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

And provided a great overview of the scale, technology and operational differentiators of Micron's wafer manufacturing, assembly and test and module systems with network. So I thought it'd be great if Manish updates us on what's changed from an operational perspective since 2018. And then we'll go ahead and kick off the Q&A. If you'd like to ask a question, please click on the Q&A button at the bottom of your screen and type in your question. So with that, Manish, thank you for joining us this morning, your -- evening, your time, but thank you for joining us, and I'll turn it over to you.

Thanks, Harlan, and thanks to everyone who's with us this morning. This -- I'll start by saying, this morning, we posted a short presentation, about 15 minutes long on our website, that just provides a brief update from our Analyst Day event in 2018. It covered certainly operations initiatives and a status update on operations since that time about 2 years ago, but also covered a broad update on our markets and strategy and how our high-value solutions strategy is evolving and how we're dealing with that, as well as an update on some of our financial results and how we think we've been performing since that Analyst Day event. So I encourage you to go take a look at it if you have time. Just to give a couple of highlights from that, that are -- without going into the whole presentation. On the operations side, we are -- we've announced a plan at the time to be scaling up our Fab footprints, where they were around the world and expanding and adding muscle in those locations. We have been executing that plan, and we do feel we are getting more economies of scale, as well as -- with our Fab investments, more tool standardization, which is going to be helping us with our technology, node transitions, ramping yields more quickly, introducing technologies more quickly and having higher quality. We had -- we announced the plan then to increase our captive assembly capability, and we're now at -- more than 60% of our assembly requirements are captive. That gives us better cost position, of course, but also quality and flexibility, which is so important at times like this. So whether dealing with the tariffs over the last year, having more assembly capacity and diversified regions is really been a benefit for Micron, and that strategy has worked well. I think we made good progress on our smart manufacturing initiatives as well as environmental responsibility initiatives. I gave an update on that. And then high-volume solution strategy really has been unfolding well over the last few years. We -- one of the key focus areas we called out was that a 30% reduction in the time to customer qualifications, the time we give customer samples until the time they're actually qualified and we're able to get into high-volume production, that's played out in a number of different ways. For example, we made some comments that the 1Z DRAM technology ramp was the fastest ramp for our mobile products to over $100 million of revenue in our history. So we really think we've made a lot of progress there. And then I listed a few results, but the one key result there, in 2018, we had laid out a plan that we had -- between 2016 and 2018, we had achieved $6 billion in operating profit improvement versus the industry, versus where we were in our 2016 baseline. And we set out our plan to have another $3 billion achieved by the end of our fiscal 2021. And we actually achieved that $3 billion already at the end of fiscal 2019. So we kind of delivered early on that. So those are some of the highlights that I had gone into. And there's a few other things in that presentation, so I encourage you to take a look if you have a chance. The other thing I want to just give a quick update on before we got started, Harlan, was the COVID-19 situation and how -- what we're seeing at Micron, how we've reacted and what we're doing to support our employees and our communities. So I think we feel like we've reacted pretty well to the COVID-19 situation. And early, I think, is one of the key things. We took actions very early starting in mid-January when the outbreak first started to become more widespread. In China itself, we started taking actions. Not just in China, where we have one assembly and test facility. But all our Asian sites, whether for manufacturing or design or sales, we actually started putting temperature monitor in place way back in January, lots of protocols around rotating people on site, segregating -- segmenting them on site, so that -- reducing the number of people who came to the site, whether they're visitors, contractors. Many different protocols that we put in place then. And we've been very fortunate through this whole time period throughout all of our Asian operations, where the bulk of our manufacturing activity is. Knock on wood, we've only had 1 confirmed case out of more than 20,000 employees. So we feel like we reacted early and well, and that's helped us to keep our factories operational. All of our Fabs have been fully operational throughout this period. We've been able to source materials. We've been able to keep chemicals and gases coming in. So all the Fabs have been at full production throughout. And other than our Malaysia facility, where I think we did comment that we were at limited production for some period of time, all our other assembly and test facilities have been at full production. And then now more recently, even our Malaysia facility has come back up to full production. So -- and we think we've reacted pretty well as an operations team to the COVID-19 statement situation. In terms of how we're supporting our employees and team members, we've committed $35 million to COVID relief efforts in all the communities where we operate around the world. And we are helping our employees. We've done -- taken a pledge to not -- the 90-day pledge to not lay off any employees around the world. We've also made a onetime payment to about 70% of our workforce of equivalent of USD 1,000 in all our facilities around the world just to help them with any needs they may have that arise from COVID-19. So we definitely think we're doing a good job supporting our team members, supporting our communities. We've also -- I think we mentioned this in our earnings call as well. We've also reduced or shortened the payment terms to our small business vendors just to make sure they have liquidity. So we've done, I think, a good job across all these areas.

