Micron Technology, Inc. (MU) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for attending JPMorgan's 18th Annual Technology Investor Forum here at CES. Very pleased to have Sumit Sadana, Micron's Executive Vice President and Chief Business Officer. What we'll do as well, because we -- it's very rare that we have Sumit out here, who is in charge of the different product lines and business units, I thought we'd just go ahead and kick off the Q&A.

And so question -- first question for you, Sumit, is you've been spearheading the transformation at Micron, leveraging the broadest memory technology portfolio into a vertically integrated full solutions provider, silicon to software. And you articulated this vision at your Insights event back in October. And again, on the earnings call, we've always said that great semiconductor companies are product and system solutions providers and not just silicon providers. So help us understand this transformation at Micron.

Yes. Thank you, Harlan. Just a quick word on our forward-looking statement. I may be making some forward-looking statements today, and please consider our SEC filings for all of the comprehensive risk assessment and discussion. So turning to your question, yes, I mean, it's a super exciting time at Micron. We are seeing a transformation in the company across literally every single function in the company and whereas, in the past, the company was heavily focused over the past couple of decades on driving industry consolidation on the DRAM side that has certainly run its course. And our next chapter for our evolution is to focus on leadership. And you will see a lot of that happening in terms of important milestones for the company going forward. But even in the last couple of years, if you look at our technology execution, we have made very significant strides. We are the first company in the world to have high-volume production in 1Z DRAM node. That's like -- I can't remember when was the last time Micron did that. If you look at our NAND technology, we have world-class cost structure with our 64- and 96-layer nodes. We have industry leadership in QLC SSDs. And as you think about the overall changes that we are driving, it's really focused on technology leadership, having product and solution leadership and having a very, very competitive cost structure and then back all of that up with very thoughtful capital allocation. And if you look at our balance sheet today, over $10 billion of liquidity, a rock-solid balance sheet that allows us to invest through up and down markets for the long-term benefit of our shareholders.

That -- and a good example of that, if I take into account the product leadership, the technology leadership, the systems software focus and so on, a good example of that, and the team always focuses on this, is higher -- the mix of higher value-added solutions, right? And so in your NAND business, in fiscal year '19, you drove 50% of the -- the mix was towards higher value-added solutions. And at one point last year, you were driving NAND gross margins, we estimate relative to your competitors, you drove gross margins about 10 percentage points higher versus some of your competitors. And I think that much of this was due to the mix in things like MCP solutions for mobile, your share gains in enterprise SSD with your status solutions. You've targeted higher value-added solutions to be 2/3 of the NAND mix this year. What are you going -- what are going to be some of the product solutions that are going to continue to drive the margin mix higher?

Yes. No, it's a great question. If you look at our history, for many years on the NAND side, especially our high-value solution mix, used to be in the 20% to 30% range. As you said, it got to 50% last year, meaning 2019 fiscal year. And we have made tremendous progress on the mobile side. We have gained a lot of share with both our MCP products as well as our discrete NAND products in mobile, and these share gains have taken place across multiple customers around the world. And we have now introduced products on the SSD side in every major swim lane. We had a very strong portfolio in SATA. We had gaps in our portfolio on the NVMe side, on the PCI side. And we have introduced products on the client NVMe side. We had tremendous amount of good growth in that in our latest reported quarter as we mentioned during our earnings call. We also have enterprise SSDs that we have spoken about in our Insight event that we have been focused on bringing to market. Of course, these things take some time in terms of qualifications, et cetera. But over the course of calendar year 2020 and 2021, we expect a tailwind of share gains in SSDs as well as a very robust performance in our mobile business. And these will complement very strong execution on the industrial and automotive side, where we have market share leadership in both of those segments, and the growth is really ahead of the market growth in industrial and automotive. So across the board, we are driving that mix higher. We are also seeing good progress on our high bandwidth memory product under development. So that is another set of products on the DRAM side that we will introduce. And of course, you know about our 3D XPoint product, which we are very proud to announce at the Insight event, another very high-value solution example, true differentiation in the market, world's fastest SSD. Microsoft did speak about that product as part of their focus on bringing innovative technology into Azure, and this is a super exciting partnership for us with Microsoft and another example of what we are trying to deliver.

You briefly mentioned it, but I think one of the often overlooked dynamics around Micron is that you are #1 global market share leader in automotive and industrial memory. Total Embedded is about 15% of your overall revenues. But I think these design wins are stickier. Actually, I think that the margin profile is better than your other products. So help us understand how the team differentiates itself here to maintain this leadership position. And what are the content growth opportunities, especially in things like automotive and industrial, looking out over the next several years as auto moves, for example, to -- from 2, Level 2+, then to Level 3, Level 5, and then in the industrial space, as we see more intelligence and compute capability on things like smart building and factory floor?

