Thank you for standing by, and welcome to Micron Technology’s Fiscal Third Quarter 2022 Financial Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference may be recorded. [Operator Instructions] I would now like to hand the call over to Farhan Ahmad, Vice President, Investor Relations.

Thank you, and welcome to Micron Technology’s fiscal third 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 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 financial conferences that we will 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, specifically 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 quarterly revenue with strong profitability and free cash flow, enabled by our team’s excellent execution and our industry-leading technology and product portfolio. Micron achieved revenue records in the auto, industrial and networking markets, and in SSDs for both data center and client. Our NAND business delivered record quarterly revenue, and our Embedded Business Unit and Storage Business Unit NAND revenues also hit all-time highs. Our 1-alpha DRAM and 176-layer NAND ramps are several quarters ahead of the industry and progressing well as we continue to qualify new products that use these nodes. The Micron team delivered these excellent results despite supply chain challenges and COVID-19 control measures in China, which impacted our business on both the demand side and the supply side. There are consumer demand and inventory-related headwinds impacting the industry and consequently our fiscal Q4 outlook. However, we remain confident about the secular demand for memory and storage, the attractiveness of our market opportunity, Micron’s excellent competitive position and strong execution capabilities, and our cross-cycle financial model. Micron is leading the industry in both DRAM and NAND technology, and we are also well-poised to continue this lead into calendar 2023. In DRAM, our 1-alpha node ramp is several quarters ahead of the industry, and in fiscal Q3, 1-alpha represented the largest DRAM node in our shipment mix. Our newest node, 1-beta, is on track to ramp in manufacturing by the end of calendar 2022. In NAND, our industry-leading 176-layer node continues to grow in mix of sales, having previously reached the majority of our NAND bit shipments in fiscal Q2. This technology node is contributing to a competitive cost structure across our product portfolio, and in FQ3, we achieved several important 176-layer product qualifications. We are also making excellent…

Thanks, Sanjay. Micron delivered strong results in fiscal Q3, marked by record quarterly revenue and $1.3 billion of free cash flow. Total fiscal Q3 revenue was $8.6 billion, up 11% sequentially and up 16% year-over-year. Growth was strong across most end markets. Fiscal Q3 DRAM revenue was $6.3 billion, representing 73% of total revenue. DRAM revenue increased 10% sequentially and was up 15% year-over-year. Sequentially, bit shipments increased by slightly over 10% while ASPs declined slightly. Fiscal Q3 NAND revenue was $2.3 billion, representing 26% of Micron’s total revenue. NAND revenue increased 17% sequentially and was up 26% year-over-year. Sequential bit shipments increased in the high-teens percent, and ASPs declined slightly. Now turning to our fiscal Q3 revenue trends by business unit. Revenue for the Compute and Networking Business Unit was $3.9 billion, up 13% sequentially and up 18% year-over-year. Data center, graphics and networking contributed to both year-over-year and sequential growth. Revenue for the Mobile Business Unit was approximately $2 billion, up 5% sequentially and down 2% year-over-year. Strong execution and product momentum allowed MBU to deliver sequential growth in a challenging smartphone market demand environment. Revenue for the Storage Business Unit was $1.3 billion, up 15% sequentially and up 33% year-over-year. We achieved record SSD revenue, with both data center and client SSD revenues reaching all-time highs. Data center SSD revenue more than doubled year-over-year. Finally, we achieved record revenue for the Embedded Business Unit at $1.4 billion, up 12% sequentially and up 30% year-over-year. Both automotive and industrial revenues set records in the quarter. The consolidated gross margin for fiscal Q3 was 47.4%, down approximately 40 basis points sequentially. An increasing mix of NAND contributed to the decline. Operating expenses in fiscal Q3 were approximately $950 million, below the low end of the guidance range and down…

Thank you, Mark. The memory and storage TAM is expected to grow to $330 billion by 2030 and become an increasing portion of the semiconductor market. The near-term market environment notwithstanding, we are executing extremely well on all aspects of the business that are within our control. Micron’s continuing technology, product and manufacturing leadership puts us in an excellent position to capitalize on the long-term opportunity and to extend the frontiers of what is possible with memory and storage. We will continue to exercise supply discipline and take appropriate actions to navigate through the near-term headwinds, and we remain focused on creating value for shareholders and generating healthy free cash flow cross cycle. Thanks for joining us today. We will now open for questions.

