Good afternoon. My name is Jonathan, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technology Second Quarter 2018 Financial Results Conference Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Shanye Hudson. You may begin your conference.

Thank you, Jonathan, and welcome to Micron Technology's Second Fiscal Quarter 2018 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 audio and slides, is being webcast from our Investor Relations website at investors.micron.com. In addition, our website contains the earnings press release which was filed a short while ago. Today's discussion on 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, along with the convertible debt and capped call dilution table. As a reminder, the prepared remarks from this call and webcast replay will be available on our website later on 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'll be attending. You can also follow us on Twitter, @MicronTech. As a reminder, the matters we will be discussing today include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer you to the documents we filed with the SEC, specifically our most recent Form 10-K and Form 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're 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 you, Sanjay.

Thank you, Shanye. Good afternoon. During the second quarter, Micron, once again, set company performance records across multiple metrics, including revenue, gross profit, EPS and cash generation. We are consistently delivering results that underscore our relentless focus on execution and solid progress on our strategic priorities. Specifically, we are evolving our product portfolio to a richer mix of high-value solutions, enhancing our financial performance and cultivating deeper relationships with more key customers across multiple mega markets. Our growing portfolio of managed NAND solutions and low-power DDR4 products boosted our mobile business to record revenue and profitability during the quarter. We also grew our SSD shares in our second quarter with total SSD sales up 80% year-over-year and sales of cloud and enterprise drives more than tripling for that same period. Continued strong penetration of our highly competitive DDR4 products into cloud applications and our industry-leading high-performance graphics memory portfolio into gaming, graphics and cryptomining applications contributed to a robust 15% sequential growth for our Compute and Networking Business Unit. Strong demand for our DRAM and NAND products delivered record second quarter revenues for us in the automotive market. We continue to execute well on our goal of introducing new products on our advanced technologies, delivering performance, quality, supply and cost advantages to our customers. In NAND, we are transitioning from being the components supplier to becoming a solutions provider. We launched and began qualifications of the industry's first cloud and enterprise SATA SSD drive incorporating 64-layer 3D TLC NAND. We also introduced the 3DFS solutions targeted at flagship smartphones. These solutions are also based on our 64-layer 3D TLC NAND, which has 15% higher performance and double the density of the prior technology. We have qualified a family of these products with a major chipset vendor and we expect to…

Thank you, Sanjay. I'm excited to be joining Micron at a time when the company is accelerating its focus on execution, including the delivery of more high-value solutions and the ongoing improvement of cost competitiveness. During my first few weeks at the company, I've been diving into the details of the business and operations, and I'm more convinced than ever that there's a fantastic opportunity to build an even stronger company while continuing to enhance shareholder value. For the second fiscal quarter, revenues were $7.35 billion, up 8% from the prior quarter and 58% from the prior year. The overall strength reflects a positive business environment and broad-based demand for our memory and storage solutions, particularly for cloud, enterprise and mobile markets. Non-GAAP gross margins for the quarter were 58.4%, up 300 basis points from the prior quarter and up from 38.5% in the prior year. Our ability to drive a richer mix of high-value products, strong execution on our cost goals and favorable market conditions contributed to the gross margin expansion. Non-GAAP operating margin was 49%, up from 46% in the prior quarter and 25% in the prior-year period. Non-GAAP operating expenses were $666 million, up approximately 9% from both the prior quarter and prior-year periods. The sequential increase is primarily attributed to expenses associated with shifting our portfolio to high-value solutions and accelerating our technology and product development. These expenses tend to fluctuate quarter-to-quarter. We're also beginning to incur the impact of solely funding the development of our fourth generation 3D NAND technology. We continue to manage operating expenses tightly and are generally only increasing operating expenses for developing and qualifying new products and technologies. Turning to performance by business unit. The Compute and Networking Business Unit grew revenue to $3.7 billion in the second quarter, up 15%…

Thank you, Dave. Micron will be celebrating our 40th anniversary this fall. Innovation has always been a key cornerstone to our success, ensuring that our technologies and products quickly adapt to serve the world's growing appetite for faster data. As we look ahead, we remain focused on nurturing and fostering an accelerated pace of innovation, and I know our team is fired up and ready for the challenge. The opportunity to create a dramatic impact on the world around us is undeniable and I'm excited to be part of this team shaping that future. I'm looking forward to speaking with all of you at our analyst and investor event in May. You can expect us to provide more detail on how we see secular market trends, creating new opportunities for memory and high-performance storage, and why we believe Micron is well positioned to win. We will now open for questions.

