are all parts of our discussions when we address their requirements on their future purchases when we address LTA requirements. And of course, we need the necessary investments related to our production mix in terms of die requirements, in terms of our assembly and test requirements, and we really work closely with our customers to help manage these. And just keep in mind that -- as I mentioned, that a lot of new product considerations go into the LTAs as well, as well as, of course, the volume and overall demand and supply considerations. So LTAs, at the end, really help both the parties. They help us plan our engineering, our product roadmap, alignment on that, our investments in things such as back-end capacity because products like HBM, product like high-density modules and, of course, in the mobile sector, products like MCPs, et cetera, have all different considerations at the back end. And these are the kind of things, LTAs really help us plan with our customers.

Thanks so much.

Thank you. One moment for our next question. And our next question comes from the line of Krish Sankar from TD Cowen. Your question please.

Thanks for taking my question and congrats on the good results. Sanjay, the first question I wanted to ask you was you spoke about AI servers having 6 to 8 times more DRAM content and that demand is strong while traditional data center server demand is weak. There's a view that some of these AI servers are replacing over 10 of the DCs -- regular DC servers. So I'm just kind of curious how to think about overall DRAM demand as AI grows but probably cannibalizes some of your regular data center server DRAM content? And then, I have a follow-up.

So look, when we look at the overall DRAM demand, the DRAM TAM, of course, the AI is driving growth. Automotive, certainly driving growth. Other end markets, such as we mentioned, mobile and PC, in terms of -- or consumer, in terms of their end demand, has been somewhat lackluster. The AI demand that is driven in data center, whether it is in the enterprise definitely drives healthy trends for memory growth. Yes, enterprise server and some of the data center demand has been recently somewhat impacted by the macro trends, but the trend of AI and more memory is absolutely continuing. And that's what -- when we look at our overall 2023 demand growth and the projections of CAGR that we have ahead of us, we have taken those into account. This is very, very early innings for AI, and AI is really pervasive. It's everywhere in, of course, cloud applications, enterprise server applications, applications such as generative AI would be in enterprises too. Because due to confidentiality of data, enterprises will be building their own large language models. And as you know, while the enterprise large language models may not be as large as the large language models you may see, and examples such as super clusters, et cetera, but all of them are really tending towards greater number of parameters. Now we are talking about parameters with generative AI getting into even trillion parameter range. Not too long ago, these used to be in 100 millions of range. That requires more memory. So regardless of the applications, whether it is on the enterprise side or on the cloud server side, the memory requirements are continuing to increase. And I'll just point out that 6x to 8x that we have mentioned is the multiple of DRAM requirement in AI server versus standard server. And of course, as we highlighted in the script, there are many compute configurations, such as the supercluster example that we gave you, where the DRAM content that is required is few hundred times higher than a standard server. So really, I think the journey here ahead of us will be very exciting. And when we look at machine-to-machine communication, when we look at opportunities for the virtuous cycle for the ever-increasing data that training applications, that inferencing at scale and various edge applications, including automotive, are driving the requirements for memory and storage will continue to grow well, and Micron is going to be well positioned with our products. And we consider 2024 to be a big banner year for AI, for memory and storage. And Micron will be well positioned to capture this with our strong portfolio of products from D5 to LP5 to HBM to high-density modules, even including graphics.

Got it. Very helpful, Sanjay. And then a follow-up for Mark. You said no inventory write-down in the current quarter expected. And if remember right, Mark, you also mentioned in the past that inventory write-down is tight to your view on pricing three quarters out. So is it fair to assume that you're expecting a pricing drop pretty much this quarter? And if the CAC decision does get really worse that 15% to 25% of your sales gets impacted, is there any more risk of inventory write-down, or is that agnostic to the inventory write down? Thank you.

Yes. Thanks, Krish. Maybe I'll spend a few minutes just covering because it's a very complicated topic with a lot of moving parts, maybe spend a bit of time on the topic. So our reported gross margin, our outlook, it's a function of many factors, including pricing. The inventory write-downs, which do include or incorporate our forward view of pricing. The effects of utilization, which you heard today, we've increased -- or reduced our wafer starts further. And then just volumes and associated leverage on period costs as discussed in previous quarters, and of course, mix. These factors are continuously changing due to market environment and our actions. And as I've stated before at these lower levels of profitability, our margin forecast and results are more sensitive to slight changes in assumptions such as price. Now given price trends and our current view on pricing and costs, we took a material write-down in the second quarter as we reported $1.4 billion, took another $400 million this quarter. And with these write-downs, we've pulled forward inventory costs, thus lowered the carrying value of on-hand inventories. Yes, as this lower cost inventory clears in the future quarters, we'll realize more income in those quarters than we would have otherwise without the charge. So as an example, we took this $400 million of additional write-downs in third quarter for inventories produced. And considering our latest views on volume mix, we also realized a benefit of near $300 million from selling through the lower cost inventories impacted by the second quarter write-down. So I do want to call out that it's -- with all the uncertainty, complexity and sensitivity at these profitability levels, our write-down and the benefits that we had in the third quarter were not far off what we estimated in our…

Yes. Thanks a lot, Mark. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Harlan Sur from JPMorgan. Your question please.

Hi, good afternoon. Thanks for taking my question. I guess as a follow-up to that, Mark, on your gross margin guidance for the fourth quarter, I know there are no inventory write-downs, but is it contemplating a step-up in underutilization charges or period costs associated with underutilization charges sequentially? And because you cut your wafer starts another 5 percentage points right to 30%, if you could maybe quantify that step-up in underutilization charges? And then as a follow-up, is the incremental 5% cut in utilization is primarily a result of the CAC restrictions?