[Operator Instructions] Our first question comes from the line of Harlan Sur of JP Morgan.

Good afternoon. Thanks for taking my question. On the data center business, as you guys mentioned, I mean, enterprise CIOs are concerned on the macro outlook and pulling back on their spending budgets. Cloud remains strong. But within that, we’ve heard that continue -- there’s continued strength from the U.S. cloud service providers, but a pullback in spending from the China cloud customers. Are you guys seeing these dynamics within your cloud segment? And then, on the supply side, again, within your cloud business, can you discuss the level of inventories in the channel and at customers that feed into the cloud segment? Because we’re hearing that kind of similar to enterprise that inventories in the cloud channels are also pretty elevated, but wanted to get your views.

Thanks, Harlan, for the question. And before I answer the question, I just wanted to note here that we have Sumit Sadana, our Executive Vice President and Chief Business Officer here as well. As you may recall, Sumit was with us in the last earnings call. And in the given environment, I thought it would be good to have him here to add any color to the market environment related specific questions. So, with respect to the question you asked regarding the enterprise server OEM side of the business. There, yes, as we noted that we have seen some inventory adjustment, particularly given their concerns on the macro environment as well as certain supply chain shortages that they may be experiencing. However, on the enterprise server OEM side, the end market demand continues to be healthy as well. And same thing on the cloud side as well that the end market demand for cloud is healthy, cloud demand to us is relatively healthy as well. Of course, cloud also carries elevated levels of inventory versus the pre-COVID level of investments versus the pre-COVID level of inventory. And of course, the cloud investments in CapEx continued to be at a strong clip in their infrastructure, and that bodes well for memory and storage. And I think what’s important is that the overall trend of digitization and use of data to help drive greater productivity and efficiency in businesses, particularly in the backdrop that the world is facing today with the macroeconomic uncertainties is helpful in driving greater technology adoption across industries, and that’s where memory and storage plays out well as well. And specifically, with respect to China and U.S., of course, in China, as we have pointed out earlier, we have seen overall weakness and certainly weakness on the consumer demand side from China as well as some other parts of the world. But we are not really breaking it down between China and U.S. at this point. But again, the overall cloud trends continue to be healthy in terms of the end demand. Sumit, do you want to add any comment on channel customers in terms of inventory?

Yes. I mean, I think the inventory level, as Sanjay said, is higher on the cloud customer side and generally on the data center side compared to where it was pre-COVID. The channel business on the cloud side is relatively in a better place compared to the consumer business challenges that Sanjay highlighted. But of course, different customers have different strategies on how they manage their particular inventory. And the smaller customers in the channel that focus on data center products have had more challenges getting their hands on some of these products that are in shortage like NIC cards to complete server builds, and the smaller customers are getting more impacted there than some of the bigger customers.

And Harlan, I’ll tell you that we work very closely with our customers. I mean our team here, Sumit, myself, I mean, we really engage very closely with our customers across our ecosystem partners here - in China as well as here in the U.S. and worldwide. So, of course, we are keeping close tabs on how the business environment is evolving.

Our next question comes from C.J. Muse of Evercore.

I guess, first question, can you speak to the magnitude of the correction for both DRAM and NAND, how you see that playing out? I’m assuming here that it’s a much larger impact on the DRAM side for you and should be thinking maybe bits down kind of in the low teens. Is that the right way to think about it?