Great. Well, that was a great overview. And again, we would encourage investors to look at your presentation on the investor website.

I'll add one more thing before we start. Now that we're going to get into the rest of the conversation, I will be making some forward-looking statements. So just want to make sure -- I'm sure all your participants know the normal safe harbor language, but all the risks of our business are contained in our SEC filings.

Great. All right. So you talked about not seeing too much impact from COVID-19. And I recall, when you guys reported back in late March, that was just before we had a lot of the major Asian geographies going to lockdown, right, areas where you guys have significant operations. So Singapore went into lockdown. Various regions in Japan went into lockdown. As you mentioned, Malaysia went into strict sort of movement control. And so except for -- it sounds like you have maybe a little bit of interruption at Malaysia, but how has the team been able to manage through the Singapore lockdown, in the various regions in Japan and all of your third-party subcontractors? How has the team been able to manage that, I would say, relatively unscathed?

Yes. So thanks for asking, Harlan. And it's been a 24/7 job for us for the last -- really since mid-January. We've been on it as a team. Every single site lead calls in the meeting. Every single factory manager calls in the meetings every 48 hours here at Micron. And we're kind of following through on every aspect that we can. Certainly, it starts with making sure that we keep our team members safe. So I mentioned many of the things that we had done and protocols we put in place to make sure that we felt that we could be safe and safely operate in every single region. And we didn't just wait for the virus to spread and then start to take actions. We took actions ahead of time. We were always trying to be ahead of it. So I think that part was good. We were early and good. But then -- and certainly putting our key members health and safety first. But then on top of that, we had a lot of collaboration with our suppliers just -- as the virus spread from one location to -- one region to another, we had to work with suppliers, increase our inventory level to pull in supply of raw materials or chemicals, gases, bringing more of that even on site. We had to do some qualifications of alternate sites or even alternate vendors very quickly to be able to make sure that we had everything that we needed to be able to keep running production. And then we continue to monitor it now. And the other thing I'll say is that we're fortunate to be operating in a number of places where governments have handled this very well. I think Taiwan government certainly handled this very well. Even China and Singapore. Outside of the foreign worker dormitory issue that they have now have handled it extremely well. And so we kind of collaborate with all the governments. Even in the United States, we collaborate with the states in Virginia and Utah where we operate. And I'll tell you that in multiple -- virtually every geography where we have these ongoing dialogues. I can tell you Singapore, I can tell you Malaysia, I can tell you in [indiscernible], in Taiwan, in Virginia, we've had conversations where our manufacturing teams go and share our protocols for safety and protecting our team members' health with the government officials. And they then ask us to share that with other manufacturing entities in their areas. Every single one of those, they've taken the Micron standards and protocols as the gold standard to be able to -- and asked us to share with many other companies. We've shared with equipment companies who are suppliers to us, and they've been very appreciative of that. So I think we -- it's a non-stop job here, but we've done pretty well.

Great. And this is the -- you're the right guy to be asking this question to, but we cover the semiconductor capital equipment companies, and they're having their own supply chain constraints in key equipment to their customers, full systems, subsystems, and in personnel on site, come and do the installs and the calls. Is this a potential impact to the Micron team or the industry on a bit supply -- potential bit supply output basis if we think about kind of the second half of the year?

