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

Why don't we go ahead and get started? I'd like to welcome everyone to the morning fireside chat with the management team of Micron Technology, Inc. It's my distinct pleasure to welcome on stage with me Sanjay Mahotra, who's the Chief Executive Officer of Micron, to my immediate left; and then Dave Zinsner, the Chief Financial Officer. We have a fireside chat format here. It's pretty straightforward. I'm going to start a conversation with Sanjay and Dave. [Operator Instructions] With that, I'd like first thank you both for joining. It's great to finally be back in person. I think investors and management teams are very happy seeing one another face to face. And I really appreciate the support and the participation.

Sanjay, my first question is a question I actually asked you last night at dinner. I actually like both yours and Dave's answer, so which is why I'm asking it. But I would argue that one of your biggest achievements since coming to Micron is really focusing the company on closing the cost gap with its peers. And so I want to talk about gaps here a little bit because the gap that really hasn't closed yet is if you look at the relative importance of memory over time and just measure it as memory growing as a percent of semiconductor revenue, it's been going up in 3- to 5-year increments pretty consistently. And if you look at our models through 2030, we would expect memory to perhaps be 30%-plus of the overall semiconductor market. And so that's been on a nice secular uptrend. If I then compare that to Micron's market cap relative to the overall semiconductor market cap, your stock has done tremendously well, but you haven't captured the same value. There's sort of a value gap there. And so I'm kind of curious. Maybe it's something you don't worry about, because if you take care of the things that you can take care of, that will take care of itself. But how do you think about closing that value gap over time, for the people in this room?

So first of all, John, really great to be here. And like you said, great to be in person with our investors. And both John -- Dave and I are really excited to be here today. And before we go ahead answering your questions, I just want to remind everybody that we will likely be making certain forward-looking statements today. And please refer to our SEC filings, which we make from time to time regarding the risk factors associated with the business. And since you said, John, that with respect to this question, you liked the answer yesterday that we both gave, so I'll make sure that both Dave and I participate in answering that question. With respect to the value for Micron, there is no question that Micron has certainly been building value through the performance we have demonstrated over the course of last few years across the cycles in our industry. Particularly, we are today in a technology leadership position in DRAM, with our 1-alpha node being in production ahead of anybody else in competition; our 176-layer NAND, also the world's most advanced and first to go into production; and of course, continuing to strengthen our high-value portfolio solutions and deepening our relationships with our customers, and really delivering excellence on manufacturing. All of this is combining into strong financial performance for the company. And you can see that in terms of how we have narrowed the gap with respect to gross margin performance versus our peers and really driving differentiation and greater value-add solutions in our portfolio. Micron is in a very different place today perceived by customers versus how it was perceived just a few years ago. So we are very pleased with our execution. And I'm very confident that over time, our execution, our focus on technology and product leadership and manufacturing excellence will continue to drive greater value for Micron over the years to come. So Dave, now you go ahead with your part.

Yes. I don't remember what I said last night, so hopefully I'll do it similarly. Yes, I just -- look, I think about Micron's transformation over the last few years. And when you look at the through-cycle margins of the company through the last cycle, we generated 40% through-cycle gross margins, 50% through-cycle EBITDA margins. I mean this is absolutely a different company than it was a decade or more ago. And I think in some respects, the value market, the [indiscernible] market is a little bit behind in terms of catching up to that message. And we recognize that. I mean we generated free cash flow consistently over the last, what is it, 5 or 6 years. We expect to generate cash flow again this year. It's a business that now you need to look at in terms of cash flow from operations and free cash flow and really start to look at the business in that light. And I think investors are taking some time to catch up to that story. In the meantime, we're doing 2 things. One, we announced a dividend in August. And that was really partly one method of giving cash back to shareholders, but it also sent a message I think to everyone that hey, we have confidence around the consistency of the cash flow, the long-term cash flow generation of the business. And that's why we can do a dividend, and that's why we can grow the dividend over time. So that's one piece. And then in the meantime, when -- while equity markets may not value it appropriately relative to its intrinsic value, we're going to buy back stock. And we have an opportunistic buyback in addition to a programmatic buyback. That opportunistic buyback kicked in, for sure, in a pretty significant way in the fourth quarter. I think you'll see that we had a pretty good buyback in the first quarter. And so we'll take advantage of these moments where the valuation is dislocated from where it should be, buy back a lot of stock. And that should give investors an opportunity to see enhanced value creation as we drive the company forward.

