Good day, and welcome to Micron's First Quarter 2023 Financial 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] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Farhan Ahmad, Head of Investor Relations. Please go ahead.

Thank you, and welcome to Micron Technology's Fiscal First 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 on 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 the financial conferences that we may be attending. You can 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 the statements made today. We refer you to the documents we filed 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 fiscal first quarter revenue and EPS within our guidance range despite the pricing environment, which deteriorated significantly from our prior call. The industry is experiencing the most severe imbalance between supply and demand in both DRAM and NAND in the last 13 years. Micron is exercising supply discipline by making significant cuts to our CapEx and wafer starts while maintaining our competitive position. We are also taking measures to cut costs and OpEx across the Company. Customer inventory, which is impacting near-term demand, is expected to continue improving, and we expect most customers to have reduced inventory to relatively healthy levels by mid-calendar 2023. Consequently, we expect the fiscal second half revenue to improve versus the first half of our fiscal year. We expect our days of inventory to peak in our current fiscal Q2 and gradually improve over the next few quarters as our bit shipments improve and our supply growth is significantly reduced. Despite this improving bit shipment and revenue trajectory, we expect industry profitability to remain challenged through calendar 2023. The combination of our technology leadership, manufacturing expertise, diverse product portfolio, a strong balance sheet and our decisive actions provide a solid footing to navigate this challenging near-term environment. I'll start today with an overview of our technology position. Micron continues to lead the industry in both DRAM and NAND technology. We are first to market with 1-beta DRAM and 232-layer NAND. While both on 1-beta DRAM and 232-layer NAND offer strong cost reductions, we have slowed their ramps to better align our supply with market demand, as we previously indicated. Yield trajectory for these nodes is on track, and we are continuing to qualify these nodes across our product portfolio and will be well positioned to ramp these…

Thanks, Sanjay. Fiscal Q1 revenue and EPS came within our guidance ranges despite worsening market conditions over the course of the quarter. Total fiscal Q1 revenue was approximately $4.1 billion, down 39% sequentially and down 47% year-over-year. Fiscal Q1 DRAM revenue was $2.8 billion, representing 69% of total revenue. DRAM revenue declined 41% sequentially with bit shipments decreasing in the mid-20% range and prices declining in the low 20% range. Fiscal Q1 NAND revenue was $1.1 billion, representing 27% of Micron's total revenue. NAND revenue declined 35% sequentially with bit shipments declining in the mid-teens percent range and prices declining in the low 20 percentage range. Now turning to revenue by business unit. Compute and networking business unit revenue was $1.7 billion, with weakness across client, data center, graphics and networking. Embedded business unit revenue was $1 billion, with automotive staying stronger than consumer and industrial markets. Storage business unit revenue was $680 million, while QLC mix increased to a new high. Mobile business unit revenue was $655 million, a low level, partly due to the timing of shipments between fiscal Q1 and fiscal Q2. We expect mobile revenue to grow through the rest of the fiscal year. The consolidated gross margin for fiscal Q1 was 22.9%, down approximately 17 percentage points sequentially, primarily due to lower pricing. Operating expenses in fiscal Q1 were down roughly $50 million sequentially to $101 billion. We are taking significant additional actions to reduce our operating expenses through the remainder of this fiscal year. We reported an operating loss of $65 million in fiscal Q1, resulting in an operating margin of negative 2%, down from operating margins of 25% in the prior quarter and 35% in the prior year. Fiscal Q1 adjusted EBITDA was $1.8 billion, resulting in an EBITDA margin of 45%, down…

Thank you, Mark. In the last several months, we have seen a dramatic drop in demand. Micron has responded quickly to reduce our CapEx and supply output, and we are taking strong enterprise-wide actions to control our expenses. We have increased liquidity on our balance sheet and adjusted our operational plans. While the environment remains challenging, we currently expect second half fiscal 2023 revenue to improve from the first half. We are confident that the broad advantages enabled by data-centric technologies will create long-term growth for our industry and expect the total available market to reach approximately $300 billion by 2030. Thank you for joining us today. We will now open for questions.