Yes. So I think it's -- for the industry, it certainly can be. For -- I'll start with Micron and then I'll talk about the industry a little bit. We happen to be in a situation just by the timing of our equipment deliveries and the timing of our next-generation technology ramps where we actually, for DRAM, have most of the deliveries that we need for our 1Z ramp already in-house. And so we made some comments in the last earnings call about our 1Y and 1Z combined getting to more than 50% of our output by this summer. And those plans are still on track, and everything we need is already in-house, fortunately. And then with our replacement gate NAND ramp, as we had said, we're not really ramping our first replacement gate node. We're going to be ramping our second replacement gate note later on. And so the timing right now for us with regard to those deliveries doesn't have that much impact on us. Certainly, if these supply chain challenges for our equipment vendors go on into the second half of the year, there could be an impact on our next-generation technology. But right now, we don't see much impact. But for the rest of the industry, certainly, it could be an impact to competitors of ours who maybe were at a different place in terms of their investments or timing of technology or capacity ramps. And so you could see that it could have an impact on supply in the second half of the calendar year for others.

I'm just curious. From the time that you get equipment delivery until the time that, that equipment becomes useful in a high-volume production environment, what is that sort of -- what is sort of that cycle time?

The time a tool is delivered, there's the install time and then the qualification time, and then you start the wafers, and depending on where in the process it is. But I would say it's around 2 quarters, right? Maybe depending -- plus or minus, depending on where in the process that tool is used. But that's a rough number for you. And just speaking of installs, one of the things that just occurred to me kind of that's interesting about this whole -- kind of blending your first 2 questions together, the COVID situation and the [indiscernible]. We have definitely accelerated the use of video conferencing, and even AR/VR solutions that we had on our road map for next year are coming in now. So we're able to operate these -- manage these tool installs remotely. Even with the travel restrictions, that all of our engineers as well as our suppliers' engineers and field service personnel are able to set up. So I think that's one of the advantages we have of having very experienced mature team members in all of our locations, so that we're able to use video conferencing and be able to do -- we're doing start-ups of tools. We've got start-ups of facilities, equipment, even construction where some new equipment is getting started up. We're doing a lot of these things remotely even with these travel bans. So that's another way that we're tackling the current situation. And hopefully, will provide efficiency once we come out of COVID as well.

So in addition to the COVID-19 related potential supply-demand issues, supply issues, which you've seemed to move through pretty efficiently, and the potential for equipment delays. And we also have another vector which is trade. And on the recent Department of Commerce BIS memo on the license requirements for China shipments, particularly around components that could be used for military applications, but also applies to civilian types of products as well, has the team assessed the potential impact to the business because of this new initiative that's gone down?

So we're working on it, Harlan. We haven't completed our assessment yet. As you know, these things take a little bit of time, legal review to be completed. Our early assessment is that we don't think that we'll see a significant impact, but we're continuing to assess it and make sure that we get the final legal -- the full legal view as -- and then be able to provide any update after that.

Okay. Great. Back in late March when the team reported, obviously, solid February quarter results, solid mid-quarter outlook. On the forward outlook, Dave, your CFO, characterized the May quarter as an environment of favorable demand and pricing trends, both in DRAM and NAND, even with the uncertainties related to COVID-19. In your update, your video update, you sort of mirrored what the team said on the earnings call on the demand, strong demand from work-from-home dynamics, which is driving strong data center. But at the same time, you are seeing weaker smartphone and automotive trends. Putting all of this together though, have the overall demand and pricing trends remain favorable for the team? And how was the team thinking about the overall demand profile and pricing outlook heading into sort of the second half of this calendar year?

Yes. Yes. So we won't be updating guidance today. So I want to make sure that's clear. But we do continue to see -- there haven't been any major surprises relative to that guidance we gave, which is why we -- as you said, we kind of reiterated it this morning on the webinar, that we still see strength in the cloud and server DRAM segment. And those were the areas that we were talking about strong pricing trends on the last earnings call, and that demand overall has continued to be strong. We don't give too much commentary about pricing, as you know, forward-looking. But we can say that our high-value solutions in NAND are certainly continuing to progress well, and we highlighted that on our last call. And we continue to see that as a strength for us now and even into the second half of the year. So we feel like that will help us with margins because we have more product sales going on rather than wafers and components as part of the NAND. So those are the things that are -- I'd say, a little bit of color on that, but it's still a few weeks to go here yet in our quarter, and so we're not ready to provide a guidance. We had provided, as you know, a little bit wider range just given the uncertainties. And I think everybody is looking at things that way. And the uncertainty for us right now does also carry over. We think in -- the second half is still something we're being cautious about given the various macroeconomic data points that keep coming out. So we're just trying to manage it with the lower visibility that we have.