A very, very good answer. I want to be very respectful of the fact that you guys will be reporting November quarter in a few weeks, which is my way of giving myself cover to be able to ask you some near-term questions. But if you look at the last quarter you reported, you're clearly seeing kind of an interesting dynamic in the overall semiconductor industry. You've got one of the worst supply situations that we've ever seen across semiconductor. But that's actually preventing you guys from actually shipping bits to full demand, especially in the PC market. What update can you get us about the PC supply chain in particular actually working through some of these kitting issues? And when do you expect that to be fully behind you?

So business dynamic in this regard is fairly consistent with what we said in our earnings call in late September. And I think when you hear the results from PC manufacturers over the course of last few weeks, I think their commentary is very similar to what we had said at the end of September. What we had said at the end of September with respect to PCs is that in the PC segment, having matched kits to ship all the necessary demand that those OEMs have was a challenge due to supply chain shortages of certain components in the industry. And as a result, that resulted in some reduction in demand for memory and storage. However, we had also said at the end of September in our earnings call that we expect those to work themselves out over the course of next few months. And that's what we are seeing in terms of how it's being played out, that as we go through the rest of this year and of course into next -- early next year, these supply chain challenges that the PC customers have faced will slowly, gradually work themselves out. And some of that is leading to pent-up demand that will actually become a tailwind for us in the future as we go through calendar year '22.

And Sanjay, as you go through this transition period, how would you characterize the inventory levels, both on your balance sheet, kind of your peers' balance sheet, but more importantly your customers' balance sheet right now?

So certainly in terms of our balance sheet as well as semi memory producers, the inventories generally have been reported to be low. With respect to our customers, we just talked about that on PC customer side, some inventory for memory was high that resulted in some adjustments, which we again discussed at the end of the September quarter. When we look at on the data center side, the inventory's in decent shape. In the mobile markets, of course, there have been certain share shifts, so it may vary from customer to customer. And the China economy has been somewhat weak as well, so there may be some implications in that regard. But overall, we would expect seasonality in mobile as we come up with the holidays here with the Chinese New Year. All of that should be spurring demand. And more importantly, mobile 5G trends, 500 million units of 5G phones this year going to 700 million-plus in calendar year '22; and there's a lot of installed base of phones worldwide that has to still continue to convert to 5G over time. And 5G phones demand more memory, more storage. So overall trends, the secular trends for memory and storage across the data center to the smartphones continue to be one of increasing content and strong demand drivers. And certainly on the automotive side, we have talked about it in the past that, that supply chain has been hand to mouth. And so overall, the supply chain shortages are improving, leading to improvements in the industry. but these will continue to gradually improve throughout calendar year '22.

Sanjay, going back to the idea of how you're running the business differently and how the industry might be a little bit different over time. Last night at dinner, the conversation gravitated towards LTAs. And I was actually surprised by the magnitude of your revenue now that sits on LTAs. Now it's a little bit different because it feels like it's more about volume, with a lot more flexibility on pricing in these LTAs. But maybe you can talk about kind of the progression of LTAs as a percent of your overall revenue and how these LTAs are structured, and quite frankly, how they change the dynamic of running the business.

So about 4 years ago, about 20% or so of Micron's revenue was based on LTAs. And today, more than 75% of our revenue comes from LTAs. And yes, these LTAs are targeted toward a commitment related to supply and customer forecasts. And it is a reflection of how Micron is getting closer with its customers, engaging in dialogue regarding their future requirements, how those future requirements will shape throughout the quarters, and really puts the industry and certainly Micron business in a very different place. It helps bring greater accountability between the customers as well as us. And like you noted, these are based on supply. And pricing, of course, gets negotiated primarily over the course of the LTA period. There are certain parts of the market, end market segments such as automotive where there is agreement on supply as well as on pricing. But primarily, the LTAs today, again, more than 75% of the business on LTAs are around the supply agreements. So this helps bring about greater planning capability, greater predictability, greater consistency. And it really builds a greater relationship of trust over time between the customers and partner like Micron to them. So this is really a good thing. We're continuing to drive this forward. And I have customers welcome this as well, because they too want to see less volatility and greater predictability in the market environment.

And Dave, just to add on to that, one of the reasons why I wanted to go down this route is I think after the August quarter, one of the investor concerns out there was given how you guys have sort of projected bits for both the November and the February quarter versus the full fiscal year, it does imply a significant sort of acceleration post-February. Do these LTAs give you visibility into that kind of volume acceleration?

