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

Good afternoon. My name is Valerie, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Micron's investor update. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Vice Partner of Investor Relations. You may begin your conference.

Hello. Thanks for joining us today. On the call with me today are Micron's Chief Executive Officer, Sanjay Mehrotra; and Micron's Chief Financial Officer, Dave Zinsner. Today's call will include a presentation followed by a brief Q&A session. We ask that you limit your questions to the topics covered in today's presentation. We will not be answering any questions that aren't related to the topics covered in today's call. 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 Form 10-Q, for a discussion of risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after today's date to confirm these statements to actual results. I'll now pass it off to Sanjay.

Thank you, Farhan. Good afternoon, everyone. A short time ago, we issued an 8-K and press release disclosing Micron's decision to adjust our capital allocation plan and to introduce a quarterly dividend of $0.10 per share. Today, I would like to share how we arrived at this major milestone. I will start with a quick recap of the incredible transformation Micron has undergone over the last few years, and then Dave will discuss our financial strength and how it enables our updated capital allocation strategy and dividend policy. So starting with Micron's transformation. The new Micron is stronger than ever before. Our industry is benefiting from strong secular demand across end markets and slowing supply growth. Meanwhile, Micron has established ourselves as a technology leader to strengthen our product portfolio and greatly enhance our fab network and our competitive position. Moreover, the Micron team is focused on delivering innovation for all with a focus on sustainability. All of this provides us the confidence to initiate a dividend. The demand for memory and storage has evolved dramatically from the PC era in the early 2000s. Today, demand is diversified across end markets: from the data center to the intelligent edge to feature-rich devices. $38 billion of annual industry revenues during the PC era grew to $62 billion in the mobile era. And the strong growth of the cloud and the data economy has propelled this figure to $120 billion in calendar 2020. Additionally, within end markets, growing memory and storage content per device has created an opening for the DRAM and NAND industry to capture a greater portion of the end unit bill of materials. As a result, DRAM and NAND revenue growth is outpacing the growth of the semiconductor industry. 20 years ago, the DRAM and NAND TAM used to be around 10% of the semiconductor industry TAM, and this figure is now approximately 30%. Looking ahead, we expect DRAM and NAND TAM growth to continue and reach $183 billion in 2024. Turning to supply. Over the last decade, the memory and storage industry has seen structural changes that have improved the industry's supply dynamics. These changes include the slowing of Moore's Law, industry consolidation and a greater focus, industry-wide, on ROIC and capital return. Within this context, Micron has exercised supply discipline by targeting stable bit share and aligning our CapEx spend with long-term industry bit demand growth while taking action to manage occasional short-term oversupply. These actions include adjustments to utilization, capacity shifts between end markets and a willingness to walk away from unsatisfactory pricing and to instead hold higher levels of inventory. The supply-demand dynamics have completely changed since the PC era. And these new dynamics add to our confidence in the sustainability of our transformation. Against the backdrop of strong industry dynamics, Micron has also transformed our technology position. Whereas Micron historically lagged competitors on the leading edge, as a result of our efforts to close the competitive gap, Micron has not only caught up, we have emerged as a technology leader. We were the first to introduce 1-alpha DRAM, the industry's most advanced DRAM node, which utilizes our leadership in multi-patterning. We were also the first to introduce 176-layer NAND, the industry's most advanced NAND node, combining the fifth generation of our CMOS under array design with replacement gate. Additionally, we have improved our cost position by driving faster yield ramps, faster transitions of our production mix to leading-edge nodes and faster customer qualifications. Despite the increasing