[Operator Instructions] Our first question will come from the line of Tim Arcuri with UBS. Please go ahead.

Sanjay, I had a question about the market outlook for DRAM. You have already said that your DRAM production will be down mid- to high singles year-over-year in calendar '23. And then you said in your remarks, you said that if the industry production was down, this would accelerate the recovery in profitability. But at this point, I guess, I have two questions. One, do you think the industry will be down in terms of production for DRAM? There's some concern about what your big core income competitor is going to do. So I'm just sort of curious, do you think that they are cutting such that the industry production in DRAM will be down just like yours is down year-over-year?

So Tim, I would like to point out that what we said is that our DRAM supply growth would be slightly negative in fiscal year '23. So not mid- to single high single digits -- supply growth for Micron would be negative. That's because we have taken the actions. We are taking the actions in terms of supply -- wafer output reduction reducing supply through underutilization in the fab. And as you know, we have also CapEx reduction. We have pushed out our 1-beta DRAM production in the fab so that we can bring our supply closer to demand. So the industry is oversupplied, and we do believe that actions need to be taken as reflected in Micron's actions with respect to supply reduction. And of course, the rate and pace of the industry supply cuts would affect the recovery of the industry in terms of bringing supply and demand balance closer together. So look, I mean, we cannot specifically comment with respect to the -- our competitors. But what we can tell you is that if the industry supply is -- supply growth in calendar year '23 is negative, and for DRAM and flattish for NAND, it will accelerate the recovery in the industry.

Thank you. One moment for our next question and that will come from the line of C.J. Muse with Evercore ISI. Your line is open.

I guess the question is your -- you've -- in the last few years, really taking the leadership role both in DRAM and NAND. And so as you think about hitting the worst downturn in 13 years and taking the appropriate reductions in supply and cost. How can you, at the same time, make sure that you maintain your leadership? What are you doing on that front? Such that when we do go into the next upturn that you are in that lead position, lead role and can really take advantage of technology again.

Thank you, C.J. Of course, Micron is in a strong technology position. We feel very good about our technology capabilities and our road map. Our -- if you look at our 1-alpha DRAM that compared to our prior 1-z node gave us a 40% bit efficiency gain per wafer. And now if you look at our 1-beta, industry, you would expect less, but what you see in our 1-beta node is a 35% improvement in terms of bit efficiency per wafer versus our 1-alpha node. And our 1-beta DRAM node is well designed for D5, DDR5 deployment as well with good performance and good power efficiency improvements over prior products. So it's really 1-beta is a very good node when you compare it to any other even EUV nodes that are out there in the industry. So it's an industry-leading node. We are well positioned with our 1-beta node. And of course, our 1-gamma node will be well positioned as well. And we are timing the production of these nodes to maximize the ROI in our R&D and manufacturing. And of course, to bring supply and demand in balance overall and keeping in mind the longer-term CAGR for DRAM growth and adjusting our technology cadence accordingly. So I think we are managing our technology node development and manufacturing plans our supply plans in a highly responsible fashion, and we'll be well positioned with our technology. And same thing on NAND side, our 232-NAND is in very good shape. Both 1-beta and 232-layer NAND in terms of cost, in terms of quality and in terms of, of course yields, we are well positioned with them and continuing to work with customers in qualifying those products. So not only just 1-beta and 232 layer, we feel good about our technology road map, capabilities and position with our plans for 1-gamma and the node beyond the 232-layer in NAND. And just to point out that Micron, I was recently talking to a leading customer and executive there, and the customer was facing Micron's as being the best in the industry. And same kind of accolades we get from customers on LP5, on GDDR6 on our QLC NAND. And of course, we are broadening our portfolio of products too. So not only with respect to technology, we are well positioned. I think we are well positioned with respect to our product momentum as well.