Yes. So that's exactly what I was going to jump in and say. So this is really a helpful tool for us as we're planning our supply out for the next year. Because before when you're largely flying blind on what demand looks like, you got to make some assumptions. And sometimes those assumptions is going to be pretty far off from reality. And so this gave us a good sense of for the bulk of our business, what we might see in terms of demand bit growth for next year. Then we can kind of operationally look at how we feather the supply in and how we manage inventory to make sure that we can meet that demand for next year. And you're right. I mean obviously, it gives us some confidence around the predictability of the back half of the year. And obviously to some extent, this is on a best-efforts basis. But it's amazing how committed the customers are to these LTAs even when they're maybe not written in an ironclad way. There's a lot of commitment from our customers in terms of adhering to those LTAs, and there's a lot of commitment from us to deliver on those LTAs.

Sanjay, I want to go back to what I talked about in my preamble about you closing cost gaps with your peers. Maybe talk a little bit about the technology road maps, both in DRAM and sort of NAND from here. You've got the 1-alpha ramp coming, which is going to be a great cost node for you. All indications are you're significantly ahead of -- or at least ahead of many of your peers. Can you talk about kind of the road map beyond that? And especially now that you've talked about the introduction of EUV? Not only on the manufacturing side but then all of a sudden things like DDR5, CXL, how do we think about kind of memory evolving over the next several years? And how are you going to stay ahead on that cost curve?

So 1-alpha ramp is not just coming. It has already started, and it will continue to ramp through calendar year '22 as well. And it's a great node for us. It provides us great cost structure as well and again, a strong demonstration of leadership for Micron, and similarly the 176-layer NAND. And we are deploying it across our broad portfolio of products. So both of these nodes are really going to be strong workhorse for us in calendar year '22 in terms of meeting our supply bit growth projections for the market, keeping them in line with the industry demand as well as meeting our cost reduction objectives. And yes, going forward, we feel very confident about our road map. We have discussed that we will be introducing EUV in our 1-gamma node. And Micron's capabilities in multi-patterning along with EUV, I believe, will put us in a differentiated position in the marketplace in a unique position. Again, we have tremendous leadership and experience in multi-patterning. And that's why we have carefully chosen the introduction of EUV with our 1-gamma node, with first production in 2024 time frame. So I feel very good about our DRAM road map, multiple generations of 2D scaling ahead of us with DRAM. And similarly, I feel very good about our 3D NAND technology road map, with continuing increasing the number of layers over the future generations of technologies. And in 3D NAND, Micron has demonstrated not only leadership with 176 layers, but from the very beginning with 3D NAND, CMOS under the array has been a hallmark of Micron's leadership. So well positioned with respect to the road map, and we are very confident about our future capabilities and leveraging these advanced technology road maps to build differentiated portfolio of solutions. And in that regard, DDR5, we are well positioned there in the marketplace. This will be starting now and becoming meaningful by the end of calendar year '22 in the marketplace. And we are engaged with the customer ecosystem with DDR5. And just note that DDR5, because it has ECC built in on the chip, it has across the board as a result of the specs of DDR5, has larger die size in a given capacity versus DDR4. That means it does have an effect in terms of moderating the industry supply growth as well. So again, a differentiation opportunity for us with DDR5, and then CXL. We are excited about that because this creates opportunities for memory hierarchy, creates opportunities for differentiation. These kind of transitions take place once in 20 years going from DDR to CXL, again an opportunity of us continuing our momentum on building high-value solutions and differentiation capabilities.

And just help level set people in the room, when can we expect CXL? I mean is that still 3-plus years out? How do we expect that?

That's right. I think CXL introduction is more like in 2023 kind of time frame and gradually increasing from thereon.

And then on the NAND side of the business, a key part of your strategy has been trying to mix to higher-value solution. The one piece of the puzzle that you're still working on that NVMe enterprise, hyperscale-class SSD drive. Give us an update there. And once that's in the market, how significant of a financial driver can that be for the NAND business?

So NVMe data center SSD is certainly a tremendous opportunity for Micron. And you're right, as we have noted in the past, that has been a gap in our portfolio of NAND solutions. And we have been working hard on building that road map, building those products. And I'm happy to report that we have made very good progress in this regard. We look forward to actually gaining more share with NVMe SSD and certainly an important part of building our high-value solutions portfolio. These are NVMe data center SSDs, examples of products where you command greater premium in terms of the solutions. Of course, they come with higher cost of building the product as well. But this is what we mean by how we shift the mix within the high-value solutions, how we mix -- shift the mix towards greater profitability solutions. So this is an exciting opportunity, and we definitely look forward to gaining more share in the NVMe SSD market. And I'll just point out aside from the data center NVMe SSD, of course, we are doing well with our client PC and VME solutions as well and really doing well with our mobile managed NAND solutions that include multi-chip packages, DRAM and NAND. And again, an area of strength for Micron. So again over the course of the last 3 to 4 years, we have driven a significant transformation in our NAND business that will help us improve the overall profitability of the NAND business as well.