So certainly, on the -- in terms of inventory adjustments that are primarily happening in the smartphone and the PC market. Of course, those inventory adjustments are happening in NAND as well as in DRAM. And clearly, as we have said that in terms of overall demand projection for this year, we definitely see it below -- for DRAM below the guidance we had provided earlier as well as the longer term CAGR for DRAMs mid-teens to high teens. So, we see that below that trajectory. And in terms of NAND, same thing that earlier we had said that the CAGR is high 20s, and we see that in calendar year ‘22 coming in below that. Again, adjustments are happening with respect to inventory both in smartphone and PC market. And just keep in mind that compared to earlier in the year estimation for PC growth, we now are projecting that PC year-over-year in calendar year ‘22 will be down nearly 10%. Similarly, smartphone at the start of the year was expected to grow in mid-single digits in terms of total unit sales worldwide year-over-year and now, one is looking at a decline of mid-single digits. So, a swing of 10% in smartphones as well. If you were to translate it into units, it amounts to like 130 million units reduction versus expectation earlier in the year for smartphone. And similarly for PC, let’s say, 30 million kind of reduction in terms of total units versus the projections earlier in the year. And of course, PC and smartphone combined represent half of the memory and storage worldwide demand in terms of bits, right? So, with this adjustment primarily happening in the second half of this year in these two markets, clearly that is resulting in a year-over-year change versus prior expectations in DRAM as well as NAND demand growth.

Very helpful. As a follow-up, Mark, you talked about WFE trending lower in fiscal ‘23. Can you give an idea of the magnitude there? And then, how should we think about overall CapEx trending into fiscal ‘23?

Yes. C.J., as mentioned in the prepared remarks, we expect to end fiscal ‘22 at around $12 billion, so -- on total CapEx. So that would be an uptick in Q4. And that’s consistent with previous statements. Now, with bit supply growth assumptions coming off versus previous group -- the view, we’re actively working to bring spend down. And as you say, we’re confident that as we sit here today, WFE spend will be down in fiscal ‘23. We’re also evaluating construction and other large areas of spend. We’re looking to reduce utilization on some older nodes to maintain supply and drive CapEx for use and shift production to more cost-effective nodes, doing a number of things. And the market is dynamic. So, this is real time. I’m not going to size the reduction next year just at this point because it’s still moving. But at this point, we’re confident that WFE will decline year-over-year.

Our next question comes from Krish Sankar of Cowen and Company.

I have two quick ones. First one, Sanjay or Sumit, I kind of have different way of asking the cloud question. As you mentioned, mobile and PC are slow, but it seems like data center the next year to drop, but yet, you seem optimistic about data center to remain strong in the second half 2022, but you also said cloud inventory is high. So, it seems like if consumer spending slows, which it is, data center CapEx is a drift. So, love to hear your thoughts why you think overall, the U.S. cloud trends, one, drop in the second half of this year? And then a quick follow-up question for maybe Mark was on the impact of the China Shanghai COVID-19 lockdown. Is there a way to quantify what it was in the May quarter and what it means to second half output for Micron?

So earlier, I provided some color regarding our view on cloud. I think I will ask Sumit just to add some further color on that. And Sumit, maybe you can just take the China question as well.

Yes, sure. So, Krish, very quick on the cloud discussion. As Sanjay mentioned, the CapEx trends for our customers in the cloud space continue to be pretty strong and the end demand for cloud services and the growth in those cloud services continues to be robust. And so, of course, like you also pointed out, I mean, the inventory levels are higher compared to where they were pre-COVID. Now, it remains to be seen how the macroeconomic environment is going to cause the cloud spending trends to modulate over time. But if anything, we think that the cloud spending trends are going to be pretty secular, pretty strong. Even if there is some kind of an impact, it will come back strongly as things stabilize. And even companies that do focus on tightening their belt in this macroeconomic environment will continue to look for ways to become more efficient, become more profitable, improve their competitive positioning. And that means extracting more value from data, digitization trends to continue. So, those kind of things, we feel are going to be well sustained through the environment that may happen. But of course, a lot depends on how the macroeconomic environment evolves, and that’s why we are staying very close with customers. Switching to your China question. China has been a pretty significant impact to our FQ4 trajectory. This time last quarter when we were contemplating our FQ4 trajectory compared to that to our latest guidance that we have provided. Our view for China revenue has come down by approximately 30%. And that reduction in the China revenue has caused roughly a 10% reduction in our consolidated company-wide revenue. And so, that’s the impact to the Q4. It’s pretty substantial. And the China impact is largely driven by, of course, smartphone weakness, PC weakness, the general consumer environment there has been weak due to the COVID shutdowns, and that has percolated to different parts of the economy. So, the economic environment is weak. Now, we do feel like given the weakness in that economy, as you know, China does tend to provide stimulus to improve the financial and economic conditions, and we are hopeful that that kind of stimulus and improvement in the economy will be forthcoming in the quarters ahead. The timing of that and how it plays out with further COVID-related issues in China is unclear. But we remain optimistic that over time, the consumer demand will come back and improve things.