So it sounds like, again, the overall demand trends that are sort of playing out as expected. I'm assuming that would lead to a view that the pricing trends have also been sort of directional as you would have expected as well?

I don't want to comment too much on pricing. But I know the demand trends have been in line there, as I said, with certain areas having strengths and certain areas being a little bit weaker, and I'll just kind of leave it at that.

Okay. I mean there was some discussion, maybe questioning by the management team on the last call about the potential for some pull forward of shipments, maybe some inventory build ahead of fears on supply -- ahead of fears of more supply chain disruptions, right, by your customers. How are you seeing channel inventories in the various end markets?

Yes, yes. So certainly, cloud inventories, as we came into COVID, were -- they were an area that were kind of unhealthy as we got into the beginning of this down cycle 2 years ago. And those were areas that we were starting get this COVID. If you go back, we said that we thought our F Q2 would be a trough. That was really based on the fact that inventories had gotten healthy there. And we continue to see strong demand, and we think they're definitely in a healthier state than they were 2 years ago. There could be some inventory build as part of this. Just like I mentioned to you, we're building inventory of raw materials and other things. They couldn't completely mobile maybe, right, where demand kind of stops. When factories couldn't build any smartphones, of course, demand comes to a halt. So now there could be some inventories as they start to ramp back up and see how the demand plays out across the various economies that are beginning to open up, there could be some inventory there, I would say. But overall, definitely healthier than what they were back at the beginning of this downturn back in 2018, particularly for the cloud.

The team talked about shifting some of your -- given the dynamics, right, work from home, stronger. Smartphone and auto, maybe a bit weaker. The team talked about shifting some of their consumer-focused bits over -- both in DRAM and NAND, maybe to more sort of data center centric type products. And so maybe if you could answer in -- maybe if you could help us understand. Has the team been able to successfully move the mix more over to kind of data center centric products? And #2 is that I seem to recall from the last Analyst Day that server and data center DRAM was, I think, the second largest part of your DRAM business. I would assume that it's the biggest part of your business today. If you could maybe give us some color there. And then secondly, the sustainability of hyperscale and cloud spending into the second half of this year off of a very strong first half.

Yes, yes. So you're right. The server market is a fast-growing market for us. It is growing. Server and cloud are growing faster than the overall broader DRAM market. But the mobile market is still the largest segment of the market for -- actually both DRAM and NAND for us right now. But the server is growing largely driven by cloud. And as we mentioned, the first half of the year has been strong for that. And as I said, we're being cautious about what we're going to see in the second half of the calendar year. But certainly, some of the trends that are driving it, we believe, are here to stay, right? Whether it's video conferencing, we're on Zoom right now, whatever, all of us are using to be able to work from home, learn from home, to order from home, right? Those trends are going to continue. So there will be some catalysts for strength, but the broader macroeconomic trends could weigh on that as well, especially after this initial surge. So we're still cautious on that. And we may have more comments by the time we get to our earnings call.

Okay. Great. And so then let's maybe move over to sort of the product and technology level execution, right? On the DRAM front, on technology migration. As it relates to cost reductions, you came into the fiscal year with a view of high single-digits percentage cost declines here in fiscal '20. It's a step down from prior years as you were closing the gap with competitors. But now that you're sort of in line or maybe even still slightly better than peers, is the team executing to this cost down profile so far this fiscal year?

Yes. So we've been -- I think I mentioned before, we've been making good progress on our overall technology platform. We still expect 1Y and 1Z to be more than half our bits by the middle part of this year. So that part is still on track. In terms of overall cost declines, we had said that we would see high single-digit for DRAM. Your question was about DRAM primarily, right?