Yes. And I'd say it's a great point that I believe is not very well-understood or appreciated, so happy to discuss that. It's really all the rage now to talk about automotive, and a lot of companies are starting to focus on that. But Micron has been in the automotive business for a couple of decades. We have been supporting our customers in that business. We have very, very deep, long-standing partnerships and relationships with the automotive supply chain, including the end customers, the Tier 1 OEMs. We have joint development labs with them. We modify and make changes to our memory in terms of the qualification process. The quality is really outstanding, world-class quality for our customers. And we also have a dedicated fab focused on long life cycle technology and product support for our customers. And what this has done and what it has resulted in is a lot of joint development in some of the leading platforms that are being implemented for these Level 2, level 3, level 4 types of innovations that are coming about. And the important thing to understand is the automotive market, even though on a unit basis doesn't grow very much, is a very flattish type of a profile, there is tremendous level of growth taking shape in the NAND content as well as the DRAM content. So just to give you an example, if you go -- if you look at Level 1, Level 2 type of a car versus 2+, 3 and 4 type of a car, the difference in DRAM content between a Level 3, Level 4 car versus a Level 1, Level 2 car is 20 to 30x. So it's like 20 to 30x more DRAM in that vehicle. And on the NAND side, it is even a bigger multiple. So we don't really need for all of the cars in the world to become fully autonomous and get to Level 4 and 5. The biggest jump in capacity is actually -- comes in going from Level 2 to Level 3. And that is a very, very big step function change, and that is why we are super excited because we think that over the next 5 to 10 years, there's going to be a very, very strong tailwind of average capacity increases. Like you said, this business tends to be less volatile, that are long-term partnerships with customers, very sticky designs. And we serve them, we serve our customers in many, many different ways, that creates value for them and for us in this long-term relationship. So it's a really exciting time for us.

We'll get back to the product focus stuff. So let's just talk briefly about the market supply and demand environment. So it's been less than a month, less than a month ago that the company reported earnings. And the team basically called the bottom in gross margins here in the February quarter, which also typically lines up with positive inflections in overall industry supply and demand balance. We already started seeing NAND pricing start to inflect second half of last year. We've recently seen DRAM pricing start to firm up as well. From a supply side perspective, you and your competitors have all been disciplined on expansion. Help us understand, starting from the second half of last year, what drove the strong demand profile for both NAND and DRAM. And especially on DRAM, what helps to continue to sustain the improved demand environment as we move through 2020?

Yes. I think on the supply side, for sure, there has been a fairly significant level of reductions in CapEx from Micron as well as our competitors both on the DRAM side as well as the NAND side over the course of the last several quarters. And what we are seeing now is the impact of all of those supply cuts sort of feed into the market. So the market is getting tighter. And all of those CapEx cuts are constraining the supply growth. And as all of you know, the -- these things have pretty significant lag times, and there, certainly, Micron has been very disciplined in ensuring that we manage our CapEx very effectively. So our CapEx is going to be down quite a bit in fiscal year '20 from 2019 fiscal year, and we have seen publicly announced reductions from a lot of our competitors as well. So I think the supply environment is in very good shape in terms of creating a much healthier environment. And on the demand side, we have seen strong demand across both NAND and DRAM. And on the DRAM side, we have seen higher levels of demand in the second half of 2019 than we had originally expected. Early in 2019 calendar year, we had mentioned that our expectation was that the second half of 2019 would be pretty good from a demand perspective, but the demand actually came in stronger than we were expecting in the second half of '19. And what that has done is it has depleted inventories faster. The leading edge of DRAM certainly has become tighter, and we have been seeing pockets of shortages already over the last several months in DRAM. And the DRAM demand continues to do well across multiple segments. The graphics demand is going to be pretty robust heading into the 2020 year with all of the new product announcements, et cetera. You look at the server demand on the cloud, continues to be very robust. The average capacity increases in mobile has been very stellar on both the DRAM and NAND side throughout 2018 and 2019. And so that has become an important underpinning of the demand and very steady demand, solid demand there. So the demand environment is going to continue to be robust in 2020. So as 2020 calendar year progresses, we expect that the environment is going to continue to tighten in terms of the supply-demand balance. And there is some level of inventory, maybe at our competitors, based on their public comments, that is going to get into a healthier place right about now. And we are seeing the optimism sustained through ongoing discussion with customers that the pricing trends will improve in the future.

Maybe focusing on your DRAM business, you've talked about some pockets of tightness. And on the pricing front, we started to see pricing improvements here in the first half. Can you just help us understand in what end markets are you starting to see some signs of sustainable firming or increasing in DRAM pricing? Is it primarily server DRAM? Because we know that the cloud guys, all of a sudden in Q3 of last year, basically turned on the CapEx figure again after a couple of quarters of a pause? Or is it primarily server DRAM that you might be seeing firming prices? Or are you seeing firming prices across the entire portfolio?