Our next question comes from Timothy Arcuri of UBS.

I guess I had two questions. The first one is for you, Mark. The buyback this quarter was great. But I guess -- and you did say that you’re going to buy back more in August. But I guess I had a bigger picture question around sort of you have an opportunity now with the stock where it is. You have leadership in terms of technology. Where would you be willing to take cash balance to take advantage of this price weakness? I mean, is there a sort of a minimum cash balance that we can think of where you could sort of opportunistically buy back a fairly significant piece of the Company?

Yes. Tim, I’m not going to comment on definitively about our rate and pace. As you point out, the balance sheet is stronger than ever. And I think what’s most important there is we’re in a great position to sustain long-term investments as the markets a bit softer here. We’ve got $14.5 billion of liquidity, which you point out, $12 billion of that’s in cash. And that is above a liquidity target that we had set of about 35%. We’re 10 points over that. Leverage is low, 0.4% on gross and we’re in a net cash position. So, no near-term maturities, average debt maturity out 2031. So we’re in great shape. I think we want to maintain a balance sheet to be able to focus on the long term of the business. As you point out, we did return historically high levels to shareholders in third quarter. At these share price levels, we project opportunistic repurchase to increase. And then from there, we’re just focused on free cash flow growth, returning excess cash to shareholders and importantly, maintaining investment-grade rating. So, I’d say, we have ample liquidity now to repurchase at a higher rate this quarter.

Cool. Thanks for that. And I guess, second question also, Mark, for you. What does the guidance assume for your inventories in August? And sort of how do you think about sort of the balance between holding some inventory if you believe that data center will stay strong and sort of how should we think about inventory in August and sort of your bigger picture strategy around keeping some inventory on the bet that cloud does remain strong?

It’s a good question, Tim. And you heard Sanjay talk about this briefly in his prepared remarks. Our strategy is to manage supply through inventory as a buffer and we did talk about reducing bit supply growth assumptions a bit. We are starting this sort of softer period in a pretty good place. We ended the third quarter $5.6 billion of inventories, 109 days, down from 113 days in 2Q. So, we do expect inventories to go up this quarter. And that will build in some flexibility as we work to optimize price on our products. I want to note, it’s cost-effective inventory, much of it built on leading nodes. And so, it will be competitive for a long time. And then, we’ll also use this inventory build to revisit some CapEx decisions and defer CapEx, optimize the manufacturing footprint where we can. And to CJ’s earlier question, it gives us more confidence that we can lower WFE spend next year. So, in the -- we expect it to go up a couple of weeks and days in the fourth quarter. From there, we’ll have to see how the market develops and which way it moves. We are -- we do have more complex wafer processing and more complex module products that are sort of adding some pressure on the days, but we’re also offsetting that with better cycle time, lower stock levels and so forth. So, I think the days that we would be uncomfortable with is a number that we’ve talked about in the past, around 150 days where we start to -- that’s too high a level. So, we would definitely go up in the fourth quarter, and then we’ll see where inventory levels go from there.

Our next question comes from Vivek Arya of Bank of America.

