Thank you for standing by, and welcome to Micron's Second Quarter 2023 Financial Call. [Operator Instructions]. I would now 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 Second 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 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 may be attending. You can also follow us on Twitter, @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 second quarter revenue within our guidance range, and excluding the impact of inventory write-downs, margins and EPS were also within the guidance range. The semiconductor memory and storage industry is facing its worst downturn in the last 13 years with an exceptionally weak pricing environment that is significantly impacting our financial performance. We have taken substantial supply reduction and austerity measures, including executing a company-wide reduction in force. We now believe that customer inventories have reduced in several end markets, and we see gradually improving supply-demand balance in the months ahead. Excluding the impact of inventory write-downs, we believe our balance sheet DIO has peaked in fiscal Q2, and we are close to our transition to sequential revenue growth in our quarterly results. We are navigating the near-term difficult environment with our strong technology position, deep manufacturing expertise, strengthening product portfolio, solid balance sheet and incredibly talented team. Beyond this downturn, we anticipate a return to normalized growth and profitability in line with our long-term financial model. Micron continues to lead the industry in both DRAM and NAND technology. We are investing prudently to maintain our technology competitiveness while managing node ramps to reduce our bit supply and align it with demand. In DRAM, 1-alpha represents most of our DRAM bit production, and we continue to make great progress in initiating our transition to 1-beta. In NAND, 176-layer and 232-layer now represent more than 90% of NAND bit production. We also continue to lead the industry in QLC. QLC accounted for over 20% of our NAND bit production and shipments in fiscal Q2. The Micron team's solid execution and implementation of smart manufacturing has driven superb yield enhancement across our leading-edge nodes. Yields on 1-alpha DRAM and 176-layer NAND have reached…

Thanks, Sanjay. Fiscal Q2 results reflected challenging market conditions with continued deterioration in pricing and profitability. Total fiscal Q2 revenue was approximately $3.7 billion, down 10% sequentially and 53% year-over-year. Fiscal Q2 revenue included $114 million from an insurance settlement disclosed at the time we provided guidance. Fiscal Q2 DRAM revenue was $2.7 billion, representing 74% of total revenue. DRAM revenue declined 4% sequentially, with bit shipments increasing in the mid-teens percentage range and prices declining by approximately 20%. Fiscal Q2 DRAM bit shipments benefited from the timing of shipments between fiscal Q1 and fiscal Q2. Fiscal Q2 NAND revenue was $885 million, representing 24% of Micron's total revenue. NAND revenue declined 20% sequentially, with bit shipments increasing in the mid- to high-single-digit percentage range and prices declining in the mid-20s percentage range. Now turning to revenue by business unit. Compute and Networking Business Unit revenue was $1.4 billion, down 21% sequentially. And on a sequential basis, cloud revenue was down while client revenue was stable. Revenue for the Mobile Business Unit was $945 million, up 44% sequentially. Mobile revenue benefited from the timing of some shipments between fiscal Q1 and fiscal Q2. Embedded Business Unit revenue was $865 million, down 14% sequentially. On a sequential basis, automotive markets were relatively stable following industrial and consumer end markets experienced weakness. Revenue for the Storage Business Unit was $507 million, down 25% sequentially and impacted by challenging conditions in the NAND market. Consolidated gross margin for fiscal Q2 was negative 31.4%. This result was negatively impacted by approximately $1.4 billion or 38.7 percentage points of inventory write-down recorded in the quarter. These noncash write-downs, which lower the cost basis of inventory, resulted -- results from projected selling prices falling below the cost of inventory and are not the result of obsolescence.…

Thank you, Mark. We are carefully managing our business to weather this industry downturn, preserving our technology and product portfolio competitiveness and manufacturing capabilities. Micron is the leader in DRAM and NAND process technology and one of only a handful of leading-edge semiconductor manufacturers in the world. Our team continues to drive new breakthroughs for our customers. Memory and storage are at the heart of systems and solutions that fuel the global economic engine, drive new efficiencies, create higher productivity and spud advances that make life better for people around the world. We look forward to a normalization of market conditions, and we remain confident in the long-term demand for our solutions based on the value they create across multiple end markets. Thank you for joining us today. We will now open for questions.

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

I guess I was hoping to get your sense of how you're thinking about the shape of the recovery. Obviously, things don't look great today, but you've been through this before and will get through it. And so would love to hear your thoughts around how you think will come out of this. And given the CapEx cuts we've seen across the industry, it certainly looks like we're going to be an undersupply situation, at least for DRAM in calendar '24. I'm curious what some of your largest customers are saying today, particularly in the data center as they start to consider this likelihood.

