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

Good afternoon. My name is Latif, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron's 3D XPoint Investor Update Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Vice President of Investor Relations. You may begin your conference.

Thank you, and welcome to Micron Technologies 3D XPoint Investor Update Call. Today's call will be approximately 25 minutes in length and include a brief Q&A session. We ask that you limit your questions to the topics discussed in the prepared remarks of the call today. On the call with me today are Micron's President and CEO, Sanjay Mehrotra; and EVP and Chief Business Officer, Sumit Sadana. Our Chief Financial Officer, Dave Zinsner, will also join the Q&A portion of the call. This call, including the audio, is also being webcast from our Investor Relations website at investors.micron.com. In addition, our website contains a press release and our prepared remarks. A webcast replay will be available on our website later today. As a reminder, the matters we will be discussing today include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. We refer you to the documents we filed with the SEC, specifically our most recent Form 10-K and 10-Q, for a discussion of risks that may affect our future results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon, everyone, and thank you for joining us today. Micron is built on a culture of innovation. Our innovation mandate is not limited only to our core businesses, but extends to include the exploration of new technologies and solutions that have the potential to bring significant value to our customers. Our customers, partners and investors can count on us to push the boundaries of what is possible to bring the promise of the future to the present. But when requirements shift and technology and customer needs evolve, you can also expect us to be decisive in refocusing our efforts and to promptly communicate our decisions to our stakeholders. Today, we are announcing such a change in Micron's portfolio strategy. After deep discussions with customers and partners, we have decided to reprioritize our R&D investments toward new memory solutions that use the recently introduced high-performance CPU to memory industry standard interface called CXL, while immediately ceasing the development of 3D XPoint. We believe this shift will better address our customers' needs and importantly, improve returns for our shareholders. Our decision was driven by our assessment of the 3D XPoint market opportunity in light of the expected impact of CXL and our new emerging memory products on the future data center. Sumit will provide more details on this decision later in the call. We are also in discussions with several potential buyers of our dedicated 3D XPoint fab in Lehi, Utah. Our goal is to finalize the sale within calendar 2021. We expect that the overwhelming majority of our team members in Lehi will find strong career opportunities with the buyer of the fab. The actions we are announcing today may affect our GAAP financials and are expected to be accretive to our near-term and long-term non-GAAP financial performance. The underutilization charges at Lehi fab have been impacting our non-GAAP operating profits at an annual run rate of over $400 million. Dave will outline more details in our fiscal second quarter earnings conference call on March 31. We will not be providing any further financial details related to this announcement today. I want to thank all of our Micron team members across the world who have worked tirelessly over many years on 3D XPoint development and manufacturing. Our technology and engineering teams have driven many industry firsts, from materials-based innovations to dramatic new product capabilities. I also want to call out the tremendous contributions that the Lehi team has made to Micron. This team led Micron's entry into the NAND industry 15 years ago. And then over the last several years, brought the novel 3D XPoint technology into mass production. Our Micron team members' contributions are deeply valued and the knowledge, experience and intellectual property gained in this effort will give us a head start on several important products that we will introduce in the coming years. While we are ceasing product development of 3D XPoint, we will continue our technology pathfinding efforts across memory and storage, including our work toward future breakthroughs in storage class memory. We are extremely excited about our market opportunities and business momentum. I want to express my pride in our entire team for successfully driving our transformation to a new Micron. A Micron that is focused on technology and product leadership to benefit all our stakeholders, including customers and shareholders. I will now turn it over to Sumit to provide more detail.