Sanjay, I’m curious, do you think this Q4 outlook is the bottom of the cycle, or do you think the risks can extend into Q1? Because you mentioned that the consumer headwinds could continue to play out during the second half of the calendar year and also because cloud inventory is at elevated levels. So, I guess, my specific question as much as I realize you don’t guide out more than a quarter is, do you think Q1 sales and margins are more likely to be flat, up or down sequentially?

So clearly, we don’t guide to Q1 here. But as I pointed out in the prepared remarks that we expect these inventory adjustments to be working themselves out over the course of second half of the year. We have pointed out that the inventory adjustments primarily are taking place in PC and the smartphone market. And I’ll just point out that from the past history as well, that once inventory adjustments begin in a certain part of the segment, then it takes a couple of quarters for them to work out. And here, we, of course, have macroeconomic uncertainties as well. It has been a rapidly changing and uncertain environment. And this is what we have to keep in mind when we look at when does normally see return in terms of demand. And that’s why, just like Mark pointed out here in response to the last question, we will be using inventory to address the demand next year. And we will continue to closely with our customers to understand their overall demand environment. We think that sometime in fiscal ‘23 is when -- in our fiscal ‘23 is when demand will rebound, but more importantly, it’s really about the supply-demand balance. And with respect to supply-demand balance, you can see, that we are taking actions immediately in terms of curtailing our supply growth for fiscal year ‘23 by sharing the plans with you that we are bringing down our CapEx versus our estimations earlier. So, that’s an important step. And of course, industry has shown that in DRAM that it has CapEx discipline as well. We believe our actions will also contribute toward returning the industry health sooner. So, I would expect that sometime in our fiscal year ‘23 demand will rebound as well as industry demand supply environment, there’s a store to a healthy level. But again, I will point out that, look, this is a highly uncertain rapidly changing environment. We are, of course, responding fast and -- in terms of any changes we see. So we are not been pointing to any specific quarter at this time. And again, I think what’s also important is that Micron execution continues to be really strong. I mean, whether you look from technology, product, manufacturing, customer relationships and of course, our strong balance sheet, we are well poised to emerge stronger on the other side of this downturn. So, we are really executing well, working closely with our customers to understand the latest demand trends in various end market segments and adjusting our plans as necessary and as fast as we can, and really positioning the Company for overall healthy growth in the long term. And again, the long-term trends -- as Sumit also pointed out earlier, and I shared with you, the long-term trends absolutely bode well for memory and storage.

How much is cloud inventory above a normal level, $100 million, $200 million? Any kind of rough estimation of how much of incremental headwind is that, so we can take that into account? Thank you.

Look, I mean, it really varies by customer to customer, right? So I mean, we can’t exactly give you some of those details here.

Our next question comes from Ambrish Srivastava of BMO.

Sanjay, good to see the financial and the CapEx discipline. With respect to supply growth and you’re ramping down supply growth heading into fiscal -- for fiscal ‘23. What’s the right way to think about demand growth? And so, within the supply meeting demand, how much do you think will be production growth, production supply versus coming from the inventory from the industry? Because I think the industry seems to be consistent in that, at least what we heard a week or two ago from one of your large competitors is also lowering CapEx. So, that’s the good part. But what -- how should we think about inventory on the balance sheet of the three participants adding to the production supply growth? And then, I had a quick follow-up for Mark as well, please.

So look, I mean, we are in the process of firming up our plans. And when we have our FQ4 earnings call in September, of course, we will share with you some more details around calendar year ‘23. That will be more appropriate time for us to be talking about it, as well as our fiscal year ‘23. But again, the important thing to note is that our inventory is highly cost effective. I mean, Micron is leading the industry with our DRAM and NAND production nodes, right? We are several quarters ahead. So, this is a highly cost-effective inventory. Our manufacturing operations are running well. So, we will be using this inventory in fiscal year ‘23 and of course, continue to adjust our plans as necessary on the CapEx and front-end wafer technology ramps, et cetera, to bring balance into demand and supply, and which is what I pointed out earlier that overall, the combination of our inventory as well as new production growth that’s how we’re positioned to bring that into balance to meet the demand sometime in fiscal ‘23.