That's right. That's right.

Yes. Right. And we had said high single digit, and we're largely on track there, but some headwinds due to COVID-19 that could be coming here as we move forward, higher costs for logistics, in some cases, other materials that we're sourcing. So there could be some headwinds here. One of the things that we are looking at doing as we react to the demand trends is maybe some small underutilization related to some legacy nodes in DRAM due to some automotive weakness. So some of these things could be slight headwinds to that high single-digit number that we were talking about.

Great. We have -- I'll stop here because we have one question from our audience. And so the question is, how are you allocating bits currently in DRAM? Mobile, compute, graphics, other? What is the current mix? How do you see that dynamic in terms of mix maybe changing as we move into the second half of this year?

Right. So certainly, we did move bits from mobile, from smartphone types of silicon ICs to cloud and server products. So that's one thing that we already did back at the beginning. We're continuing to work with our cloud and server customers and our mobile customers to try and evaluate what that mix should be as we go through the second half of the year. We do expect this to be a good year for graphics. As you know, we have a very strong position in graphics. And there's a -- the 2 big players both have major console launches this year. So we do expect it to be a good year for graphics. So you could see -- I think you would expect to see stronger graphics allocation for us as we go through this year and support those customers in that market. But I think the -- in terms of specific answer in terms of how we're going to tag, it really depend on the conversation we have with our customers and what we think of the trends. And largely, consumer spending will be the thing we're looking at and try and see, whether it's smartphones, whether it's automotive, whether it's PCs, all these things will be driven by consumer trends. Certainly, enterprise PCs have been strong, right, corporate PCs and network and laptops with work from home continue to be strong, but all the other consumer-driven markets, we'll have to see play out in the second half of the year.

Great. Appreciate that. So from a -- let's maybe switch over to NAND for a second. But on your first generation replacement gate NAND technology, just to keep track of the team's execution. Did the team commence the volume production ramp this quarter? Or is that something that is still ahead of the team?

Yes. Yes. We began production this quarter, as we had said we would. And as we said, it's not a major node. It's not going to go across our whole portfolio. And we're expecting our second generation to come soon. And I had mentioned that we continue to expect that the RG will be a meaningful portion of our production as we get towards the end of the calendar year, which sets us up well for a strong ramp, we think, in calendar 2021.

So from a cost down perspective, obviously, Micron has said and given us a good heads up that you're going to see minimal cost declines this year from first-generation replacement gate, right? It's sort of proof of concept, sort of product production, get out all the bugs in the process. And so when we think about the transition to second-generation next calendar year, should we assume that Micron can return to double-digit sort of annualized cost declines in fiscal '21 and beyond?

So we won't forecast that specifically. We won't give that specific of a range. But we do expect that, that second-generation node is going to be competitive. It's going to be a very good node, and we will get good cost reduction with it. And so I think as we go through that implementation in calendar '21, we'll get the cost reduction. And then even beyond that, we do see good scalability for the RG technology. I think our EVP of Technology, Scott DeBoer, talked in his webinar, I think around this time last year, about how we see scale. One of the reasons we made the switch from FG -- from Floating Gate to Replacement Gate was we saw that this was going to be scalable up to beyond -- above 200 layers. So even beyond the second generation, we feel like we have multiple more generations to go, so we will see good cost reduction into the future with this. And we think we'll be very, very competitive in our NAND costs.

I think one of the things that I took away from your presentation this morning that's posted on your website is that between calendar year '16 and calendar year '19, I think this is a commentary on both your DRAM and your NAND business. But the Micron team drove 50% greater cost per bit reduction relative to your competitors. So help us understand, first of all, obviously, there's a technology aspect of it, but there's also the operations aspect of it. And I would argue that the operations aspect of it is actually more important, right? Because that's manufacturability, that's yield improvement, that's -- and that all drives cost reductions. So help us understand some of the things that the operations team has done to help drive this faster than industry sort of cost per bit decline in performance, and you continue to expect on a go-forward basis, if you're going to continue to outperform your competitors in terms of cost per bit declines looking out over the next 1 to 2 years.