process complexity, we were able to ramp yields on our 1-alpha DRAM and 176-layer NAND at a 25% to 30% faster pace than the previous node. We have also made significant improvement in our product portfolio. We have enhanced our product portfolio through greater customer collaboration, and our approach to vertical integration and product development allows us to innovate and create the best solutions for each segment of the market. Our portfolio leads the industry in quality and includes products with the highest bandwidth, lowest power consumption and highest performance. And our road map includes exciting CXL-enabled DRAM products. We are also turning our process technology leadership into product leadership. Our 1-alpha DRAM is being used in various products across PC, server and mobile; while our 176-layer NAND is featured in a broad set of SSDs, managed NAND products for mobile and products targeting automotive and industrial segments. Micron is the only major U.S.-based memory and storage company. And our global manufacturing operations offered our customers a diversified source of supply. The investments we have made to enhance our fab and assembly and test network over the last few years put Micron in an excellent position to meet customer demand with resiliency and to do so more cost effectively. First, we have enhanced our fab network. We have made significant investments in clean room space and facility infrastructure to increase our flexibility to implement new technology nodes at scale. We are building on our leadership in lithography and have invested in EUV-ready clean rooms. We recently placed volume purchase orders for the industry's most advanced EUV tools, which will help us ramp our 1-gamma technology and beyond. We have also invested heavily in smart manufacturing applications which have helped us increase productivity, ramp our yields faster and improve product quality. Second, recognizing that our DRAM manufacturing network has grown via acquisition and has disparate equipment, we have been driving towards greater equipment matching between fabs with each successive node migration. This enables us to ramp technologies rapidly across our manufacturing footprint with high yields and high quality. And finally, we have increased our captive assembly footprint, which increases our cost competitiveness, agility and resiliency. At the end of fiscal year '20, more than 60% of our assembly was captive, up from about 45% in fiscal year '18. We have increased redundancy in capacity across all product manufacturing lines and have added sites in Malaysia and Taiwan. These investments in back-end capacity also provide strong ROI while providing business continuity, which our customers appreciate. The Micron transformation would not be possible without the fundamental transformation of our culture and how we do business. This culture is defined by a vision to deliver innovation for all. We have a commitment to leadership in DEI and ESG and to serve the communities in which we operate. Today, we attract outstanding talent to Micron, and we are confident that our diverse global talent is a significant competitive advantage fueling our innovation. Micron now has more than 44,000 granted patents globally, and we rank among the top 25 companies in U.S. patents held. Our efforts to drive diversity, equality and inclusion throughout the organization are strengthening our culture and resulting in numerous Best Place to Work awards across the global locations where we operate. And we have made significant progress and ambitious commitments on the sustainability front. Micron has committed to investing $1 billion towards environmental sustainability over a period of several years, and we have adopted specific long-term goals in 4 areas: emissions, energy, water and waste. Our results are being recognized. Micron has been added to the Dow Jones Sustainability Index, and a prominent ESG rating firm scored Micron in the top 10% amongst our semiconductor peers. I'm exceptionally proud not only of what we have accomplished strategically and financially but of how we are doing it. In summary, we have a strong foundation, and we continue to get stronger, thanks to the brilliant, motivated team at Micron who remain intensely focused on driving our success. Today's dividend initiation announcement is an important milestone that reflects the structural transformation Micron has undergone over the last several years, and it is a signal of confidence in the sustainability of our financial strength. And now here is Dave who will provide more detail on our financials.