[Operator Instructions]. Our first question comes from the line of Rajvindra Gill from Needham & Company.

I was wondering, Sanjay, if you could talk a little bit about the changes in the DRAM industry that you've seen over the past year or so. I think in the past, you had mentioned that memory is becoming a strategic differentiator for high-performance computing. I was wondering if you can maybe elaborate on what specific end markets or behavior patterns that have been changing with some of your main customers in terms of how they consume memory.

Certainly. I think we are seeing the fastest growth through our DRAM memory at large-scale, in cloud computing and hyperscale data centers. And this is where high-performance memory is absolutely becoming essential along with fast storage is becoming essential for the trend such as AI, which are really driving new business models. Whether you go from education and training tailored toward the individual levels of coaching or training to the individuals or to millions of transactions processed realtime in the financial sector, to detect fraud or going to diagnosing and treating life-threatening diseases. Bottom line is we are barely starting with AI in cloud computing and data centers. And to realize the full impact of these solutions and to truly provide this new business model and services and applications to consumers and businesses alike, more and more data needs to be processed. It needs to be realtime analytics, and that requires more fast memory and more fast storage, that means flash as well as DRAM. So we are seeing tremendous growth. And if you look at trends, when we project that 2017, about 145 gigabytes per server going to about 350 gigabytes per server by 2021. Similarly, if you look at flash storage, 1.5 terabyte average in 2017 growing to something like 6 terabyte average with each server by 2021 timeframe. So these are massive, secular demand trends in the cloud computing and hyperscale for memory as well as for flash storage. Similarly, going to mobile, I talked about in my script that at Mobile World Congress, several new phone models were introduced that leverage 4K SDR capabilities that leverage AR and VR and even in our processors that are being introduced for mobile application that actually have the AI unit built into it. So just imagine how much data-intensive…

That's very helpful, Sanjay. As my follow-up, your SSD revenue was up 80% year-over-year. Can you talk a little bit about the attach rate for client SSD specifically? Last year, they were put on a temporary pause because of tightness of supply. I was wondering if you could talk a little about that now that we're about a quarter into this year?

I mean, last year's flash was severely constrained and that did somewhat slow down the cash rate of SSD in client computing as well as slow down the march towards higher capacities of SSDs in notebook computers. And attach rates for SSDs in client computing, around 35% to 40% and maybe 40% in 2018, maybe going towards 50%. Over the next few years, this is expected to continue to go toward by 2020-2021 timeframe to 85%-plus attach rate for SSD. So again, this is a large growth driver for SSDs in client computing applications. And we are focused on, of course, expanding our portfolio of SSDs. We talked about significant progress of our SSDs across-the-board in client, enterprise as well as in the consumer market. And we look at opportunities to gain further share in all of these SSD markets in the future as we continue to execute on our product roadmap.

Our next question comes from the line of Chris Danely from Citi.

This is Wayne Loeb [ph] on the line for Chris Danely. My question is when you talk about your plans for acquisitions, what would be the criteria that would make you buy something? And how does M&A fit into your plan in the context of Micron wanting to be a NAND solution provider?

We're not going to speculate on M&A matters here but we are very pleased with the portfolio of technologies and the initiatives we have with respect to continuing to advance our product solution. But of course, we do not rule out, in the future, leveraging M&A toward any growth initiatives. And of course, we'll always look for core capabilities to expand the market opportunities for Micron. And of course, we'll be focused on value in terms of any acquisition that we may entertain in the future, again, not speculating on anything at this point. And of course, always looking for ROI kind of opportunities.

As a follow-up question, can you talk about what Micron's projected cost reductions are for NAND and DRAM this year?