No, that's helpful. Sanjay, in some of your responses, you talked about some of the demand drivers. I kind of want to go through by end market, some of the key demand drivers. And if you look past -- if you look back on this year, one of the things you guys have told me that I'm now going to use against you is that perhaps you, at the beginning of the year, forecasted PC demand better than your PC customers, that these guys were a little bit too bullish coming into the year. You guys were a little bit less sanguine on that market. So now I'm going to actually look out to calendar year '22. We had two of the large CPU manufacturers on stage here yesterday. I think one of the big concerns in the audience is we had a pre-COVID PC market that was running about 250 million units a year. Over the last 2 years, we're now sitting at about 1 million units a year or about 350 million units. To us in the investment community that tend to look at patterns and when they deviate, that feels like the PC market is over-earning. I think there's a solid argument to be made that COVID actually drove work from home beyond just returning e-mails. You actually had to be a content creator in your house for the first time ever and perhaps structurally increase the value of the PC. But how are you seeing it? And I know you've done some work looking at the installed base of like notebooks. And do they have the right cameras with the right memories to make a Zoom experience or a Cisco Webex experience actually worthwhile? What's your view on the PC market?

So like you noted, compared to the pre-pandemic, PC market in 2020 as well as 2021 nearly grew beyond pre-pandemic expectations and grew on a double-digit basis on a year-over-year growth, both in 2020 as well as in 2021. And PC market's total units are somewhere around 340 million to 350 million units in calendar year '21. Expect it to be about the same in calendar year '22 as well. But what's important to note is that the content on average continues to increase in PCs as well. So when we look at the PC market, we expect that overall PC market will drive demand growth in terms of bits both in DRAM and NAND at somewhat below the industry average. Industry average means across all end market segments for DRAM and NAND. And this is pretty much in line with expectations that we have laid out in the past as well. But what we are seeing in the PC market is that not just work from home, but the learn-from-home trend as well drove the PC market growth. And at this point, Chromebooks are -- overall they saw a big surge in demand growth earlier, and those have moderated out or slowed down. However, as businesses are returning to on-site operations, you are seeing an increase in enterprise-grade PCs and -- which are favorable for memory and storage content as well. So we look at overall PC market, yes, it has enjoyed strong growth in 2020 and '21. It will stay at similar levels in calendar year '22 as well. However, there is certainly a structural change in the PC market for the reasons that you just outlined, that we do think that PC market will continuing to be a healthy market. But overall, our end markets are well diversified. Data center is one of the big markets, actually has become the largest market now for memory and storage and will continue to outpace the overall industry average in terms of growth as well. And mobile will tend to be around the average of the industry in terms of DRAM and NAND growth CAGRs. PC will be somewhat below the industry in terms of NAND and DRAM CAGRs. And of course, automotive will be one of the big drivers of growth on a percentage growth basis going forward.

You've preempted my next 3 questions, but I'm going to ask them anyhow to get into a little bit more detail. Starting with the mobile side, I do think there is a concern that as we go from this year into next year, we're kind of in the heart of the 5G upgrade cycle. And that tends to be a very good mix as you drive up that penetration curve. Once 5G becomes sort of half the phones out there, you usually start to see the mix in any consumer market begin to kind of go down again. So as you look at 2022 in the mobile market, are we still in the sweet spot of that kind of 5G adoption? Or do you expect to see content growth kind of moderate in calendar year '22 versus '21?

I mean certainly in the sweet spot in calendar year '22 of 5G adoption, again, 500 million smartphones with 5G increasing to 700 million-plus in calendar year '22. But content in 5G phones for DRAM content is significantly higher, 50% higher than 4G phones. And similarly NAND content is much higher as well. And that content increase will continue, will continue in the high-end 5G phones. But as they gravitate toward the middle range as well, the content will continue to increase. And it will continue to increase, not just because of 5G adoption across the installed base of smartphones, but also because of new applications. And these new applications, driving greater AR/VR kind of capability and greater AI capability in these smartphones, tend to drive greater requirements for memory and storage as well. So I don't think 5G is just about a 2022 story. 5G has long legs beyond '22 as well in terms of units as well as in terms of applications driving greater content.

