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

Yes. I mean, the only thing I'll add is, if you zoom out and think about the big picture, as Dave was saying, we have made substantial changes in how we manage the company in terms of closing the cost gap and the focus on cost. And really, the optimal cost equation has 2 important components to it. One is the process technology itself and the capabilities of the process technology. And there, we are making tremendous progress. Our 1z node is extremely good, very solid, very competitive, and the 1 alpha, which is the next node, we feel we should be at or on par with the world SaaS cost in process technology, from a productivity perspective, from a gigabits per wafer perspective. And then when you look at how you realize the cost benefit of the technology, it's all about moving the output of the fab to the latest nodes. And we have been heavily focused on how we ramp our latest technology into the fabs at a faster rate than we have done in the past. And we have made very significant progress as a company in doing that, and that is [Audio Gap] structured, and that remains a focus. And the last piece I will say is, even though it doesn't relate directly to cost, the overall ROI of the business is also improving because we have been making a very sustained effort across the company to improve pricing to walk away from business where we don't feel the pricing is appropriate for us. We have not really done that in the past, but we are not shy to do that going forward, and we have been doing it recently as well as also ensuring that we focus heavily on our portfolio and the mix of our products with the profitability lens. We haven't done that as effectively as we could have in the past. And that's another thing that we are doing very differently going forward to ensure that we have the most optimal mix of products from a profitability perspective as well as from a stability of the overall revenue and margin profile. And those are the 2 lenses through which we're looking at optimizing the portfolio that will improve returns in the future.

In a hypothetical world where a few nodes down the road, Micron does choose to adopt EUV, do you think that would lead to a year where DRAM cost reductions are pretty minimal, sort of along the lines to this year, as Micron and NAND is switching from floating gate to replacement gate, there's pretty limited cost down. If you had to do that with EUVs, do you think we'd see a similar cost implication?

Yes. I mean, I think we would use it when it made cost sense to use it. And so -- now that being said, if node to node, cost reductions are slowing down, for sure. But I don't think EUV necessarily would drive -- will be a big determinant of the cost.

Perfect. Maybe we could switch to a near term question for the business overall. But with the unfortunate health crisis going on in China with the coronavirus, maybe you can talk a little bit about how Micron is responding operationally and whether or not there's any impact to business conditions?