Thanks, C.J., for the question. So I think we can look at the question from the demand and the supply point of view. And from the demand side, as we have indicated that we are seeing that the customer inventories are improving while still elevated, but in aggregate, customer inventories are improving. And we do expect that the volume of shipments, both for DRAM and NAND, will continue to increase on a sequential basis from here on. And of course, on the supply side, you have heard actions from industry players and through various reports, you have seen that the CapEx reductions are being made as well as underutilization is being made in the industry. And that is going to be taking out a chunk of – it will take a bite at the supply in the industry. So basically, the supply trend will also begin to improve. So the demand and supply balance will gradually improve through the course of the year. We have said that inventory -- we believe also days of inventory will continue to improve as well. For us, days of inventory peaked in Q2, and exclusive of inventory adjustments, we would expect days of inventory to continue to improve from here on. We have talked about for our business that we see being close to transition to sequential growth in revenue going forward. So overall the industry environment, with the demand and supply gradually improving, we expect the trajectory of pricing also to be improving. So this then ultimately means that while the profitability remains challenged, and yes, free cash flow remains challenged, but the fundamentals of the industry are beginning to improve. And certainly, with the actions that have been taken, it could be that in 2024 timeframe that there could be shortages in…

And our next question comes from the line of Timothy Arcuri from UBS.

I had a 2-part question. First, Sanjay, I was curious -- just following on the last question, what are the lasting changes that you think that the industry is going to implement coming out of the cycle? I mean it's been so much worse than I think any of us thought it would be. Do you think that the industry and you -- I mean, certainly, you, it sounds like, but do you think the industry is going to be more draconian about adding bit supply? Do you think you can engage customers in more LTAs, given that the writing clearly is on the wall about where pricing is going to go after all this? And then I guess also then for Mark, a question on the write-down for May. Why keep on producing if you're going to immediately write-down $500 million worth of inventory? Is it that you've hit some sort of floor in terms of utilization where you can't go below that? I'm just curious why you'd produce and you'd immediately write that down.

So I think with respect to the industry environment, you have to look at that over the course of last 3 years, the world faced once-in-100-years kind of pandemic, once-in-multiple-decades kind of Russia-Ukraine war and its impact on the economy, 40-year-high inflation and its impact on the macro. And all of these really resulted in an environment that created a material dislocation in terms of the demand, the surge in demand, and then the inventory adjustments that took place and resulted in a material dislocation in the customer behavior as well. And now you are seeing the process of recovery that is starting, the process of recovery with respect to the supply growth reductions actions that are being implemented. We talked about ours today. And so this will ultimately lead to the industry to recover to healthier levels. The profitability levels in the industry today are simply not sustainable. So the demand and supply environment has to improve in the industry. And keep in mind that before this period of last 2 to 3 years with all these events that I just mentioned, the industry for 10 years plus has been disciplined particularly in DRAM. So I do believe that the investments in the future that require healthy levels of profitability and, of course, supply discipline will be back and the industry will grow. And particularly, keeping it in mind the strong demand trends. I talked about 2025 being -- we think will be a record revenue year for the industry because last 2 years have been slow demand growth in terms of shipments. We think '24 and '25 will be strong years that will drive strong growth. You are seeing actions on the supply side. The health of the industry will be restored in the future quarters. And no doubt that AI -- and we talk about generative AI, right? I mean this is very, very early stages of generative AI, and these are the trends that ultimately really drive greater demand for a long time to come for memory and storage. I mean when you look at really the future, it equals AI and AI equals memory, and Micron is well positioned with our technology and product roadmaps to address the growing opportunities there.

Yes. Tim, on your second question, we have been actively taking supply out of the market. We took utilization levels down late summer. We increased that more in the fall. And as you heard on the call today, we've taking utilization down even further. And it's -- we're at levels now that none of us have seen before on underutilization at Micron and maybe in the company's history. So it's a significant reduction. I'll add that we do, as you know, build principally to WIP. So we're able to then finish those products later and minimize the amount of build. We've also very thoughtfully, when we've reduced utilization, done it in the way that we can maximize the cash benefits reductions that we get when we reduce. And then it's important to note that in the time horizon that we're looking at, we are seeing bit volumes increase sequentially from here on out. Now in the third quarter, I will note just some housekeeping that DRAM volumes were up modestly in the third quarter, and NAND is up sharply -- as strongly, I should say. And while both are price-challenged, NAND is more challenged. But again, we are seeing growth in bits, and we expect that too is the beginning of supply/demand getting into better balance.

