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

Good morning, everyone. Thank you very much for joining us for the third and final day of our technology and Internet conference. My name is Toshiya Hari, and I cover the semiconductor and semiconductor capital equipment space here at Goldman Sachs. I'm very excited and very honored to have Manish Bhatia, Executive Vice President of Global Operations from Micron, with us this morning. We have about 40 minutes for this fireside chat. I'll go through a list of questions I put together, but I'll definitely try to weave in any questions you guys may have in the audience that come through the webcast. With that, I'd like to get started. Manish, first of all, thank you for joining us today and supporting the conference. I know it's very late where you are, so appreciate the time.

Thank you, Toshiya. Thank you for inviting me and inviting Micron and [ Kong xee far chai ] to everyone. It's the eve of the Lunar New Year here in Singapore.

Awesome, awesome. So Manish, before going into specific questions, I was hoping you could kick us off by reflecting on calendar 2020. It was a challenging year, very peculiar year in many ways. You had to operate with COVID. There was geopolitical instability that impacted one of your bigger customers. And in Huawei, then there was a sudden surge in demand towards the end of the year. And the icing on the cake, I suppose, was the power outage and the earthquake in Taiwan. So as the EVP of Global Operations, how did you manage through all this turmoil, if you want to call it that?

Sure. Sure. So Toshiya, well, thank you for that. And let me start by just updating everyone that I will be making some forward-looking statements, I imagine, as we go through. I know your first question is a look back, but I'm sure we will. And so there are obviously risks associated with those. And for our risk statements, you can refer to our SEC filings, most recent 10-Q and 10-K. So 2020 was a year unlike any other. It started almost 12 months ago -- actually, on the eve of the Lunar New Year, 12 months ago, which happened to fall in January. And when the Chinese government decided to lock down the Wuhan Province on the eve of the largest migration in -- annual migration in the world. If it was that serious for them, then for us at Micron, we felt it was serious enough that we needed to really move into high gear, not just in China, where we do have some operations, but really all of Asia, we started putting in place our protocols. And many of us had been around in 2003 for the SARS pandemic then that happened in China, Hong Kong and Taiwan. And so we had a little bit of insight in terms of what the protocols maybe should be, even as the early days -- early science was evolving, early health measures were being evaluated by the various health care organizations. We moved quickly in Asia, and then we try to stay ahead of the virus and put those same controls in place in our North America operations, our European sites where we have a lot of engineering work. And we really just tried to stay ahead and prioritize keeping our employees safe. And that was really priority #1, was keeping our employees safe around the world. And we did a very good job at that and continue to be keeping our vigilance up even as the pandemic has entered more of a marathon stage that we're in today. And hopefully, we see light at the end of the tunnel with the vaccines starting to roll out. And hopefully, we'll see the pandemic recede as we go through the year. The second was -- the second thing we were focused on was providing business continuity for our customers. And we were able to keep nearly all of our factories running at full capacity all year, but it really took a lot of tenacity, first, to be able to work these protocols into operation, work with local governments in all of the regions. Essentially all the regions we operate in, we had to go work with the local governments to assure them that the protocols we were putting in place were going to keep our employees safe. And I can tell you that in, again, almost every region, or I think every region, our protocols wound up being used by those governments as a blueprint for how they guided all other manufacturing sectors in their region. So we really were taking a leadership position, and it allows us to keep operating at full production while keeping our employees safe. And we were able to, for the most part, deliver to the demand as it evolved, as it moved between mobile and then eventually -- mobile when, obviously, was lower in the first half of the year. Automotive was lower in the first half of the year, but cloud was very strong. And then as we went into the second half of the year, all sectors, maybe other than enterprise, started to heat up. PCs got stronger. Mobile came back. Automotive came back. And we really strengthened our supply chain. It was really an opportunity for us to look at how many different sources we had for different materials, for different production assemblies and make sure that we had resiliency across our supply chain. We developed the capability for qualifying products to be built in multiple different locations for it -- so that whatever the -- whichever region might have been impacted by the pandemic, we could build products in other factories and keep our continuity for our customers. So that was really the second big focus, was keeping business continuity. I think we did a good job with that as well as stable to our customers and really strengthened our supply chain and our manufacturing network for the future. And the third real priority was maintaining our focus on our technology and product portfolio. And I think, there, we really did a great job on the technology side. I'm so proud of the announcements that we've been able to make over the last couple of months around our leadership in both 176-layer NAND being the first to reach that milestone and begin production ramp on that industry-leading technology. And then same for 1-alpha DRAM being able to be the first to start production on that. And for the first time in Micron's 40-plus-year history, we're leading the industry in both DRAM technology and NAND technology at the same time. So really being able to keep that focus on technology, even amidst some of the travel restrictions, using virtual sessions, AR, VR with some of our tool vendors to be able to make sure tool installations can continue, tuning of all those processes to be able to ramp the new technologies and really a great job there. And then the other priority, of course, products. We did -- we were able to launch the world's fastest graphics memory, GDDR6X, last year, and we also launched our first high bandwidth memory. So focus on technology, focus on products were kind of the third big area that we were able to deliver on last year. I think all of those things together just helping us to emerge stronger as the markets are picking up right now.