Yes. Yes. So for sure, it does start with technology. And I think our technology team has done a fantastic job of coming out with good nodes, getting us to 1Z to the leading edge of the DRAM industry by feature size, right? And then the seam off under the array with 3D NAND being the first ones there. Really, the first ones in the industry during this period going back, it seem to kind of majority converter -- even vast majority convert to 3D NAND. These are all made possible by the technology team doing such a great job. But then certainly, manufacturing picked up the ball and ran with it. I mentioned before economies of scale. We think if we scale up, you get more output, more value-added moves or more bit output, both by over -- spread over a smaller fixed overhead because you're ramping up or scaling up in sites. And we were relatively small sites compared to some of our competitors, and we've been getting more, building more muscle. So that's one area. But then our yield curves, we're coming up our yield curves faster than we were before. There's more collaboration going on. Manufacturing gets involved in the technology and development earlier, so that we kind of know, we can put inputs, give inputs into making sure that the way that the process is engineered is going to make it capable for us to ramp it up across a broad set of tools, manage the variability to be able to have fast build ramps. We also are certainly working to manage the material costs, right, the consumption of materials and our -- the way that we're managing the waste in our line. And also, just absolutely working on the throughput of all of our factory. We implemented advanced scheduling systems in all of our Fab sites. Especially, as we've grown up, scheduling becomes much more important, and we've been able to improve the throughput, improve the overall utilization of the line. We capitalized that utilization really of all of our sites. So these are the things that we're focused on, being able to drive costs there. And then the other area that's important, I shouldn't leave the assembly and test site out, but more captive assembly and test certainly helps drive cost effectiveness. We've done a lot of things. A lot of that increase in captive assembly has come through natural throughput routes, not through investing in new capital equipment to add up assembly capacity. We've actually substantially increased the throughput of our assembly sites just by being able to do good manufacturing engineering to improve the [ throughput ] tool. So I think all those areas come together, and I think it's been a good partnership for us with technology manufacturing.

In the -- refocusing back on the NAND portfolio, there has been a...

I'm sorry. And then your question, just to say, your question was what do we think we can do going forward? Certainly, it's our target to keep outperforming the industry, right? Certainly, our target is to be able to keep outperforming the industry. We'll be on the high end of the industry going forward in terms of cost of funds.

Great. And then back on the -- maybe focus back on the manufacturing technology front. Back at the Analyst Day, you discussed the team, scale, productivity and efficiencies. You described an environment back in 2018 where the number of process steps, every generation was increasing by 30%, right? And -- but only -- but that only resulted in a 10% increase in fixed costs at Micron side, equipment, Fab shell, human capital. Can you just give us an update on these metrics? I assume that process complexity has continued to rise at a very fast pace? But has the team on the fixed costs side been able to drive that growth at a much lower rates?

Yes. So I'd say that the process complexity is in the similar range to that. I think, at that point, we still had that big transition from 2D to 3D NAND. So now as we're doing subsequent nodes of 3D NAND, it's not quite at that level, maybe a little bit lower than that, but still substantial, and I don't know, 20% to 25% maybe. And then I think the fixed costs, as I said, with more economies of scale, we're going to be doing around the same level of fixed costs, maybe even a little bit better. But still, I think those are the 2 key things that we're doing is making sure that we have -- that our Fab expansions are focused on being able to deliver cost-effective implementations of these new, more complex process technologies. And we're not getting as many bits per wafer on each of these subsequent nodes even though the products don't [ become ] longer. So we have to become more efficient, and that we're seeing that. Although I will say that it's not as easy as it used to. And over time, the cost declines that we're able to generate, which is essentially that gap between bits per wafer and the wafer cost growth, is declining over time, not just for us, but for the whole industry.

Great. Well, we're just about out of time. Manish, I want to thank you very much for joining us today. Hope to have you come and present to us at some of our other events in the coming years. And so thank you very much. I appreciate it.

Yes. Thanks, Harlan. Appreciate it. I appreciate you scheduling it at a time where I can do this here from Singapore. And hope you stay healthy and safe, and everybody on the call does as well.

Yes. Stay safe. Thank you.

Thank you.