Got it. And Mark, real quick one on the WFE versus non-WFE, what’s the percentage? And I respect the fact that plans are still in flux, so you can’t give us a number for ‘23. But what’s the number expected to be for this year, please? Thank you.

I’m sorry, Ambrish. I couldn’t hear the question.

Sorry. My question was, what’s the wafer front end versus non-wafer front end spend in the CapEx for this year?

Okay. I got the mix of spend. I won’t give an exact number because the mix varies from year-to-year and depends on product cycles, availability of fab space and facilities and other factors. Over half of CapEx generally is manufacturing WFE, and then, the other half is split between development CapEx and construction.

So, when you say you will be -- you could take down construction as well, that means construction as well as development, or what’s the right way to think about the kind of the playbook is what everybody is looking for if things continue to…

Just to be specific, we’re talking about WFE for manufacturing, and that’s what I was addressing would go down year-over-year. We did not commit to going down year-over-year on construction, nor on technology development. I did say though that depending on how the market plays out here and inventory levels and supply bit growth and so forth, we continue to look at our footprint. That’s a continuous process to optimize the amount of spend. So, again, just to make sure that’s clear, WFE over half, and then the rest is construction spend -- equipment spend for R&D and assembly and test.

Got it. Thank you. And again, I apologize if misinterpreted your comments. Thank you.

Our next question comes from Aaron Rakers of Wells Fargo. Please go ahead.

I just wanted to ask in this environment, these last couple of quarters and at the Analyst Day, you emphasized how much of your business you had kind of line of sight in terms of kind of the long-term agreements that you’ve established. I’m curious, as we’ve gone through this kind of correction or downturn, how would you characterize your discussions on those long-term commitments? Have they changed at all? Have customers pushed back on taking the amount of previously committed supply from you guys. How has that changed at all as we go through this kind of correction right now?

That’s a great question, and I will have Sumit address it.

Yes. Happy to talk about that. So, the long-term agreements, generally, we go out four quarters, talk about volume in each quarter. And as I have pointed out in the past, these are not meant to be take-or-pay agreements, but more meant for planning and shared assumptions and so on. We have had extensive discussions. We keep having ongoing dialogue with our customers about the environment. We obviously continue to press our customers to stick with the agreements and the quarterly SKU, et cetera, as much as possible. But, when there are such significant extraneous events that are happening, exogenous shock sometimes to the environment and such unpredictable type of situations that Sanjay was highlighting, fast-changing environment that is causing impact to the end demand, especially given some of the consumer spending shifts that are happening in the world that are causing reductions in purchasing of certain electronics products, PCs, smartphones, et cetera. Then it is not possible for our customers to purchase based on the LTAs that were established when the assumptions around the industry were very different. And so, our goal then is to work with our customers to come up with the best approach and figure out how best to position ourselves in terms of the forward-looking views of their purchasing patterns. And this is where I feel like the product momentum that we have had has played out really well. We just mentioned that our data center SSD revenue doubled in the most recent quarter year-on-year. We have tremendous product portfolio momentum across all of our products. We are shipping in volume, HBM products. We have the world’s fastest graphics DRAM product, first to market with low power DRAM and mobile and really strong capability in automotive, number one share in auto, industrial and networking. So, these all play to our strengths with our customers. So, in the areas where we want to improve our portfolio position, improve our share because they are more stable segments in the market or they are more profitable portions of the industry profit pool. That’s where we focus on. And then our portfolio strength really helps enable that transition with customers to make our own business more optimized and more profitable, more steady over time. So, that’s the engagement that we have with customers. And we use those LTAs to then drive those longer-term goals that we have with customers.

Thank you. Ladies and gentlemen, we have reached our time. That does conclude today’s conference call. Thank you for participating. You may now disconnect.