Thank you, Sanjay. The value proposition of 3D XPoint was to operate as persistent memory at a lower cost to DRAM or as storage that is significantly faster than NAND. In the years since 3D XPoint was first announced, data center workloads and customer requirements have continued to evolve. As data-intensive workloads proliferate and AI ramps in data-centric applications, the CPU to DRAM bandwidth has become an increasingly limiting factor of overall system performance. In addition, as CPU architectures evolve to dramatically increase CPU core count, more DRAM is needed to ensure adequate memory bandwidth per CPU core. This trend has driven ever-increasing server DRAM content. The industry now stands on the threshold of a significant change in data center architecture, driven by the adoption of a new high-performance interface called Compute Express Link, or CXL, that will connect compute, memory and storage subsystems in the years ahead. This upcoming change creates a significant opportunity for Micron to take advantage of industry-leading innovation in technology and products to benefit our customers. We expect these new memory solutions to utilize the industry standard CXL interface and enable our customers to achieve new levels of performance and improved total cost of ownership, or TCO, for data hungry workloads. On the storage front, the significantly lower cost of NAND will remain a barrier for wide adoption of 3D XPoint. Therefore, 3D XPoint-based SSD products were not expected to be anything more than a niche market over time. Memory was always the strategic long-term market opportunity for 3D XPoint. One important challenge that 3D XPoint memory products face in the market is that the latency of access requires significant changes to data center applications to leverage the full benefit of 3D XPoint. These changes are complex and extremely time-consuming, requiring years of sustained industry-wide effort to drive broad adoption. In addition, there are important cost performance trade-offs that need to be characterized and optimized for each workload. As we develop new products using CXL, our focus is on addressing data-intensive workload requirements, while reducing barriers to adoption, such as software infrastructure changes. Importantly, our development model for these newer products will be significantly more cost-effective, and we expect a higher ROI for our investments in these new technologies going forward. These new memory solutions could ultimately delay the adoption of 3D XPoint even more and reduce the overall addressable market for that technology. This further affects the anticipated ROI for 3D XPoint and ultimately led us to our decision to terminate this initiative. For competitive reasons, we are not going to provide additional details of our new engineering endeavors at this time. However, it is important to note that our current and future plans for investment in resources, technology and engineering in emerging products remains unchanged. We will continue to relentlessly drive the cutting-edge of memory and storage technology for the benefit of our customers. We strongly believe that our emerging technology capability across the memory storage hierarchy remains industry-leading, and we expect to deliver differentiated solutions to our customers in the years ahead. As Sanjay mentioned, we will end 3D XPoint development immediately and cease manufacturing 3D XPoint products upon completing our industry commitments over the next several quarters. We are currently engaged in industry discussions for the sale of our Lehi, Utah fab with a goal to finalize a potential sale within calendar 2021. This advanced fab provides an excellent location for advanced semiconductor manufacturing, and we are evaluating initial offers from prospective buyers. In closing, the secular growth in the data economy continues to create significant opportunities for Micron. We have never been in a stronger position in our technology road map, and our industry-leading 1-alpha DRAM and 176-layer NAND technology nodes are both in volume production. We are now reprioritizing our emerging technology investment to best meet customer needs with higher ROI expectations that are aligned to our goal of driving long-term shareholder value. We will now open for questions.

[Operator Instructions] Our next -- our first question comes from the line of John Pitzer of Crédit Suisse.

Sanjay and Sumit, thanks for the update. Sanjay, I wonder if you could just give a little bit more detail around the decision to sell the capacity at Lehi. Given where the supply-demand equation is in the overall memory market today, why not try to repurpose that equipment? As you look to sell those assets, should we expect the potential buyer to be somewhat in the specialty memory space? Or is that capacity applicable for other device types?

Thank you, John. That's a great question. As you know that in semiconductor memory and storage, scale and cost competitiveness is extremely important. And of course, return on investments is important as well. So our scale for DRAM is focused on our fabs in Taiwan and Japan. And our NAND scale is focused on large fab in Singapore. And of course, our Manassas fab here in Virginia is running our legacy nodes with DRAM, NAND as well as NOR technology. So in terms of driving for the supply needs of the future, in terms of technology transitions as well as any new wafer capacity additions required in the future, it would be best to really build on the scale that already exists in our core DRAM and NAND existing fabs. And that's the best way to achieve the ROI as well. That's why this Lehi fab doesn't quite fit the footprint requirements of the future of DRAM and NAND for us. And this fab has tool sets that would be attractive to semiconductor production for analog or for logic or for foundry as well. And as we noted, it has a very strong team that has tremendous experience running production first with 2D NAND and later with 3D XPoint technology. So it is an attractive asset, particularly in times like this, when there is increased demand for semiconductor production capacity for another acquirer to take on this fab, while we continue to meet our needs through our existing global footprint at other sites.

Our next question comes from C.J. Muse of Evercore.

I guess curious, Sanjay or Sumit, perhaps, could you speak to, I guess, at least the learning curve from investing over the years in 3D XPoint, particularly as you think about DRAM moving to 3D over the next 5-plus years. Are there any sort of technical takeaways that are really value-add for you guys from investing here over the past, I can't remember, 5-plus years?