Yes, I can take that, and you can add. So regarding the coronavirus situation, clearly, it's a complex situation, and it's unfolding realtime in front of our eyes. And data at this time is still very patchy and very limited. So obviously, our commentary is going to be based on what we know today, and things can change going forward because it's a very dynamic situation. And our customers, our ecosystem partners and ourselves, we all find ourselves trying to figure out the extent of the issues that this is creating for us. The way we are looking at it is [Audio Gap] handles to address one, of course, is the very important one is the safety of our team members. And so we are taking adequate precautions on that side to ensure the safety of our Micron team members as well as all of the other partners that we work with on an ongoing basis. Their health and safety is paramount, and we are taking adequate precautions to ensure that, that remains a focal point. The other aspect is looking at our own supply chain and all of the input parameters, all of the things that we procure from the industry in order to drive our own supply chain, everything from equipment to consumables and the fab to substrates and controllers and all kinds of mechanical parts and everything else. And so we are working with our suppliers to see what kind of impacts there are in the supply chain. Clearly, a lot of what we buy does come from China. And so there has been some level of disruption that has been taking place in the manufacturing across various industries in China. So we are trying to assess what impacts there are. So far, the impacts on that front are manageable, but the data is fast-changing because the factories are coming online this week. And so most companies are trying to assess how many people came back. When will the rest of them come back, et cetera. And so those are things that are still unfolding realtime. We are also watching very closely the supply chain of our customers, who are assembling parts there. So some of our customers are actually [Audio Gap] chain in China, where they manufacture product, not just for consumption within Greater China, but also in other parts of the world that they ship products out of China. So we are working with our customers to understand what the impacts on their supply chains are. And again, that's a very dynamic situation. And so far, it seems that maybe there is some impact to certain supply chains, notably in the PC, laptop arena and the mobile phone arena. But the extent of that impact and whether it's just a few days and weeks of delay that will then be caught up or something more substantial is unclear at this time. We are hopeful it's the former, with meaning like a temporary delay rather than anything more meaningful, but we don't know that as of this time. On the demand front, that's the other angle that we're trying to assess. Certainly, there has been an impact to demand in China. Most estimates that we have seen are the same as what all of you are seeing, which is some kind of maybe about a 1.5-point impact to China GDP is what many analysts are talking about in calendar Q1. And that obviously impacts various parts of the technology supply chain across the whole bunch of technology products. And of course, the hope is that this is a short-lived situation. And so you have to kind of look at it in 2 ways. If the virus is effectively contained, then any impact to demand side or the supply side should be fairly short-lived, and there should be a decent bounce back effect in subsequent months and quarters. And this will be [Audio Gap] if the virus is not contained on the other hand, and more companies find people who are infected in their manufacturing ranks and have to quarantine people, et cetera, then this thing can become more challenging, and the time line for a recovery would become more unclear. So I think right now, the impacts are relatively manageable. We feel comfortable that based on what we know today, certainly the FQ2 range that we have provided is still okay, and we are comfortable with that. But it is a very evolving situation. And as you can expect, our quarters tend to be back-end loaded, and we are still a couple of weeks away from the end of the quarter. But having said that, our hope is that thing -- the virus does get contained, and most of these effects end up being relatively short-term in nature. And stepping back from all of this, of course, we are very positive about the foundational trends of demand in all of our businesses, everything from 5G to the cloud computing growth to automotive-driven growth, a lot of positive factors driving growth across all of our businesses. So we will get through this, whether it's a short-term thing or something more than that. Dave, anything to add?

No that's perfect, actually.

I just want to follow-up on that in terms of Micron's own facilities in China. And I know your major factories are not located in China, but you do have some sites, I think, back end and maybe sales offices and things like that in China. In terms of your own offices restarting work, is that this week, next week? Just give us an update on that?

Yes. I mean we are certainly complying with all of the local [Audio Gap] way we operate and the country-wide coordination that we are doing with the policies being put in place to minimize the risk of spreading of the virus. And so we have facilities coming back online this week. And we don't have, thankfully, a situation where we are having to quarantine a lot of people and so on in any meaningful way. But we are on alert. We are monitoring all of our team members to see what kind of issues come up. And we are very focused on all of that. But we are so far finding it to be manageable, but we are on high alert.

So at the last Analyst Day, Dave, you talked about some structural cost reductions that Micron was putting into place, and a lot have been achieved at that point. But there's another $3 billion of cost reductions from fiscal '19 to fiscal '21 that Micron was hoping to reduce. Can you give us an update on how much of that cost has been taken out at this point?

Yes. Just a reminder, at the Analyst Day, which was in fiscal '18, we said that we had accomplished about $6 billion of, call it, EBITDA improvement to the business through driving or getting caught up in terms of cost structure and improving our mix, improving our operations. We did indicate that from that point through FY '21, we thought we could get, on an annualized basis, another $3 billion. I think things are progressing well, where if not on track, maybe even a little bit ahead of schedule in terms of where we thought we could be. Some of it obviously ultimately hinges on how mix and so forth kind of play out by that point. But so far, everything is on track. Our mix is improving, as Sumit mentioned. We've been pushing a lot in terms of driving better or higher portion of our biz into high-value solutions in NAND and even pushing in terms of products in DRAM into higher-value products, the cost reductions outside of this RG transition, which, of course, will drive a relatively minimal amount of cost reduction for this year and maybe into next year. Once we do get the next -- the second generation of RG out, replacement gate out, I think we can expect very good cost structure in that, and that should help us in terms of the cost benefits. We're also doing a lot in terms of the back end now, optimizing our back end, bringing more of our back end in-house, putting it in regions that makes sense from a cost perspective. And so we think that will contribute -- be a contributor to this $3 billion. So right now, we're pretty optimistic that we'll at least achieve the $3 billion we committed.