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

Just a couple of specific questions on the expected recovery. Is your base case -- I guess in terms of the PC and cell phone demand for the second half of this year, is your base case expecting those end markets to get back to normal seasonality? And how should we expect utilization rates to trend as you continue to increase DRAM and NAND shipments? Should we expect you to get back to full utilization rates in a couple of quarters? Or is there some sort of revenue or bit level that you could give us that would indicate that you're back to full utilization?

So with respect to the utilization rates, of course, we will continue to monitor the industry demand, and it's important for us to continue to work on bringing our days of inventory down, and utilization could continue into fiscal year '24 as well. We'll make decisions regarding utilization as a function of, again, our latest status in the future around our inventory position and assessment of demand. Regarding your question on the smartphone market, as we have said that in calendar year '24, we expect that smartphone unit volume will decline on a year-over-year basis, and Q2 growth for us was above seasonal. And as customers' inventory levels normalize over the course of the year, then normal demand trends will also be restored in the smartphone market. And regarding the smartphone market, even though the unit volume may be down on a year-over-year basis, important thing is that the smartphone market is shifting its mix more towards flagship phones, and flagship phones require more memory as well. So these are some of the trends that will play out as the demand grows over the course of the year for -- in the smartphone market.

And our next question comes from the line of Harlan Sur from JPMorgan.

On the underutilization charge, I know last call the team had articulated roughly $460 million of charges recognized primarily in fiscal Q3 and Q4. So how much of this is embedded in your Q3 numbers and Q3 guidance? And given the lower utilization, tick it down to 25% or cut it by 25%. If you continue to drive lower utilization through the second half of this calendar year, like how do we think about some of the utilization charges in fiscal Q4 and second half of this calendar year?

Yes. Harlan, so I'll answer it briefly here at the beginning and then maybe take the opportunity to just talk through gross margins and effective utilization gross margin. So based on what we told you last quarter and I went into some length last quarter about the charges and period costs and so forth. But last quarter, we thought we'd have around $900 million in fiscal '23 and about $460 million would hit FY '23 COGS. With the underutilization that we've stepped up here, we see now about $1.1 billion in '23, and this is a combination of cost and inventory and period costs, and we actually see about $900 million of that flowing into FY '23. And that's driven by not only the increase in utilization costs -- underutilization cost is driven by the effects of the write-down and the accounting -- or inventory write-downs and the pull forward of cost. So if we step back and we look at our reported gross margin and our outlook, their a function of many factors, including pricing, inventory write-downs, which incorporate our forward view of pricing, the effects of utilization, volumes and the associated leverage on period costs, as we discussed last quarter, and of course, mix. These factors are continuously changing due to the market environment and our actions. And then further, I'll add that at these lower levels of profitability, the margin forecast and the results are more sensitive to slight changes in assumptions, importantly, such as price. So on price, given the recent price trends that we've seen and our current view on pricing, as we reported in Q2, we took a material write-down of inventories of $1.4 billion. And then the Q3 guide contemplates a write-down of $500 million on these additional inventories produced. With these write-downs,…

Our next question comes from the line of Toshiya Hari from Goldman Sachs.

One question on the NAND business end market. You talked about your bit production being down year-over-year in calendar '23, which I believe is a little bit more draconian than most of your competition. Just curious how you're thinking about the strategy in NAND. Could this cause permanent damage to your relative competitiveness? And kind of related to that, one of your competitors has significant capacity in China. Wondering if you had customers come to you and express concerns around that, and if that could be a potential relative positive for you over the medium to long term.