Yes. I mean we are very much focused on ensuring that the pricing that we are getting from customers is fair on the DRAM side. So we have actually walked away from some transactions where we felt that the pricing was not good in recent months. And what we see happening is that all of our discussions with customers are continuing to support better pricing environment going forward and that inflection taking place. And of course, calendar Q1 tends to be a seasonally weaker quarter compared to the other quarters. But as we go through that time and we look ahead, we have ongoing optimism that the pricing on the DRAM side is going to be in a healthier place and will continue to become more robust as we go through calendar year 2020. And of course, our goal is to drive the pricing across the entire portfolio to a better place.

Again, just sticking with DRAM. The team's outlook is for 15% industry bit demand growth this year. If I look at smartphones and servers, which account for about 65% of total bit demand consumption, we and third-party research firms are forecasting DRAM content per server and smartphone growing at about sort of 25%-plus this year and associated bit demand growth about 25%-plus per year as well, which is, again, significantly higher than the industry bit demand outlook. Can you just share with us maybe some of your assumptions on either content growth in smartphones this year or content growth in server?

Sure. So yes, I mean, the way to think about our 15% number for 2020 in terms of DRAM bit growth on the demand side is that we did have a much stronger second half of calendar '19 in terms of demand. So what we have been looking at in our modeling is that we didn't adjust 2020 as much as saw some level of potential pull-in of some demand perhaps in China happening from 2020 into second half of 2019 because of perhaps decisions to carry higher levels of inventory. And of course, we don't know if that is going to be a strategic decision on their part to carry inventory for longer periods of time at a higher level or not, but that was one aspect. We have some assumptions that some of that higher level of inventory in China will bleed out in 2020 and impact some of the bit growth. That's one aspect. The other aspect is, of course, there continue to be PC processor shortages that are impacting the market in at least the first half of calendar 2020. And the final point is as pricing came down in DRAM quite substantially over the last several quarters, there was a fairly significant increase in average capacities on the DRAM side and smartphones. And so we continue to see an increase in average capacity in smartphones in 2020 as well but perhaps somewhat moderated from the levels that you have quoted. And of course, we may get surprised on the upside there because it's -- the demand on the smartphone mobile side is very strong. And the average capacity has continued to move up across all tiers of smartphones because more and more cameras are getting put into these phones, a lot of AI processing, machine learning capabilities embedded in these processors, and all of our wonderful photography that everyone is now used to taking with their smartphones really relies on heavy use of DRAM. So in a way, interestingly, photography is the killer app for higher DRAM. And of course, we have 5G coming in there, again, which will use higher levels of DRAM as well. So overall, it should be a robust environment for the next many quarters.

In your NAND business, the team forecast industry bit demand in calendar year '19 was 40%, decelerating to about 30% for calendar year '20, with long-term growth in that 30% range as well. Firstly, can you just explain what is driving the apparent deceleration from calendar year '19 levels? It just feels like content per smartphone, more SSDs going into cloud and hyperscales. What do you think is driving that outlook for sort of a lower bit demand growth profile? Is it just an assumption that higher pricing and price elasticity kicks in and we see a slightly lower level of demand for 2020?

Yes. So I think one way to think of it is the bit growth in 2019 on the NAND side was very robust. So we're -- we have been looking at mid-40s-percent bit growth year-on-year in 2019 calendar year versus 2018. And this was following a very robust 2018 as well in terms of bit growth. And so ultimately, you look at the average capacity growth in smartphones, for example, very robust average capacity growth across both years. And average capacities in smartphones tend to go up in sort of step function ways as full tiers move from 64-gigabyte to 128-gigabyte and so on. And so certainly, that effect of very dramatic growth in average capacities over 2 years means that those kinds of things cannot continue at the same rate necessarily. But -- so these average capacities will continue to grow just somewhat at a slower pace. We see strong penetration of SSDs in laptops and PCs. We had about 65% number going to 72%. And so you look at getting to a point where PCs and laptops' penetration of SSDs into these platforms will start to saturate and get closer to that 80%, 90% over time. And so these things all have an impact. And of course, our expectation is that through calendar '20, the pricing environment that was very, very positive for expanded average capacities in the last several quarters is going to be actually somewhat of a headwind for average capacity growth because we expect the pricing to actually be increasing. And so increasing pricing typically acts as a little bit of a constraint on average capacities in the short term. And so our bit growth assumptions take into account all of that. And then, of course, we have said in the past, we have spoken about potential for some kind of China inventories adjustment. We have made some of those assumptions in there as well. And of course, all of these numbers assume that there is no macro dislocation or trade-related issues, any new trade-related issues. So those are part of the assumptions in all of these.

Any questions from the audience? Let's transition over to the manufacturing technology front. So as you mentioned, Micron first to market with 1Z-nanometer DRAM. You've discussed the 1Z mix increasing through the year. Can you give us an expectation of bit crossover with your 1Y in legacy technologies?

