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

Good morning, everybody, and welcome to the KeyBanc Technology Leadership Forum. I'm John Vinh. I cover semis here at KeyBanc Capital Markets. We are pleased to have Dave Zinsner, CFO of Micron, join us. The format of this session will be a Q&A fireside chat. If you have any questions, feel free to submit them online at the bottom of your web page.

Welcome, Dave. Maybe -- I was wondering if you could maybe just kick us off and talk about some of the key demand trends that you're seeing in your end markets right now and how you're thinking about the second half here. You obviously have been benefiting over the last several quarters from these kind of work from home trends. But given that there are increased vaccinations, there is some anticipation in the second half here that people are going to start heading back to work and there's a little bit of uncertainty and consternation in regards to the sustainability of some of these trends.

Okay. Yes, sure. First of all, John, thanks for having us. Really appreciate it. I'll just start with just the normal commentary we start with when we are discussing information. So obviously, I might make forward-looking statements, and to the extent I do so, investors should consult our Risk Factors section in our most recently filed 10-Q and 10-K for a discussion on those risk factors. And also, I might mention at times non-GAAP figures, and a reconciliation of GAAP to non-GAAP is available on the Investor Relations section of our website at micron.com. So with that, let me talk a little bit about the near-term environment. As we said on the earnings call for the third fiscal quarter, we see very positive trends, both for DRAM and NAND. We also talked in June that we thought pricing would be up in both DRAM and NAND for the fourth fiscal quarter. So those are obviously positive signs. When I look at the markets, and I'll kind of break them down. Cloud, we're still seeing robust demand in cloud. Not surprisingly, capital investment continues to be strong with our customers. And of course, as we migrate through this year and into next year with new CPU architectures, we'd also expect good content improvement in cloud. On the enterprise front, as we talked about in the past, that had been negatively impacted by COVID. Cloud was positively impacted. The enterprise was more negatively impacted from the pandemic. But we have seen things improve. In particular, as more people migrate back to offices, we've seen more investment in the enterprise space. And so we do expect that to improve over time. On the mobile front, I would classify or characterize that as stable at this point, but that's usually what you see around this time. And typically, the second half of the calendar year tends to be quite strong for mobile. So we do expect that to occur this year as we get into September, October and so forth, when we expect to see a seasonally strong period for the mobile space. Also, I'd just point out in the mobile space that 5G continues to be a good story for the industry. Content is pretty meaningful in terms of the increase versus 4G. So that obviously creates a tailwind for that business. On the automotive side, and I guess I'll couple that with the industrial business as well, that is very strong coming out of COVID, has definitely driven some strength there. I'll be honest with you, at this point, we're struggling to keep up with that demand. Things are very tight there. Inventories are -- most of the industrial business gets sold through distribution. Distribution inventories are quite lean. And it's been widely reported, automotive has seen a big uptick and has been struggling to get the parts necessary, and we are definitely in that camp with many other suppliers to the automotive industry. On the consumer front, that is, I would call it somewhat weaker, not entirely unsurprising given that we're in the summer months. I think that's driving a little bit of a slowdown. And also, I think consumer spending has shifted a little bit for the summer to be more around travel and so forth and maybe a little less around electronics and computing. And so that has driven some weakness in the consumer space. But our current view is that's probably somewhat seasonal in nature. On the PC space, I would call it mixed. Definitely, where there was a lot of strength during COVID was really in these kind of what I call the low-end laptops, Chromebooks and so forth. That saw a big strength, particularly for education at home usage. I think most of the education side of things, there's more of a trend towards coming back to school. So we have seen more weakness in that space. But we have seen strength. The corporate standard desktops and PCs, we've seen strength in that area. The good news is that's got a better content story for us. And so we're -- while it's mixed, that's certainly a positive that we see this strength in the corporate side of things. And we would think that, as I said, as enterprises start to come back to the office, there's going to be some upgrade happening and that will kind of underpin the demand there. And then lastly, maybe before I turn it back to the next question, John, I would -- let me just talk about inventory for a second. I would say that inventory at suppliers is very low. In fact, probably our days of inventory as we exit this quarter is going to be probably the lowest we've seen in some time. So that's, if anything, a challenge for us to meet demand. Also, as I mentioned, on the distributor side, we see inventory being quite low there as well. And we've quite honestly struggled to keep distributors at an appropriate level of inventory. I would say on the customer side, that most of the segments, the inventory levels are in pretty decent shape. There are some pockets of inventory that's above kind of normal levels. We see that in some customers within the mobile space and some customers within the PC space, where inventory levels are a bit higher. Some of it's kind of a buildup for strength, like, for example, in the mobile space as we think the second half, in general, is going to be seasonally stronger. Some of it is, quite honestly, an impact of an inability for some customers to procure everything they need to build products. So they might have the memory but don't have some of the companion parts. And so that's creating a little bit of a challenge. And once that alleviates, things should improve. And then some of it's just kind of a reaction of customers to the supply chain challenges they're seeing and where they can operate at higher weeks of inventory, they're doing so. And this is this [Technical Difficulty], I mentioned, of kind of a migration from just-in-time to just-in-case. They're moving towards higher levels of inventory so that they can manage -- better manage the supply chain disruptions.