Thank you. One moment for our next question, that will come from the line of Chris Caso with Credit Suisse. Your line is open.

Question is on the pace of gross margins as you go through the year. And you spoke about revenue and free cash flow being better in the second half. Do you believe that's the case for gross margins as well? Do you think gross margins are bottoming here? And if you can comment about some of the impact of the unutilization charges and how they flow through the year and beyond Q2?

Chris, this is Mark. I'll take that. A few comments on the profile. We did say that Q1 would be the bottom for bits, and we expect bits to be up in the second quarter and revenue down. So that points to continued challenges around the market conditions. We also expect 2Q to be peak on DIO, but 3Q will be the peak on inventory dollars. So the industry remains in an oversupply situation. But customers are depleting inventories, and we expect them to be in a better position by the second quarter of the calendar year. But profit is going to be challenged through the year, and that will challenge gross margins. Now the utilization effects specifically maybe I'll talk just costs generally first. In FY '22, and historically, Micron has strived and achieved cost downs in line or better than the industry, node advancements, manufacturing, productivity and other factors. But fiscal year '23 is going to be challenging in the near term as these utilization effects and low volumes weigh on the cost per unit and weigh on margins. And there are three principal drivers that will help explain that. One is maybe an overlooked factor is just simply the effects of routine period costs that run through the business on a normal basis, scrap preproduction volumes, pre-qual volumes, freight, royalties, these sort of things. And when you add this sharp decline in volumes and revenue, those period cost effects are going to impact margins. And so we're seeing that. The second driver is the much lower volumes are creating underload issues in the back end. And of course, that creates higher cost inventories that some is period cost, but most of it still hangs up in inventory and creates higher inventory costs. And that also is a…

Thank you. One moment for our next question, that will come from the line of Tom O'Malley with Barclays. Your line is open.

My question is really on the demand side. I think that you did a good job of calling out what you saw from an end market perspective into next year. But I just wanted to ask specifically on the data center. You've called out inventory in the past, but versus where you guys talked about the data center last quarter, do you think that inventory at customers was worse than you initially thought? Or do you think that you're seeing a weakening in terms of data center and demand?

So inventories with data center customers including cloud is higher than what we thought. So that inventory adjustment has begun, and it has some wood to chop in that area. And of course, the end demand for cloud operations that are driven by consumer-related activities given the overall consumer environment and the macro trends, some portions of cloud and demand may be weaker as a result of that as well. And also in the macro environment that exists today, there is -- given the higher interest rates and other macro trends, companies do become somewhat cautious in terms of managing their overall expenses and any long-term agreements, et cetera. So that can impact some of the current environment for end demand in cloud. But what I would like to point out is that digitization trends ultimately do remain positive. Cloud definitely helps drive that efficiency that businesses seek in an environment like this. We do absolutely expect that once we get past the current macroeconomic environment and macroeconomic weakening, longer-term trends for cloud will remain strong. In terms of the current environment, yes, inventory adjustments and some impact of cloud and demand weakening as well. that's impacting our overall data center outlook.

Thank you. One moment for our next question, that will come from the line of Krish Sankar with Cowen. Please go ahead.

I just have a quick question for Mark. Mark, you said inventory base to peak in the second quarter and inventory dollars in F3Q. What kind of inventory days should we expect in F3Q? And what is the risk of inventory write-down? Kind of wondering what is your inventory write-down methodology?