Yes. So what we can say is that our 1Y and 1Z together will have bit crossover with all of the older nodes in terms of volume somewhere around the summer of 2020. So 1Y and 1Z will continue to increase as a percent of the total, and we are on a pretty good ramp of that technology. Of course, our cost reductions are going to be more towards the second half of fiscal 2020 for DRAM. And then on the NAND side, of course, we have spoken about the RG transition.

So from a -- that's a good -- just a segue into my next question because from a manufacturing and cost per bit perspective, you've been driving double-digit cost declines in your DRAM business, but cost declines this year are expected to be in that sort of high single-digit range. Can you outline why the cost declines are decelerating this year? And more importantly, as you look beyond, let's say, 1Y, 1Z, do you see a path to getting back to double-digit cost declines? Or is just the complexity going to prevent this from happening?

Yes. So for a number of years, Micron was trailing the best-in-class cost structure and technology deployment on the DRAM side. And we have been closing the gap very rapidly, and that allowed us to reduce cost at a faster rate than the rest of the industry. And what we see now, of course, with our industry-leading 1Z-nanometer deployment in DRAM is that over time, the complexities do catch up, and the entire industry is facing these newer technology nodes, becoming far more complex and the cost reduction path and capability from one node to the other also becoming much shallower. And so in a sense, it's a good thing because it also reduces the amount of bit growth per wafer that you get and the industry becomes more aligned over time on wafer starts increasing in order to drive bit growth, which makes it easier in some sense to have a more balanced industry environment and a less volatile industry environment.

On the NAND technology, you appear to be making good progress with your first-generation replacement gate technology, albeit with limited capacity this year. But what are you seeing in terms of initial yields performance? Are you getting confidence in being able to make the transition and putting in place replacement gate as that sort of permanent track in your technology development profile going forward?

Yes. No, we are continuing to make good progress on our replacement gate technology. We are meeting many of our important milestones and continue to gain confidence in the transition. And we mentioned we had the yield already in the last time we spoke to investors. So we continue to have good progress on that front. We are confident we'll be able to make a good transition. Of course, the first node of replacement gate is going to be very limited in terms of the portion of our portfolio that will transition to it, and that will reduce our ability to take down costs in NAND in calendar year 2020 and fiscal year 2020 as well. But beyond that, as we get to our second node of replacement gate, we will get back to good cost decline curve again on the NAND side.

On the product front, on the last call, you mentioned that you saw very strong growth in your mobile DRAM, your LPDDR products. You discussed November quarter, mobile DRAM bit growth, 50% quarter-over-quarter and your MCP market share increasing like 50% year-over-year. What's been the big differentiator that has driven the strong market share gains in mobile DRAM?

Yes, we have our mobile business under the leadership of Raj Talluri, who's our GM there, and his team who have worked with our engineering team to really come out with really good products that have resonated very well with our customers, so both on the DRAM side, where we have world-class low-power technology compared to any of our competitors. And then on the NAND side, we have not only good, very strong discrete NAND products, but also extraordinarily high-quality MCP products that have hit the mark with our customers in terms of performance features, functionality, power consumption and quality. And we have been able to really meet their needs in a very timely fashion. And we have a very strong road map for the next couple of years in terms of bringing some new innovations to them that our customers are very excited about.

On the -- my last question is on the NAND product front. Obviously, you guys have done well in client SSD. Through most of calendar year '19, you guys did extremely well in terms of share gains with their enterprise SSDs. And I think that's a big part of the differentiation in gross margins, you relative to your competitors. As the market transitions, enterprise-wise, to the new NVMe protocol, you guys are a little bit behind. But you've introduced the 9300 product. You introduced the 7300 product at the Insights event. What's -- are customers qualifying this? When do you think we're going to start to see -- when do you think you're going to start to see production shipments of your NVMe enterprise products from your customers and then start to see that enterprise share kind of move back to Micron?

Yes, the enterprise share gains for us on the SSD front should be a 2-plus-year tailwind for us as we look ahead because we are really at a point where we expect to have pretty good share gains over the next couple of years. We will continue to introduce new products that will be the next generation and keep improving our competitiveness as well as introduce some market-leading features and functionality over time. And our whole portfolio really works very well because we go to a lot of these large customers and we can offer them world-class DRAM, SSDs and of course, 3D XPoint, and we are the only company in the world that has that really strong portfolio of capabilities and solutions. And that's the part that is really redefining our relationship with our customers and how they view Micron as a long-term partner and the role that Micron plays for them in their portfolio. So it's a really exciting time for us from that perspective and part of the exciting transformation we are leading.

Well, we're just about out of time. Keep up the great execution, and thank you for joining us today.

Thank you, Harlan.

Yes. Thank you.