Great. Thank you, Dave. That was a great overview. Maybe we could just dig a little bit more deeper into maybe some of the demand trends, specifically around NAND and DRAM. I think on NAND, there's a little bit of consternation out there. If you look at Samsung, their bit shipments, bit supply in 3Q, it seems like it's kind of low teens. Is that a little bit of a concern for you in terms of just supply? And then on the DRAM side, you'd said, hey, inventories look really lean. Maybe there's some pockets in mobile. I think there's a little bit of consternation there that if PCs are seasonally down in calendar 4Q and cloud hyperscale guys who maybe have been really robust and strong in the first half, maybe pulled in a little bit of inventory, made a little concern that they've got higher levels of inventory. And if cloud shipments are down sequentially in 4Q, that could kind of soften DRAM going into the end of the year. What are your thoughts on both fronts here?

Okay. So on the NAND front, I have to say, and I think most investors have seen this from us, we've been a bit more pessimistic about NAND coming into this fiscal year. I thought that maybe the supply/demand dynamics wouldn't be good there. I have to say it's been a bit of a surprise, quite honestly, to the positive. We came in thinking that NAND demand growth would be something in the range of 30%. And then the next quarter, we revised it to, okay, well, maybe it is a little bit better. Maybe it's in the low 30s. And then we have adjusted again to low to mid-30s. In the most recent quarter, we said mid-30s. So clearly, every quarter, we've seen a better environment for NAND. And that obviously has had a positive impact on the pricing environment, had a positive impact in the third fiscal quarter. And our expectation is that it will have a positive impact in the fourth quarter. I think clearly, some of the markets that, call it, had a positive impact from COVID, certainly drove some of that. And then as we've exited, we have seen some strength in other markets that clearly have benefited on the demand side. Plus, this is certainly an elastic market, and I think that elasticity has absolutely kicked in here and helped out. So at this point, I think, the near-term view of NAND is that, if anything, we're unable to meet all the demand out there. which has driven the favorable pricing trends. I think as you think about it long, beyond this kind of immediate period and look out further, I think it's just a question of does the industry maintain good capital discipline in relationship to this demand. We certainly are unclear exactly what the rest of the industry might do, but the hope is that they do maintain some discipline so that it's a healthy business for everyone. On the DRAM front, just to clarify, I think inventory at suppliers, us and others, I think, is quite lean. And it's lean on the distribution side, as I mentioned. I would call it more in decent shape across the board. So I wouldn't call it super low at the customer level, and there are pockets that are a bit higher, but I also don't think it's in a place where it was, for example, in fiscal -- end of fiscal [Technical Difficulty] inventories were really high at customers. We don't predict what the pricing behavior will -- how it will evolve over time. We stay away from that. I'd just say, from our perspective, our goal is to grow our supply in line with demand. We've said that we expect demand over time to be mid- to high teens for DRAM, and that's how we're investing our capital, and we will modulate supply into the industry. If there are periods of time where there's dislocation between what our supply looks like and what demand looks like, we'll have a willingness to hold inventory if that is required. And we have the ability to obviously modulate utilization if that's required. But at present, other than, like I said, some pockets where inventory looks a little elevated like mobile and PC, we think the rest of the market is -- particularly in light of the fact that everybody is probably going to operate at a higher level of inventory just like we're willing to do over time.

Great. Just to follow up on that, Dave, you guys have been talking about this for a little bit, that customers, because of the environment, we're moving in or moving to from a just-in-time inventory management system to just-in-case management system, to what extent that your customers are able to build inventory going forward? Do you think this is a new norm? Have your customers kind of all told you that, longer term, this is going to be kind of the new norm from them? Is that -- I think, there was a little bit of concern that maybe they'll kind of hold higher levels of inventory. But once supply/demand starts to normalize, they'll kind of go back to the just-in-time kind of inventory management system there.