So we don't provide specifics on cost reductions but what I can tell you is that we are making very good progress on our technology. As we indicated, I mean, in our 1X DRAM technology, we have achieved the fastest ramp to mature yield in the history of the company. And similarly, our 64-layer technology, it has ramped to mature yields, rather well and we are continuing, of course, to do very well on our 20-nanometer DRAM technology that we use as well. So we are very pleased with our continuing progress on cost at the technology level, and continuing to focus on advancing our next-generation technology nodes and products. And of course, also very much focused nonmemory costs in our products such as SSD nonmemory costs. So making good progress and all of that is baked into our gross margin guidance that we have provided.

Our next question comes from the line of Mark Delaney from Goldman Sachs.

First question, I hope you can detail a little bit more about that nitrogen issue you mentioned. Did you have to scrap wafers or just idle production? And can you help us reconcile the comment about a little bit less DRAM output for next quarter with the now full year guidance about growing in line with the industry compared to last quarter. I think, Micron was going to grow slightly before -- definitely below, excuse me.

So this nitrogen maintenance issue has not caused trapping of vapors. It has idled or slowed down production. As we said, it's impacting 2% to 3% of our this quarter's DRAM production output. And with respect to our expectation of our output growth for calendar year 2018, that remains in line with the industry estimate of 20%, and this effect is already included in that as well.

Is it fair to assume a better 1X nanometer yield? Is that how Micron is now growing in line with the industry for the full year despite this nitrogen issue?

Yes, that is correct that our production output is expected to grow in line with the industry and that is, of course, as a result of our excellent yield on 1X nanometer node as well as the 20-nanometer node.

Okay. And then one other question for me, if I could. Sanjay, you commented about having a CapEx-to-sales target in the low 30% range. I don't want to parse words too closely, I think it was about 30% as of the last Analyst Day. But the strategy for Micron, as I understood it, had been that the company is trying to keep its net DRAM wafer starts flat and there's a lot of costs associated with getting to these new nodes because of all the extra factory space that you need and need for new clean rooms. Just given your comments about CapEx coming in toward the higher end of the range this year and the comments about that ratio, is there any change about the strategy of Micron, how it's thinking about CapEx? And really just enabling -- getting to those next nodes which are getting more expensive? Or is there a change we need to be thinking about in terms of how Micron is thinking about managing its net wafer starts in DRAM?

I think if you look at last few years and you look at Micron's revenue and you look at Micron's CapEx, you will see that Micron's CapEx, over the course of last few years, is in the low 30% range of the revenue over those last few years as well. So what we have said here today is fairly consistent with what actually has been the case at Micron over the course of the last few years. And in fact, if you look at the industry itself and you look at the revenue of the industry players and you look at the CapEx, over the course of last few years, you will see actually that, that average for the industry as well is in that same range also. So in terms of our own strategy for CapEx spend is absolutely focused on accelerating our technology transitions. So our CapEx is geared toward realizing DRAM and NAND technology transition toward more cost-effective advance technology nodes for our products. And it is not about capacity, wafer capacity production increase for us.

Our next question comes from the line of Karl Ackerman from Cowen and Company.

Dave, welcome to the team. I have two questions, please. My first question is on DRAM demand. We all know that DRAM is more inelastic than NAND but I was curious, what are some signs that you look for to assess if you are beginning to see demand destruction in DRAM demand from higher ASPs, particularly in mobile and PC environments that are more sensitive to price than hyperscale environments? I have a follow-up, please.

So can you clarify the question to me? I didn't totally get the question. I'm sorry.

Yes, I'm just curious how should we assess the potential demand destruction in DRAM demand from higher ASPs in mobile and PC environments over the next few quarters, if there were to be an issue?

So I think what we have to realize is that DRAM absolutely is essential to the experience in the business models that it enables. Whether it is the experience in mobile phones, I talked about all these experiences, AR, VR, 3D gaming, multitude of applications and users absolutely expecting seamless experience that requires -- such data-intensive applications require more DRAM. So it is essential. I mean, it's not like you can offer a model with a less DRAM in it, a high-end model with a less DRAM in it and expect that users will still have the same good experience. So DRAM capacity has really become a key enabler and essential element of mobile. And same, as I talked about earlier, for hyperscale data centers. When they look at what models that they can enable for their end customers, those are all being built on very data-intensive applications. I mean, imagine retailers, and a consumer goes into a retail store and the retailer already knows about what are the needs of their consumer. All of that requires realtime -- for retail, realtime AI applications, which means lot of data that has been processed fast, which means, again, it needs more DRAM memory. So it is actually, when you look at hyperscale data centers, it's not about the cost of DRAM anymore. I think the value that it enables to these cloud applications and hyperscalers is far in excess of any aspect of DRAM price per bit. So DRAM really has become an essential part. This is very different from any time in the past.