So with respect to NAND, we are well positioned with our technology and product roadmap. We shared with you today that 176-layer NAND yields are doing exceptionally well. 232-layer NAND, we have begun shipping in the market already. And with 176, as well as 232-layer, we have been well ahead of any competitor in the industry. 90% plus of our supply today in NAND that we are shipping is 176 plus 232-layers. So overall, we are well positioned with our technology. Our underutilization actions, we really believe are -- is what is needed to bring supply in line with demand, and we think these are the actions that are needed to restore the health of the business. And we have said in our prepared remarks that the industry recovery could be accelerated if NAND and DRAM supply growth, production growth, is negative on a year-over-year basis. And we certainly are taking our actions accordingly. And regarding China, I can't really comment on the part of other customers. But what I can tell you is that our customers really do see a strong technology execution, a strong product execution from Micron, and it's our product portfolio. We have done well with leveraging our NAND and DRAM in mobile markets with multichip packages. In automotive, I talked about some of the NAND product portfolio expanding and creating opportunities to strengthen our leadership position in automotive markets. And certainly, in the data center market, SSDs is also an opportunity. And our Gen4 NVMe SSDs have been continuing to do well in the client market as well. So our customers see our execution and innovation capabilities in technology and products, and that's what is bringing us stronger relationships with our customers for the NAND business. And of course, in terms of market opportunities, those continue to be healthy in terms of NAND-displacing HDDs in the data center, and Micron having the right products to grow those opportunities in the future. This has been -- we have been -- with NVMe SSDs and data center, we have been absent in the past, and now we have a healthy product portfolio, and we look forward to growing our opportunities in that space in the future. So NAND overall, in combination with DRAM, enables us to have a strong differentiated value for our customers. And Micron is well positioned with our technology and product roadmap, and certainly, we believe that our supply actions here are prudent.

And our next question comes from the line of Aaron Rakers from Wells Fargo.

So Mark, I apologize, I just want to go back to the inventory discussion a little bit. Is there any way to bridge the prior comment of the $460 million, again, that Harlan had brought up relative to that? It sounds like $900 million for fiscal '23. I'm just curious on what's embedded in the gross margin for underutilization this quarter. And I guess on inventory, is there any risk of obsolescence of inventory? Or is the inventory good, it just gets sold through at a lower cost of goods at this point?

Yes, the inventory is still good. It just gets it -- the cost basis is lower on the inventories. And then as far as your question on underutilization charges. So we do have, as just bridging it from what we said last time, last time we had total underutilization charges of about $900 million that were incurred in FY '23, of which we believe that $460 million would pass through to the P&L in FY '23. And that $460 million was a combination of costs and inventories that clear and then also period costs. Now our view with the increased underutilization, our view is $1.1 billion of costs in FY '23. And the amount that we believe will pass through in the second half year is $900 million. Again, that is a combination of costs that are in inventory and period costs. Now the reason it's a higher percent of the total FY '23 cost that we saw is because of this write-down accounting where that -- those inventory charges are pulled forward. So I hope that clears up the question.

And our next question comes from the line of Joseph Moore from Morgan Stanley.

Sorry if I missed this, and I appreciate the detailed puts and takes on gross margin. With regards to the lower cost or market adjustment, can you walk through the mechanics of how you got to this number for the February quarter? I guess a little over $1.4 billion. Is that -- I know you pull the inventory and then you compare that to the market price. How far out in time does that market price assessment take you? And I guess, to the extent that you're -- there's more than one quarter of sell-through that's being adjusted, how are you making the determination of what the price will be there?

That's right, Joe. You did a decent job of sort of answering the question. But if you -- I would refer you to our public filings, but as a reminder, we evaluate the recoverability of inventory as a single pool. This method we've applied consistently and as disclosed, we analyzed the recoverability of our inventory based on quantities and values on hand at the end of each quarter. We project the period over which that inventory will be sold based on our most recent forecast and consider the expected selling prices during that forecast horizon. Since the pre-write-down inventory, days of inventory were about 235 days. That projection covers nearly 3 quarters. The amount by which our inventory carrying cost exceeds expected sales values adjusted for selling expenses determines the charge. And in this case, that yielded a $1.4 billion write-down in the second quarter, and we expect that same process to result in a $500 million charge in the third quarter.

Our next question and final question for this session comes from the line of Krish Sankar from Cowen.

This is Eddy for Krish from TD Cowen. It seems you adjusted the language regarding your DDR4 and DDR5 crossover date from mid-2024 to mid-to-early 2024, so slightly better than prior outlook. It's a bit surprising given that data center inventory for DDR4 is pretty high. Is that improved outlook driven by better-than-expected demand for new CPUs from Intel and AMD? Or is it a function of you seeing higher share than expected in DDR5? Or is it more of data center customers buying ahead and taking advantage of low price environment? Any color regarding the improved outlook would be helpful.

Regarding the mix of D4 to D5 transition, the comments that I made were for the industry trends, and those have not really changed versus our prior expectations. Of course, there are functions -- they are a function of deployment of the new CPUs, such as AMD Genoa and Intel Sapphire Rapids into the servers, into the data center infrastructure. And those -- and you are seeing that those CPUs are now starting to get broadly deployed and will continue to increase through the course of '23 and '24. So our expectations in terms of transition timing for D4 to D5 for the industry have not changed, and yes, we remain well positioned with our D5 product in the market.

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.