Yes. So I think we mostly -- we certainly take it from commentary we've heard from customers and what we hear people generally saying. We also think about it in our own terms. I mean we -- we've talked about having an optimal level of inventory in terms of days ranging somewhere between 95 and 105 days of inventory. And we were last quarter at 98, and it felt like we were really stretching ourselves to meet everybody's demand. And so clearly, there's just a requirement, I think, to hold more inventory. And these disruptions that occur with respect to COVID or even geopolitical issues and some things that are caused by weather and what have you, all those things make the supply chain of today a lot more challenging than it's been. And I think given the fact that working capital isn't that expensive and to meet -- miss an opportunity to catch some demand is pretty painful financially. I just -- it's my own view and the view of the company that, that just, in general, supply chains will operate with higher levels of inventory, particularly in areas where they're single sourced or can't be confident around their ability to get the supply when needed.

Got it. Dave, I wanted to maybe spend some time talking about the announcement you made. Last week, you announced the dividend for the first time, obviously, pretty significant. Speaks to the confidence that you guys have in the state of your business and maybe the state of the industry longer term. Obviously, I don't think you're disputing that the industry is no longer cyclical. But obviously, you're much more confident in terms of what the cross-cycle assumptions here are moving forward. If and when we do correct, what sort of assumptions are you making in a kind of a trough environment going forward versus what we've seen previously? And how does that translates into kind of you maintaining kind of enough free cash to sustain your dividend?

Yes. So super excited about this. I think this is tremendous. I maybe start with and I encourage anybody that hasn't seen the webinar to view it on the Investor Relations section of the website. Sanjay actually has a beginning portion. I think he did an amazing job at kind of articulating the transformation. And I think that to really what underpins that all of this is that the industry in our view has transformed a lot in particular in DRAM in terms of the level of profitability within the industry given the consolidation that's occurred. But more importantly, it's been Micron's transformation that I think has allowed us to do this. We have transformed our process technology capability to where now we are leading the market in -- at least in the most recent nodes of 176 layer and 1-alpha. But really just becoming more innovative, more at the leading edge in terms of the capability on the process technology side. We have talked about this drive towards higher-value products and really just becoming a product company, and that transformation, well, certainly, we're not finished with it. We've made a lot of progress in terms of driving into products that generate better profitability and so forth. And we've really, I think, improved operationally the business to really execute better operationally to get the bits out that we need to meet customer demand when called upon, but also to really efficiently manage operations both on the front end and back end to deliver good cost reductions in this environment. And so that's been, I think, the biggest factors that have driven this. And then we look to the future and know that, hey, we still haven't fired on all cylinders in terms of our execution on the product side just yet. We have all of these markets that are going to drive growth and increase content, 5G in the mobile space, this evolution of the cloud, this drive into artificial intelligence, autonomous driving and this more richer infotainment in automotive. There's more smart manufacturing on the industrial side, Internet of Things. All these things are, I think, in our view, are just going to drive tremendous growth for this industry. And as I've mentioned, Sanjay had this great slide which talked about TAM between 2020 and 2024. And if you interpolate the TAM is like 11% CAGR for the memory space. So it's certainly a market that's going to grow faster than the underlying semiconductor industry and certainly faster than GDP. And so I think that all those things give us some confidence around that, just the future of the business. And then if you look at how we went through a cycle, which was actually a pretty tough cycle given where 2018 ended in terms of DRAM pricing and what happened after that and then throw in a once-in-a-100-year event like COVID and look at how that impacted the business, and yet every year, for the last 5 years, we've generated positive free cash flow, good profitability through the cycles. We've been able to invest when we needed to. We've delevered. We've moved towards a more investment-grade friendly balance sheet, lots of liquidity. It's just all of those things lead us to the conclusion that this is just a different industry, a different business, a different financial profile where we can generate very strong EBITDA. And so that's -- so once you get to that point, you feel really confident around your ability to return cash to shareholders, return meaningful cash to shareholders. And then the question is just how to do that. And what we decided was that a dividend made sense. We had enough investors that said, "Hey, if you provide a dividend and you have some conviction around the ability to grow that dividend, there's funds out there that could invest in this that could ordinarily invest in." In Micron, we wanted to attract those investors. We thought it was a good message to the rest of the investment community that, hey, this is a different animal. And we're willing to show our conviction with a dividend. And then we decided that in addition to that, we would somewhat modulate the buyback strategy so that cash returned in the form of both dividend and buyback, we would still be committed to returning more than 50% of our cash flow to investors. But we would like the opportunity to move it up and down as we progress with the idea that we think we can take the opportunity to buy back more stock when the stock is deeply discounted relative to our view on intrinsic value. Am I still on?

Yes. You're still on.