Thanks, Sanjay. Micron's financial strength can be seen in our enhanced profitability, our strong cross-cycle performance and our rock-solid balance sheet. Starting with our enhanced profitability. As Sanjay mentioned, Micron has closed the technology gap, and we now are a technology leader in both DRAM and NAND with a stronger, more vertically integrated fab network. This has contributed to an improvement in our profitability, both on an absolute basis and relative to the industry. From our trough in FY '16 to the most recent trough in FY '20, there has been a more than 1,600 basis point EBITDA margin improvement. Over time, we have also seen higher cross-cycle lows as a result of Micron's improved competitive position and the improved supply-demand dynamics of our industry. Looking at 4-year average metrics revealed the sustained cross-cycle performance of our business. Revenue has trended up into the right and, as Sanjay mentioned, has outpaced the broader semiconductor industry. Furthermore, our business generates sufficient operating cash flow both to fund strong growth and to deliver meaningful free cash flow. Our asset base has grown steadily each year as we continue to invest in the growth of our business. We believe there is an opportunity for multiple expansion as investors appreciate these characteristics. Notably, the cash generation power of our business has enabled us to invest for growth and concurrently strengthen our balance sheet. We have significantly reduced debt and are in a comfortable net cash position. There has also been a dramatic transformation of the debt structure from one relying on secured debt to one materially made up of unsecured debt. Additionally, we have been reducing convertible debt, and the remaining converts will be repaid in F Q4. We have investment-grade ratings from all 3 rating agencies. And in the last few months, Fitch and Standard & Poor's both raised their outlook from stable to positive for Micron's debt. These upgrades to the outlook for our debt ratings are further evidence of Micron's financial transformation, and we're committed to maintaining our investment-grade ratings, net cash positive position and low leverage ratio. Now on to our capital allocation strategy. At our last Analyst Day event in May of 2018, we introduced capital allocation targets and a $10 billion share repurchase authorization. Our net CapEx was above our targets during the period of fiscal -- of FY '19 to F Q3 '21 as revenue was impacted by the memory cycle. Net CapEx was approximately 38% of revenue, but we maintained strong liquidity at around 50% of revenue. During this period, we remained net cash positive. And as I mentioned, we achieved investment-grade ratings from all 3 major rating agencies. And even through the pandemic, we maintained a strong balance sheet. In fiscal '19 and '20, we also met our cash return target to return more than 50% of our annual free cash flow to shareholders via share repurchases. In fact, from FY '19 to our most recently reported quarter, we returned approximately $4 billion or 69% of our total free cash flow when combining share repurchases and convert equity premiums. All in all, we retired 90 million shares, representing 7% of our total shares at an average price of $42, a considerable discount to today's price and our view of Micron's intrinsic value. As we have mentioned before, we expect F Q4 to be a strong quarter for share repurchases. Going forward, we've modified our capital allocation targets. I'll start with our liquidity and net CapEx targets, which are interrelated. Maintaining liquidity that equals our net CapEx to expectations enables us to fund investments in all market conditions. Looking ahead over the next few years, given the slowing of Moore's Law and increased capital intensity, including EUV, we expect higher net CapEx and, therefore, higher liquidity. And so we are updating both targets to mid-30s as a percent of revenue. Our cash and debt targets remain unchanged, and we intend to remain net cash positive. Our first priority is to fund the business and maintain solid liquidity. We then plan to return excess cash to shareholders. There are 2 components of our cash return program moving forward. First, we're introducing a $0.10 quarterly dividend with the goal of growing this dividend over time, reflecting our confidence in the cash flow generation of our business. Based on today's diluted share count, a $0.10 quarterly dividend equates to approximately $450 million on an annualized basis. The first quarterly dividend will be payable on October 18 to shareholders of record as of October 1. Second, we're changing our buyback approach to be more opportunistic, and we are modifying the time frame for our cash return target from annual to cross-cycle. This gives us greater flexibility to conserve cash and buy back stock at larger discounts to intrinsic value. I would note that while the size of the repurchases might vary each year, we do expect to repurchase shares every year. If Micron's stock appreciates significantly, we will scale down the buyback activity. And if the stock depreciates significantly, we expect to be aggressive in our buyback activity. We still expect to return at least 50% of cash flow cross-cycle with the combination of buybacks and dividends. But with this new opportunistic approach, we should retire more shares over time. Ultimately, we expect the share repurchase program to drive strong earnings per share accretion and create shareholder value. In summary, Micron has undergone an incredible transformation. The introduction of a dividend is a milestone event and a signal of Micron's firm, competitive position, our industry's improved supply-demand dynamics and Micron's significant improvement in our financial profile. It is an achievement that the entire Micron team can be proud of. We'll now open the call up for questions.