It is not. It's more of an industry dynamic and our intent to get supply discipline in the market. Supply needs to come out of the market given inventory levels, and that's the principal driver. As far as the effects of utilization, it is already incorporated in this guide. The period costs in the fourth quarter are about $200 million. And again, they're contemplated in the guidance.

Perfect. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Ambrish Srivastava from BMO Capital Markets. Your question please.

Hi. Thank you very much. Mark, I wanted to come back to the gross margin. When you had given the guidance for this quarter, you had walked us through in detail. And you had said that stripping out all the adjustments and the industry write-down, 3Q would be at 7.5%. Am I reading this right that now we stripped out as negative 16%, right? So it's much worse than what you were thinking?

No, I don't think it's much worse than what we're thinking. If you strip out just the underutilization effects, but you keep in the insurance settlement, you're close to what we said, sort of that 7%, 8%. So that you need to consider. We had said that was in there.

Okay. Got it. And then a follow-up either for you or for Sanjay. On the 15% [big round] (ph) number, 15% of bit loss -- share loss in China, how do you recoup that? Is that based on the assumption that bit growth or bit supply will be constrained, and so if the other two suppliers are able to meet the China demand, they'll leave some demand out here -- in other regions for you to basically go after? Is there a pricing element to that? I'm just not pretty sure I understand how [you hit that] (ph).

I will take that. So what we have said is that approximately 50% of our business in China is at risk of getting impacted. And of course, we are focused on mitigating any share loss with CIIOs or as a result of CAC decision, with those customers -- global customers who are not impacted by CAC decision. So keep in mind that our share in DRAM is approximately 23% and our share in NAND is approximately 12%. So obviously, we have opportunities to gain share with other customers. And this is what we are focused on. It will take some time, and the CAC decision can -- I mean, as we have said, it is hurting our business. It is slowing our recovery. It can result in quarter-to-quarter variations as well. But over longer term, our target is to maintain our share. So while near term, CAC decision is challenging, longer term, we will work with customers who are not impacted -- our global customers who are not impacted by CAC decision to increase our share. And we have a long history of working with our customers. We have brought tremendous value of our innovation, our supply, our product portfolio supporting their innovation and roadmaps in the marketplace. Our customers want to see a strong Micron. Our strategy of keeping our target share consistent over longer term with our current share is understood by our customers because, again, they want to see a strong Micron, so they are supportive of this. And we will continue to work with our customers. And of course, as we bring value to our customers with our products and our product portfolio, we will focus on ROI on our investments, and we'll certainly focus on improving the profitability of our business from current levels as well. So we will, of course, keep profitability in mind. And again, it's important that Micron is a strong partner to our customers. And I think customers understand that multiple strong players in the industry is a benefit for multiple reasons to our customer ecosystem.

All right. Makes sense. Thank you, Sanjay.

Thank you. One moment for our next question. And our final question for today comes from the line of Tom O'Malley from Barclays. Your question please.

Hey, guys. Thanks for taking my question. Recently, we've been picking up that there is a change in some of the A series where you're starting to see some HBM2E use just given the fact that there's limited capacity of HBM3. I guess part one is, are you seeing an ability to service that market today? And then, the second part of the question is, you're saying that AI servers see about 6x to 8x DRAM content. I assume that contemplates HBM, but you guys are talking about some AI tailwinds today when you're really not servicing that market as much. So could you talk about what you're seeing ex-HBM as the multiplier effect on DRAM today, just so we can get a picture of how you guys are seeing the improvement in data center where they are today ex that product? That would be really helpful.

So certainly, we have had HBM2E product in the marketplace that actually gave us strong experience in bringing up our technology and production capability with HBM. The market, as I mentioned, is -- has shifted -- is shifting to HBM and Micron's HBM3+ product, which I called as a generational leap ahead of anything in the industry is going to position us well as we bring that into volume production during the course of our fiscal year '24, starting early part of calendar '24, contributing to several hundred million dollars of revenue opportunity over time. And with respect to AI part of the market, I want to be very clear that, yes, with respect to high-density modules and with respect to high bandwidth, HBM3 solutions, that part of the market is growing this year, and it's an opportunity that we want to capture, and I believe that we'll be well positioned to capture, as I mentioned, that we will be targeting share in HBM with our absolute industry-leading product that's higher than our DRAM industry average share. So -- but it's important to understand is that AI is being served not only by HBM or high-density DRAM modules, but it is also being served by D5 memory and by LP DRAM as well. And this is where with the D5 and LP DRAM products, we gave you some examples in our script as well. A large amount of LP DRAM being used in industry-leading high-performance compute platforms. In fact, the 144 terabyte that we mentioned in DGX, GH 200, about 122 terabyte of that is LP DRAM. And Micron is very well positioned with a differentiated solution of our LP DRAM there today. So I think it's important to understand that the AI server market is made up of HBM, it's made up of high-density DRAM modules, includes -- it also is made up of DDR5, LP5 and some element of graphics memory as well. So, we do have a broad portfolio. And in 2024 with HBM and high-density DRAM modules getting into production, I really believe we'll be extremely well positioned to capture the growing opportunity in AI. And 75% of DRAM on AI servers today is DDR5. And as I emphasized, and as I'm sure you well know, we participate very well in D5. In fact, we led the industry with our D5 products, again, built on 1-beta technology here.

Thank you, Sanjay. And I appreciate you guys sneaking me in.

Thank you. 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.