I will have Sumit comment on this in a second here. But no question that Micron as a company is uniquely positioned with all the capabilities and learnings from DRAM, NAND and 3D XPoint as well as NOR. Most comprehensive portfolio of technologies that has been pursued by a company, we are uniquely positioned in terms of continuing to drive the future innovations that are required in memory and storage. And as we have talked about many times, I mean, memory and storage is becoming increasingly important in today's AI and data-driven economy. So of course, all the IP, all the learnings that we have from this technology will be applicable at various junctures in our future technology and product road map as well. I will let Sumit add some comments further.

Thanks, Sanjay. So I think in terms of learnings, we have had a significant number of breakthroughs on the process technology side in bringing 3D XPoint to market. And we designed our first X100 3D XPoint SSD, it ended up becoming the world's fastest storage device. And part of that was not just the media itself, the 3D XPoint itself, but significant number of product innovations that our 3D XPoint product team made. And of course, we are retaining the product team. We are retaining the process technology team. We are going to be taking a lot of those learnings from both the process technology side and the product side and applying it to future products that we are building. As we mentioned, we are going to be building products that are going to work with the CXL interface and have a different optimization point as it relates to the performance and cost and power trade-offs that exist in the hierarchy from DRAM memory to flash storage. And we'll be able to use a lot of those innovations. And the last point I will mention is that through this engagement on 3D XPoint, we have developed a lot of strong, deep relationships with our customers, and we have gotten into discussions around data center architecture at a level of depth that we would not have been able to do before. And so those relationships, insights and understandings are going to really suit us very well when we work with those same customers to figure out new ways of creating value for them in the future as well.

Our next question comes from Timothy Arcuri of UBS.

I guess I'm just curious, Sanjay, on the timing. Why not wait until the earnings call? It's in a couple of weeks. I guess, if you're just putting the fab up for sale, I'm sort of curious why you wouldn't wait for the earnings call. It would sort of suggest that maybe you have a buyer in hand which sort of forced your hand to talk about this. So I guess I'm just curious on the timing of this. Why not wait for the earnings call?

Tim, our approach is that once we finalize our decisions, then we just inform you here as well. And of course, we have taken actions to begin to shift our resources internally in the company toward these new programs that Sumit described, new products that are going to be CXL-based. So as we shift those resources, it's important for us to share the message internally as well as externally at the same time. And no point in us waiting on utilizing those resources for other exciting products for the future for us, while we wait for the earnings call at the end of this month. So once we made the decision, we let you know, we let our team know. And all of this communication has taken place simultaneously here today.

Our next question comes from Harlan Sur of JPMorgan.

Can you guys just give us the rough capacity of the Lehi fab in terms of wafer starts per month? And then on the U.S. government initiatives to fund our subsidized domestic manufacturing, specifically either the chipset or the National Defense Authorization Act, I think the team would be eligible for up to $3 billion in funding to support domestic manufacturing activities. I could have seen this being used to upgrade Lehi to augment DRAM and NAND manufacturing capabilities. But it looks like you have enough expansion capability in Taiwan and Singapore. But at the same time, the subsidies could be used to upgrade your Manassas fab that produces more specialty memory products. So will the team apply for subsidies under the NDAA, assuming that the chipset gets funding appropriation this year?

So regarding the capacity question on the Lehi fab, of course, these details are confidential. We are not going to get into that. And as I mentioned earlier, that fab can be used for logic, or analog, or foundry capacity. And of course, depends on what process is run there. Capacity there is a function of those processes as well. And regarding the aspects of incentives for the fabs. Of course, we are -- as we have indicated before, too, we are pleased that the U.S. government is putting the focus on U.S.-based R&D as well as manufacturing for semiconductors. I mean clearly, semiconductors form the backbone of all the economies today and are important from the national security interest as well. In terms of incentives available, et cetera. I think what's important, as I've shared before, too, when we make our decisions regarding NAND and DRAM production capacity, technology transitions, we, of course, focus on cost competitiveness. And that's where it's important to have the long-term cost competitiveness capability. And that best suits us in our footprint, as you mentioned, in our fabs in Taiwan, Japan, Singapore as well as here in Manassas, Virginia. Of course, we will always continue to evaluate opportunities for incentives and strengthening our manufacturing footprint, not only in the U.S., but on a global basis as well.

And ladies and gentlemen, that does end our session and the conference for today. Thank you for participating. You may now disconnect.