Sure. I think I got the question. So the -- as mentioned, the DIO peak, we expect to be in 2Q, the dollars in 3Q. And from both those peaks, we expect it to gradually improve, which is consistent with profiles that we've said before, though the conditions have worsened and volumes are a bit lower. Yes, we do expect customers to be in better shape by the second quarter of calendar year, and that's encouraging. And then you've seen the steps we've taken on supply to get inventories down. But I did cover this recently at a conference, bears repeating. Inventory is -- it's obviously a risk where we carefully and thoroughly monitor and with the lower utilization we have and the higher costs associated with that per unit. And then the weak market conditions we have, the margin of safety we have has decreased from where it was. We did a thorough quarter-end analysis as we always do. And of course, that includes the outlook. And in that, we determined that there are no write-downs to the lower of cost or net realizable value warranted. We perform extensive reviews of project -- projected pricing. We analyze customer trends, and there are a number of other factors. If our estimates did change, further, there could be risk of write-off in future quarters but none this in the November quarter. I do refer you to our inventory policy that's disclosed in our 10-K. We have a long-standing policy of evaluating inventory as a single pool, and we evaluate this policy regularly, and we apply consistently.

Thank you. One moment for our next question, that will come from the line of Mehdi Hosseini with Susquehanna. Please go ahead.

Yes. Sanjay, I want to go back to your, the color you provided on the demand trend by end customer or by end application. You've highlighted that the PC unit are expected to be down 5% to 10%. If I just take the current build rate in December and apply a seasonal decline in Q1, it suggests to me that PCs as the end market application would bottom by March, April time frame, let's say, post-Chinese New Year. Could that be a catalyzed -- could that actually catalyze a more improved visibility with pricing for DRAM and NAND? And I asked you because it was the PC end market that rolled over. And I'm just trying to better understand whether PCM market could help stabilize certain part of the DRAM and NAND segments?

Well, of course, the markets where DRAM and NAND are well diversified. PC is one of the markets. And we already talked about the decline in PC units. Actually, in calendar year '22, high teens decline in PC units. This is the sharpest decline in the history of the PCs, and smartphones, another area where unit sales of smartphones globally down 10% as well. And that, too, historically, in terms of a decline is high. So these are, of course, impacting the end consumer demand and then inventory adjustments on top of it impacting the demand. And of course, as I spoke about earlier, that inventory adjustments are happening in other parts of the market as well. I think with respect to our outlook for next year in terms of demand, we expect about 10% demand growth for DRAM in calendar year '23. And when you look at mid-single digits, low- to mid-single-digit demand growth in '22 and approximately 10% in '23 that over a two-year time period is really significantly lower growth rate compared to the years in the past, the CAGRs that have been prevalent over time. So, I think what's important here is that the supply has to be reduced. The biggest factor here really would be the supply reduction. Of course, once inventory adjustments, we are able to get past and the macroeconomic environment improves. The long-term trends for demand, driven by all the factors we have spoken about before, AI, 5G, industrial IoT, autonomous, all of those long-term factors will drive that demand along the lines of the CAGR that we have discussed today. But in the near term, the biggest factor to really address the demand supply is a reduction in supply in the industry. And of course, the rate and pace of the financial performance improvement will very much depend on how fast supply comes into balance. And as we have discussed, we have taken our actions in terms of CapEx reduction, in terms of underutilization, in terms of adjusting the technology node cadence. And we do believe that with the supply actions, the industry environment will improve. I do see that in fiscal year '24, the revenue, the profit and the free cash flow profile would be much better than '23. And of course, again, will be a function of how quickly the supplier just to demand.

Thank you. One moment for our next question, that will come from the line of Toshiya Hari with Goldman Sachs. Your line is open.

I had one quick clarification and then a question, clarification for Mark. You talked about the $460 million of headwind related to the underutilization of your fabs. When you throw out that estimate, what assumptions are you making for utilization rates for the next couple of quarters? You obviously talked about the 20% cut as of today. But are you assuming you stay at that 20% rate for Feb, May and perhaps August? Or are you assuming production rates or utilization rates kind of step up as you progress through the remainder of the fiscal year. And then the question is on the demand side. Sanjay, in your prepared remarks, you talked about customer inventory normalization and new server CPU platforms in China reopening as some of the key drivers for bit growth over the next couple of months or few months. How much visibility do you have into those three dynamics? You talked a little bit about inventory, but we're hearing customer inventory in some cases, might be increasing given some of the deals, not just you specifically, but the industry is striking, the server platforms could be a little bit more skewed to the second half of calendar '23 and China reopening still seems pretty gray. So curious what kind of visibility you have there.