And the best indicator of this is that DRAM pricing is strong and DRAM demand is strong right now.

That's helpful. As my follow-up, I was hoping you could elaborate on your comments for OpEx as we think about the trajectory of spending for the next few quarters. Specifically, do you plan on reinvesting the savings you expect to achieve from Micron and Elpida coming together for the first time on 1X development? And how should we think about the timing of any planned prequalification expenses for maybe 1X DRAM or QLC 3D NAND deployment when we make assumptions for OpEx for the balance of 2018?

So let me go back to kind of the commentary and make sure it's clear. So in the second quarter, most of the increase we experienced was around qualifications of various technologies that kind of all came together, all in kind of the second quarter. And it kind of continues on into the third quarter. Those expenses kind of vary over time. And so this just happens to be kind of a couple of quarters in which that activity is pretty heavy. And so we're kind of experiencing kind of a lift in expenses, and I would expect that portion of it to kind of settle down. And when the next set of qualifications are required, it will come back up again. The other piece of the expenses really relate to our fourth-generation 3D NAND where, as we announced earlier, we're taking that on ourselves. About half of that hit us in the second quarter. We'll have the full quarter's effect in the third quarter, and that was about $20 million on a full quarter. So about $10 million left in the second quarter and $20 million lift in the third quarter.

Our next question comes from the line of Tristan Gerra from Baird.

Given the continued strong demand that you see in data center, how should we look at the initial supply/demand outlook in NAND flash for the second half of calendar '18? Should we expect the pricing to stabilize? Any commentary based on trends that you see currently continuing for the rest of the year?

So we are not going to comment on pricing trends in the industry but what I can tell you is that NAND industry does have certain aspect of its end market such as USB flash drive or imaging cards or retail. That tends to be more somewhat seasonal in the first calendar quarter. And as we go forward, that part changes. The most important thing to look at is that as more supply becomes available, it drives deeper penetration of SSDs in client devices as well as in -- gives an even stronger value proposition in enterprise and data center applications. So this is what we expect during the course of the year. And of course, average capacities of NAND in mobile phones, smartphones, continue to increase as well. And we are expanding our portfolio of multichip packages with DRAM and NAND, which is where Micron is uniquely well positioned to expand our opportunities and increase our shares with NAND flash and DRAM-based solutions in multichip packages as well as discrete NAND solutions such as the UFS that I talked about that are in the stages of qualification with our customers. So we look ahead at the year with strong demand drivers for NAND in the industry and growing opportunities for our NAND business for the remainder of the year, calendar year here. And very focused on execution of all our new product introductions and qualifications with our customers because those will ultimately drive our success toward high-value solutions as part of mix of NAND revenue.

Okay. That's useful. And then as a quick follow-up, is it fair to assume that the high double-digit growth rate in better demand for NAND in data center is something that is possible again for this calendar year?

Yes, for this calendar year, for data center, absolutely, NAND bit consumption in data center is expected to be 50%, in the range of 50% or higher. Basically, a data center is where demand will grow faster than the average of the industry. Keep in mind, same thing for client SSDs as well.

Our next question comes from the line of Mehdi Hosseini from SIG.

Sanjay, I have a follow-up. You and others in the memory industry have been discussing opportunities in moving up the stack. At the same time, some of your enterprise customers are also trying to navigate their way and move up the stack. And I'm just wondering, what's wrong with keeping the business as is? Your NAND gross margin is in the 45% to 50%; DRAM gross margin is in the 65% to 70%, and assuming that the industry is rational and we can't avoid excess capacity, why not just focus on making the most cost-effective DRAM and bit and capitalize on the margin profile? And I have a follow-up.