I'm going to ask one more question and then give the audience a chance for 1 or 2 questions, depending on how the time [Audio Gap] but I know on pricing, Micron doesn't -- can you give us guidance, and I'd be surprised if you're about to give us the -- sort of pricing guidance in our fireside chat today. But maybe you can just talk about, from a qualitative perspective, when we're in this environment where spot price has been going up so much, I mean how good of that -- is that as a directional indicator? And when Micron's in these pricing negotiations with your OEM customers, which is what really drives your business rather than spot, does it help to have this environment where spot pricing is going up when you are in those negotiations?

Yes, I think the spot pricing trend is certainly one indicator of the balance of supply and demand in the short term. I think certainly it is true that, a very small portion of our business gets transacted on spot pricing, and the overwhelming majority is through negotiations with our OEM customers. And so certainly, that backdrop is helpful. I think what is more critical is the expectation in the ecosystem, certainly in how we talk about our own supply-demand balance with our own customers as well as our own customers' expectations, they tend to determine how we end up in the negotiation. But overall, I would say that spot pricing trend is certainly a helpful backdrop.

Does anybody in the audience have a question they would like to ask? You've got one in the back. If you don't mind, wait for the mic because we're webcasting.

Yes. As part of the Phase 1 trade deal with China, it sounds like they're going to be buying more chips from the U.S. Do you have any sense of if you'll take share from Samsung in China because of that?

Yes, the Phase 1 deal with China did certainly help to lower the trends -- tensions on [Audio Gap] I don't think just that deal alone would cause any changes on the share between the different suppliers of memory and storage to China. We have a lot of customers in China, who we do a substantial amount of business with. We are very important to their overall strategy and products. And similarly, they're important to us as a company. And we are continuing to work with them in a very close session and deliver value to them over time.

So I think one other hand go up. We have time for one last question. Maybe I'll ask it then. XPoint has been an area where the company struggled with some of the early products but have some new products out. So maybe talk a little bit about what's exciting from some of these new XPoint products. And maybe, Dave, is there a revenue number that Micron needs to get from XPoint in order for the utilization expenses in XPoint to go away?

Okay. I'll let Sumit answer this and I'll take it.

So I think just to set the record straight, we have not had any struggles on the product side with 3D XPoint. We have just announced our first product which is the X100 at the Insight event. The products that had been developed prior to that were all from our JV partner, and of course, that -- those set of products have been slower to ramp than the JV expected. Nevertheless, from a Micron perspective, the X100 announcement has been extraordinarily well received by our customers, and we are working with them. They are very excited about our portfolio and what we have shown them. It's the [Audio Gap] in the world by a big mile. We have shown and demonstrated 3x the bandwidth and 1/11 the latency of other SSDs. And so we are very optimistic about our ability to create value for our customers with our 3D XPoint portfolio. And we have shown the X100 to be just one of an entire family of 3D XPoint products that we will be introducing over time. They will, over time, be addressing the storage market, the memory market, and as we do that, it will certainly improve the underloading that we have in our financials that is amounting to $150 million a quarter right now of impact to us. And so, over time, we obviously expect to improve that. But of course, have to keep in mind that 3D XPoint is a new technology. It takes time to develop and grow the applications that use this new technology. So it won't be an instantaneous sort of a thing. But it's the only storage-class memory that is capable of working both as mass storage as well as an expansion to DRAM, and there is a lot of excitement in our customer base to be able to leverage that going forward.

Thanks. Well, yes, unfortunately, we're out of time. So we're going to have to cut it off there. But I thank everybody, for coming. Dave, Sumit, thanks for your time today.

Thank you, Mark.