Great. Super helpful. And then as we look forward to 2021, I definitely want to spend time on how you're thinking about demand and how you're thinking about cost downs and the progress you're making on the technology side. But at a very high level, what are sort of the top 2 or 3 priorities, key goals for you and the team in 2021?

Okay. As I mentioned both the 176-layer technology and the 1-alpha technology, obviously, those are now in production. So they've completed the transfer, and we're ramping both of those in our high-volume facilities. And so as a manufacturing leader, very focused on ramping the yields on those technologies, ramping to high-quality levels so that we can qualify them in our high-value segments as we go through the year. And that's going to be an ongoing effort. It'll gradually be ramping up throughout our fiscal '21, and both of those technologies will really be the workhorse for us as we enter fiscal '22 and provide us good cost downs and good bit growth as we kind of go through towards fiscal '22. So that's really the -- as the Head of Operations, that's really my #1 focus. And doing so in some of the new manufacturing sites where we've added capacity in the last year or so in our Taiwan site, in our Singapore site, we're also -- we've added new cleanroom space to be launching this. So we want to make sure we ramp these technologies efficiently. At a company level, I would say a key priority is continuing to strengthen our product portfolio. I mentioned a couple of examples last year. But this year, we're really focused on strengthening our -- we are focused on strengthening our SSD portfolio and adding to our NVMe portfolio, both on the client and the data center side. On the mobile side, we've actually had really good momentum, but we want to continue that momentum. We've done really well with our MCP portfolio. You mentioned Huawei before, and we were able to pivot our supply to other mobile customers relatively smoothly, given the strength of our mobile portfolio and MCPs as well as discrete mobile. And LP5, we've really staked out leadership place, and we look to really have the LP5 to be a strong part of our mobile portfolio this year as well. And then the last would be, from a technology perspective, continuing to focus on the next generation. It can't be a one-hit wonder. We've got to make sure that our next generation beyond 1-alpha, beyond 176 layer that those are going to be developed and being ready to launch here as we head into fiscal '22. So those are kind of some of our key priorities. I guess all of that in the backdrop of a strong market. Particularly on the DRAM side, the market is definitely strengthening and continuing to be very tight. And so very focused on delivering for our customers throughout the year.

Of course. Makes sense. And then in terms of the demand outlook for 2021, Manish, on your most recent earnings call, Sanjay shared with us your view of the market. I think DRAM bit growth in the high teens, NAND at approximately 30%. In your view, what are some of the key drivers for that growth or behind that growth, both in DRAM and NAND? And what are some of the major swing factors that can kind of fluctuate the outlook to the upside or the downside?

Sure. Sure. So I think everyone on the call probably knows the key macro drivers for the -- this next cycle really are AI and AI in the cloud as one pillar, the rollout of 5G, both in smartphones as well as in infrastructure and networking and eventually IIoT kinds of factory applications and then electric vehicles. And I don't even need to say autonomous because, really, electric vehicles have so much more semiconductor content and need for DRAM. So these are really 3 mega trends that are going to play out over the next 5 to 10 years, and they're certainly all starting to show strength as we're -- as we've seen the market grow here in the last 6 months or so and into 2021. A few different examples of drivers. Cloud has been very strong really ever since we were starting to have the lockdowns occur back 12 months ago. And cloud continues to be strong as there are more and more workloads moving to the cloud. And when we think about mobile, last year, estimates around 200 million 5G-enabled smartphones. This year, that looks like it's going to be more like 500 million. So really robust growth on -- and demand for those 5G handsets as well. And then many analysts in the automotive sector are calling this a tipping point year for electric vehicles. And so as you see more and more electric vehicle launches, every time you see those launched -- and even though we're not yet at the Level 2, Level 4 autonomous capabilities, electric vehicles -- just because of the capabilities in dash and the experience that everyone expects from an electric vehicle -- this requires a lot more semiconductor content and a lot more memory and storage. So all 3 of these are really strong areas. I think we'll see also continued strength in end devices like PCs. PCs had their best year in over a decade last year, in 2020. I think 2021, we'll still see good strength there. Enterprise is still the area that I would say is a little bit questionable. So many different verticals. It's unclear how those -- some of those verticals will be recovering. Even if the pandemic recedes, it's not quite clear how they'll recover. So enterprise is the area that we're still watching very carefully, but almost every other sector seems to be very strong and should be able to hit the bit growth targets that we -- estimates that we have -- that you mentioned that Sanjay had given last earnings call.