So let me be clear that we are very excited about the market opportunities for DRAM and NAND. All the things that we have been talking about so far over the course of the last 45 minutes here. And of course, our strategy is to continue to strengthen our competitive -- cost competitiveness as well as increase the mix of high-value solutions in our revenue. And by high-value solutions in our revenue, we mean products such as SSDs as well as managed NAND solution because we have both DRAM and NAND and that gives us a unique opportunity to provide management solutions for today's smartphones that are needing more and more of such solutions. So we are absolutely focused on leveraging our core capabilities to drive cost reductions, catch up on the DRAM cost with the rest of the competition and in the NAND, strengthen our portfolio of these high-value solutions. And I have no doubt that there is -- nobody is taking their eye off the ball and we have relentless focus on strengthening the execution engine of the company and tremendous opportunity ahead in that regards for us. It's already implied through the strong results we have demonstrated so far but there is even greater opportunity ahead of us.

In terms of costs, you recently introduced a QLC 64-layer 3D NAND SATA SSD. Is there any way you can either quantify or qualitatively discuss the cost per gigabyte that this particular product offers you? And how we should think about its ability, due to lowest cost, to penetrate and displace existing technologies?

So what we introduced recently is a 64-layer bit TLC SATA SSD. And as we have said before, QLC is certainly an exciting opportunity for Micron in the years ahead, and QLC is in the development stages. And it is not a 2018 phenomena. I mean, that is something that's more like 2019 opportunity, starting in 2019 timeframe.

But should we assume that this offers you, perhaps, I'm just going to give you a number, could it still offer a customer less than $0.20 per gigabyte of cost?

We don't get into cost discussions. And our focus, of course, is to develop QLC solutions that will be, in the future, going toward applications that are very read intensive and somewhat balanced in terms of more write applications. And of course, our goal would be to drive these -- build value in these solutions, especially going toward high-capacity aspects of the storage market, build value in these solutions so that we can be selling them in a profitable fashion and bringing strong value to our customers as well. I'm not going to get into pricing or speculate of the pricing for QLC.

Our next question comes from the line of Hans Mosesmann from Rosenblatt Securities.

Sanjay, if you can just clarify, I think somebody asked the question before but I'll just make it more concise. Are you seeing any despeccing in DRAM or NAND market? And I have a follow-up.

We're not seeing any despeccing. If anything, again, given the nature of the application, the average capacity requirements continue to go up in all end markets arena.

Okay. And then a follow-up, more of a longer-term or midterm question. After 1Y in the DRAM world, how many more node transitions or half transitions do you expect you and the industry to have before you hit a wall, if you will?

We have talked about our 1Z technology node in DRAM and our engineers are working on that. And engineers, of course, always continue to look at opportunities for further scaling. And concurrently, we are working on other advanced technologies of the future as well.

Okay. But there's no letter after 1Z at this point?

There is no letter in the alphabet after Z.

You can go to 1Zb or you can add a plus, plus or plus, plus, plus.

Thank you. We'll take you up on your suggestion.

And our final question comes from the line of Vijay Rakesh from Mizuho.

Just on the NAND side, I was wondering what percent of your NAND was SSDs? I know you mentioned it grew 80% year-on-year and seeing good traction enterprise.

We don't give that breakdown.

Got it. And I know you talked about 3D crosspoint. There's a bit drag on the margins. When do you start to see the drag go away? And I was just wondering, as you look at that ramp by the end of -- by year-end, what proportion do you think that would be of your NAND?

So 3D crosspoint products are expected to come out in -- sometime in calendar year 2019. We will have -- sometimes we'll have underloading charges. It's possible that our partner might take some of the -- of those wafers so that would obviously help on the underutilization. Of course, as we start to release those products, about late 2018, we'll start to build some of those wafers and that will help out on the underutilizations as well.

And I just want to comment on your earlier question regarding SSD. Of course, we don't provide the specifics but clearly, SSD is growing fast and it's increasingly large portion of our revenue. And very pleased with the progress that we have made in increasing the mix of SSD in our portfolio.

This does conclude the question-and-answer session. I'd like to hand the program back to management for any further remarks.

Thanks, Jonathan. As always, we appreciate your interest and support for Micron. I'd remind you that a copy of the prepared remarks as well as a webcast replay can be found on the Investor Relations section of our website later this afternoon. Thank you.

Thank you. This concludes today's Micron Technology's second quarter 2018 financial release conference call. You may now disconnect.