Yes, Toshi, I'll just briefly touch on the first one. We're expecting these elevated underutilization levels through most of -- well, through fiscal year '23. And beyond that, we're just going to always be evaluating the market conditions and then we'll update you and the market accordingly.

And on your questions regarding customer inventory, what I would like to point out is that customer inventory in aggregate -- and that means in terms of volume in bits, we believe it has come down, although still at high levels. And you can see that in Q2, we are guiding to increase bit shipments. And just keep in mind that where demand used to be in terms of or the industry shipments used to be a few quarters ago versus now, they have come down substantially. And even though there may be some end market weakening in demand that points to that some of the inventory is being consumed by the customers. Basically, some of the inventory that the customers are holding is being consumed by them to address their end demand. So basically, the ship out by customers is greater than the ship in, in terms of purchases by customers from suppliers. And this trend of inventory improvement, gradual inventory improvement we believe will continue. And by mid calendar '23, we are projecting even though we don't have perfect visibility, but based on all of our discussions with our customers, we are projecting that inventory at customers will be in relatively healthier position by that time. And that's where we say that our second half of fiscal year revenue will be greater than first half, and we would expect continued improvements beyond the second half as well. And regarding the question on China, of course, China reopening has to be monitored closely, and it may be choppy. In terms of the near term, we are assuming that China is reopening for the second half of the calendar year, will result in benefit in terms of increased demand coming from the China markets. And of course, China reopening is not just issue to be monitored in terms of Chinese customer demand, but also any impact on global electronics system supply chains. And of course, we have assembly and test operations in China as well, and we are continuing to monitor those as well with respect to some of the recent COVID cases there. So, I think China, COVID cases and reopening will have to be -- continued to be closely monitored.

And Sanjay, Sapphire Rapids in Genoa, the new server CPU platforms, visibility there in terms of the ramp?

So our products are well positioned, and we expect that these will be ramping during the course of '23 and, of course, continue to ramp in '24 as well. And these are the ones that will drive a greater D5 attach with the servers. And as we said, we expect that for servers, D5 in 30s percentage range in terms of deployment by end of calendar '23 and somewhere around 50% by mid-calendar. So our products are well positioned, and we are looking forward to deployment of those new CPU platforms and that will drive healthier dynamic with respect to D5 deployment. These new processors, they work with more cores. They increase the attach rate for memory because they are bandwidth hungry and that just points to greater adoption of DRAM, particularly D5 memory with those processors.

Thank you so much.

So of course, it has been pushed out. I mean compared to the plans last year or over the last few months, some of those new processor deployments have been pushed out, but we look forward to them getting broadly adopted as the year progresses in '23.

Thank you. And we do have time for one final question. And that will come from the line of Aaron Rakers with Wells Fargo. Your line is open.

I'll make just a quick question. I'm just curious, as you guys kind of thought about the guidance for this current quarter and given the pace of change that we saw in the pricing environment through the course of this last quarter. I guess, when you roll up your assumptions for DRAM and NAND, is it as simple to think that you guys are assuming kind of a similar pricing environment our pace of pricing declined this quarter as we saw last quarter? Or are you kind of factoring in any kind of acceleration of price degradation?

So look, we don't comment specifically on pricing, but I can certainly tell you that both DRAM and NAND are experiencing challenging environment. And again, it is about oversupply in the market and decisive actions that we have highlighted today are the kind of actions that are important to make progress towards bringing supply and demand into balance.

Thank you. Thank you all for participating. This concludes today's conference call. You may now disconnect.