Got it. And then so far, I think, literally, every company that we've hosted at this conference, we've talked about supply shortages and how that's impacting their businesses or respective businesses either directly or indirectly. At Micron, have you seen or experienced any impact from supply shortages? To what extent are you worried about the strength you're seeing today being at least partially sort of being impacted by shortages?

Yes, yes. So supply shortages are occurring across the industry, and it's just indicative of a really strong market with all the drivers that I was just referring to. And really, this acceleration of many of the technology trends that happened, the COVID pulled forward in certain areas, is taking hold. And it also -- pent-up demand maybe for consumer spending that didn't happen in 2020, that's going to be hopefully continuing to accelerate through 2021. So they're there. We've done a really good job at -- for our production side throughout the pandemic, as I was mentioning, of being able to qualify multiple suppliers. We've enhanced our assembly and test footprint across the world and increased our investments there, both in our captive capability as well as long-term agreements with our subcontractor partners and some of our key materials vendors. So we've done a really good job and feel like 2020 really prepared us well for what we're seeing right now in most areas. There are pockets of shortage on some areas for us. But for the most part, we think we've done a pretty good job on our own -- the supply of materials and silicon that we use for our own products. But of course, our own products are also in short supply. DRAM is very, very tight right now. And as we head in through the year, we expect it to just continue to get tighter and tighter. In terms of the -- I think the other part of your question is around the end demand and how is the end demand could be affected by shortages of components. And that we'll have to see, and we keep working very closely with our customers. And what we're doing to make sure we're prepared for that is developing flexibility across multiple different platforms and products to be able to quickly shift our production capacity and our production plan between different segments or between different customers where the actual demand ends up coming through. So we feel pretty good given the strength of the demand overall and the tightness in supply that we won't see too much impact from those end market shortages.

Okay. So I guess as a follow up to that, the worry is customers are ordering in excess of what they truly need, and you ultimately see sort of a cliff in demand. That's not a big concern at Micron at the moment given the market intel that you have?

No, right now, we see such strong trends in demand across so many segments. And inventories are still low at customer levels from what we've seen. They're not really approaching the levels that we talked at 2018, 2019. Customers are still -- really hand-to-mouth in many different areas, many different segments. And so we're seeing continued escalations from our customers asking us for more supply, and we're trying to -- especially on the DRAM side. So not really worried right now that we're seeing another customer inventory build-out quite yet. We continue to monitor it closely in certain areas. For example, in mobile, with some potential for share shifting going around, we're certainly monitoring carefully. But we think that the demand trend -- I mentioned the pent-up demand for consumer devices, it's still carrying over. Combine that with everyone want to future -- wanting to future-proof themselves for 5G-enabled phones. And so the strength of the 5G-enabled handsets rolling out across multiple different vendors. These things -- we think that any pockets of inventory will work -- if there are any, they'll work their way out this year, and we should really just see continued tightening, particularly in DRAM as we go through the year.

Right. And so Manish, I guess that was sort of my next question on customer inventory. If you were to differentiate between or among applications end-markets, is there a significant difference, for example, between server customers and mobile customers, PC customers? Or is the tightness that you're seeing in DRAM, is that pretty much even across and applications from a customer inventory standpoint.

Demand is very strong across the board. In terms of customer inventory, I think I -- certainly, the mobile customers that I mentioned, given some of the competition that may be going on for share, there could be some -- a little bit more inventory there. We're monitoring that area maybe more closely. On the cloud side, there's been just so much strength over the last year, and they've been continue -- it's been continually healthy. Same for PCs. Really, the last 6 months or so, PCs have been very strong and continuing to be strong. So I'd say there's probably less inventory on the compute side. And on the mobile side, we're monitoring. And if there is any that may be a little higher, pretty confident it'll work its way through -- quickly in short order this year. Just because the overall demand situation, particularly for DRAM, is so tight for the year, especially as you -- I think most analysts now say, see that the DRAM bit growth strengthened towards the end of last year a little bit higher than what maybe we were projecting it to be earlier in the year. And so that just has reduced inventories for all of the suppliers across -- or in our own supplier -- supply of inventory is normalizing very rapidly, and we expect to be at our kind of healthy levels of inventory. Normal -- low level of inventory very shortly here as we enter the second half of the fiscal year. And I believe the others in the industry have made similar comments about their inventories being at low levels.