[Operator Instructions] Our first question comes from C.J. Muse of Evercore.

I think the opportunistic focus makes a lot of sense. I guess, Dave, perhaps you could share with us how you think about intrinsic value until we can kind of gauge, I guess, where we should think about you guys being very aggressive.

Good question. Okay. So first of all, I would say -- I just want to remind you that we do expect to be aggressive in the fourth quarter. So we will be aggressively buying back stock this quarter. I think over the long term, there have been periods where the stock has been meaningfully below the intrinsic value, and intrinsic value measured by any number of factors including the discounted free cash flow of the business. And it's in those periods where we want to be very aggressive in the buybacks. We think we can take out more shares and create more shareholder value in those circumstances. I don't want to give an exact number because, obviously, it might change over time. But I think if the stock goes to a level that has gone in the past relative to the discounted free cash flow of the business, you can expect us to be aggressive.

Our next question comes from Srini Pajjuri of SMBC Nikko Securities.

Congrats on the dividend. Sanjay, just a longer-term question. I'm just curious about the timing. I understand the balance sheet is in a much better shape. Do you think going forward that industry cyclicality declining is what's prompting you to take this decision? Because one of your peers actually had a dividend and they had to actually cut back on their dividend. Obviously, their situation was a little different. But I'm just curious as to what prompted you to kind of start the dividend now. And what does that mean for your cyclicality going forward?

So we have often talked about, when we have had discussions with investors, that we will be looking at dividend. And our decision, with respect to the timing on the dividend announcement today, certainly ties to the overall industry health, industry fundamentals as we have highlighted that memory and storage has become an increasingly important part of the semiconductor industry. And certainly, markets are diverse and there are secular growth trends in our markets and then, very importantly, Micron's transformation that we highlighted today from technology, to product portfolio, to manufacturing footprint and strengthened balance sheet, customer engagement and really a strong product road map. And when we look at how we have come through the pandemic and the resilience that we have demonstrated through this period and the strong results that we have continued to produce, this has what really led the management to focus on greater shareholder return and the enduring shareholder return in the long-term value creation. So a combination of the industry demand-supply fundamentals as well as long-term outlook and Micron's transformation and our confidence in our ability to drive for the best combination of business growth and profitability really positions us to share with you this new approach towards capital return consisting of opportunistic buybacks as well as dividend. So we really are pleased with this announcement today. Our Board is highly supportive once the management proposed to it. And we definitely plan to be aggressive with buybacks in the future when the opportunities present themselves while continuing to demonstrate our confidence with growing dividend in the future as well.

If I can have a quick follow-up. Maybe you can talk about what this might mean for -- or might not mean for M&A going forward and how you're thinking about M&A. And then Sanjay, you also mentioned dividend growth. I know it's early days, you've just initiated this. How should we think about your potential dividend growth going forward?

So I'll certainly have Dave comment on any aspect of dividend growth in the future. But with respect to M&A, we are not going to speculate, obviously, on any M&A matters. But as I noted, we really feel that Micron's position in the industry, with the results we have demonstrated as well as the road map that we have ahead of us for technology and products and our confidence in the secular nature of the demand trends, really leads us to drive for the best combination of growth and profitability. That means that it positions us well to make the necessary investments and prioritizing the necessary investments in driving the growth of the business, including investments in R&D as well as necessary investments in manufacturing, staying in line with our strategy of growing our supply in line with the industry demand. So of course, we will always prioritize our business growth, and I really believe that we are well positioned to address any aspects of that business growth going forward and making the necessary investments while, of course, continuing to provide strong, longer-term value to our shareholders as well.

So on the dividend growth side, we -- I think it's important to remind everyone that our first and foremost approach to cash return to shareholders will be the buyback. We think we can generate very good shareholder return by timing the buyback to aggressively repurchase during periods where we are deeply discounted to intrinsic value. So that will be the primary. Of course, this augments that. I would say that we expect, as free cash flow increases, we'll keep the dividend at some -- within a range, some percentage of that free cash flow. And so as free cash flow grows, the dividend will grow.