Got it. Yes, makes sense. Shifting gears a little bit, wanted to dive into the DRAM side of the business a little bit. On cost downs, Manish, from a process technology standpoint, as you noted at the very top, you're currently transitioning from 1Y to 1Z. You also have volume manufacturing of 1-alpha going on as well. Given your current road map, is the mid-single-digit cost-down target still the right target for fiscal year '21? And how should we think about the rate of cost-downs in fiscal '22 and beyond given the multiple puts and takes, whether it be the no transition or product mix and so on and so forth?

Yes. Good question, Toshiya. So you're right, we do have -- we have our 1Z technology that we were sort of completing the transition on, and then we started the production ramp on 1-alpha. And 1-alpha, it's an industry-leading technology. It's going to give us a great position across many different end-markets as we ramp it and get multiple products qualified on there -- multiple customers on there. But it's going to be a gradual ramp through fiscal '21. And so the majority of the cost reduction impact will be really towards the end of '21 or really in '22 for us. And so for this year, the mid-single-digit number is the right number still for us. We had a decision to make back at the -- as the pandemic -- maybe I'd say, 9 months ago on what we were going to do with our CapEx. And we certainly were very prudent in terms of what we were going to invest in, in IDM. We didn't want to overspend. We knew we had 1-alpha coming. And so -- and we prioritized our CapEx towards 1-alpha and maybe a little less towards 1Z. And so that maybe impacts our cost decline this year, but it sets us much better for cost declines in the future because 1-alpha will ultimately be a better technology. And so that's why this year, mid-single digits is still the right number. But as we go beyond, mid- to high single digits is what we're -- what we expect. And we expect to certainly be at least in line with the rest of the industry, if not above, as we look at '22 and '23.

And Manish, as a quick follow-up, the mid- to high, is that a like-for-like sort of target as opposed to one that sort of embeds potential mix dynamics?

Yes. It's kind of on a like-for-like basis.

Like-for-like. Okay. Got it. And then sort of related to that, I wanted to ask on EUV. It's a topic that we get questions on quite frequently from investors. One of your peers in Asia, I believe they're introducing EUV to their manufacturing process in DRAM. Your messaging at Micron has been pretty consistent. You will introduce it when it makes sense economically. At the same time, I think you've spoken to sort of the comfort level as it relates to your proprietary multi-patterning technology. Remind us where are you with EUV insertion? Is there a general time line at Micron?

Yes. So we are continuing to evaluate the technology. And I think our EVP of Technology, Scott DeBoer gave a good overview of where we see the kind of the pros and cons of the technology and what needs to be worked out in conjunction with the primary equipment vendor in order to see it being effective for us in our road map. Through our 1-gamma node, we have a strong path to scale with multi-patterning. And it's really our 1-delta where we could look for insertion. That would be the next -- the earliest we could do it, and we're evaluating whether it makes sense there or not, but it's really about getting the cost crossover capability, which means the tool availability, the cost to run the tool versus the benefits it brings in reducing the number of steps and other processes that we need for our multi-sidewall spacer assisted patterning or what you call multi-patterning process. We just need to see more throughput and better overall cost performance from the EUV tool in order to make that decision. But like, as I said, through 1-gamma, we feel good about our multi-patterning and feel like that's the lowest cost path. And then beyond 1-gamma is what we're looking at a potential insertion.

Got it. Earlier, you talked about the supply discipline on the DRAM side, inside Micron and also across the industry. Obviously, you're seeing significant tightness today. You've got pricing on the rise, hopefully, over the next couple of quarters, if not several quarters. Based on your market intel, what's your full year view on supply-demand in DRAM? Are you concerned at all that potentially competitors start to grow CapEx given the positive outlook in the industry?

I think you're right, Toshiya. We were -- we, as an industry, not just Micron. I mentioned Micron specifically before. But even as an industry, I think, in 2020, pretty disciplined about CapEx on the DRAM side. And given the lead times, that's what bodes well for the supply-demand balance to be healthy in '21. And I think just given the lead times, we -- I expect that DRAM will continue to get tighter as we go through the year. Demand is going to keep getting stronger, both because of the pandemic-induced recovery and gradual -- fiscal and monetary stimulus continuing to take hold as well as just the -- that acceleration of the -- these technology trends that I mentioned, AI, 5G and electric vehicles. So I expect DRAM to continue to get tighter as we go through '21. In terms of CapEx from our competitors, I would -- I can't really comment on what they're going to do. We're going to continue to look to grow our bits in line with the industry demand. This year, in DRAM, we're actually growing -- actually in DRAM and NAND, we're growing a little bit under the -- from a supply basis, growing a little bit under the -- what we project as the industry demand. And we're using our inventory to be able to make sure our revenue shipments can be in line with the end demand, and that's our strategy for this year, and we'll just continue to evaluate our CapEx as a -- as we see what the demand looks like for future periods.