And then the two faster-growth markets, data center and auto. Starting with data center, there's some really interesting architectural shifts going on at the CPU level next year. Our checks would suggest there's actually just a lot of pent-up unit demand for servers next year as well. How do you think about kind of units plus content growth in 2022, especially as you start to get Intel moving to Ice Lake and then Sapphire Rapids. You've got AMD starting to ramp Genoa. It sounds like the densities of these servers could be going up fairly significantly.

Yes. So the units for servers, particularly as enterprises coming back with the recovery from the pandemic, enterprise server units going up, of course, the hyperscale server units going up. Like you pointed out, the new CPU architectures with more cores, with more channels also will drive greater server boxes with new CPUs, which are required to address the increasing workload requirements in the hyperscale as well as in the enterprise environment. But these new CPUs with more cores, with more channels actually enable more memory, and at the end, more memory per box. And end market applications driven by AI are also requiring more memory in the boxes to really fulfill the full potential of those applications. So yes, we see calendar year '22 to be a strong driver for data center markets, for memory and storage.

And then, Sanjay, oftentimes when we think about server, I think we focus too much on the CPU part of the market, and not enough on the accelerator part of the market and some of these new workloads and applications around machine learning and AI. Can you help us understand what happens to density and memory intensity as you move from sort of an enterprise server to a hyperscale server to maybe an AI/ML server?

So AI/ML server tend to require a lot more memory and storage. We have discussed in the past how AI workloads require 6x more DRAM versus a standard server. So no question that as these workloads become more data intensive, they are requiring more memory and storage, and AI and ML work servers and workloads require more. And -- but you are seeing this increase in memory and storage requirement across the full hierarchy from enterprise to hyperscale to AI/ML servers. Today, the BOM for memory and storage in a typical server represents about 40% for memory and storage, and increasing toward 50% and potentially even higher as we look at the years ahead. So data center will continue to be not only a large market, the largest market for memory and storage, but we'll continue to, again, outpace the rest of the industry as well in terms of its growth opportunity, not just in '22 but '22 and beyond as well.

And then the other one, a little bit smaller today but still above industry average growth rate would be automotives. And I'm hoping at the point in time where you actually start to break that out as an individual category, you don't call it autos, you call it data centers on wheels. But could you talk a little bit about the trends you're seeing there? And I think last night, we had a conversation that was very interesting, talking about what the industry thought specs might look like when they were designing cars 3 to 4 years ago from a memory content perspective, and what they're actually turning out to be.

Yes. Just a few years ago in 2018 at our Investor Day, we had talked about the Level 5 automobiles, autonomous vehicles will have 70 gigabyte of DRAM. And we have already seen announcements with -- which have around Level 2, Level 3 of autonomous capabilities in a vehicle with 100 gigabyte of DRAM. And you're absolutely right. I mean when you think about 100 gigabyte in a vehicle, I mean that sounds like absolutely data center on wheels. Because not long ago, average density of DRAM in a server box was in that range of 100 gigabytes. Of course, today it's higher. So the trend of, again, AI within autonomous vehicles requiring more data intelligence and fast processing and decision-making related to data is going to continue to drive more DRAM as well as more storage needs in the electric vehicles. You are seeing examples of 100 gigabyte and 700-plus terabytes of storage, 100 gigabyte of DRAM and 700-plus terabyte of SSDs in an electric vehicle environment. So this is definitely absolutely one of the fastest growth opportunities for memory and storage in the years ahead. A smaller part of the market today but a fast-growing part in future. And in this market, in the automotive market, Micron has #1 leadership position. We have enjoyed this for very many years due to our deep partnership with our customers and tremendous record of quality, which is paramount in this end market. Micron is extremely well positioned to capture solid growth in this fast-growing end market segment.

And I'd just add, obviously it's the opportunity set, but the market is 90 million units or so, right? And so of course, not all of them are going to have that level of content now or next year, but over time, a lot of them will. And so it's got a huge opportunity for us. That's many multiples of what the data center space. So you may get your wish that we break this out as a separate line at some point.

The last question I had, Sanjay, it's refreshing I'm sure for everybody in this room that world governments are finally figuring out something that I think a lot of us already knew, that your industry is extremely strategically important. And we're seeing a drive towards incentives for domestic production. I would argue, you are one of 2 U.S. companies that are at the leading edge of manufacturing in the semiconductor industry, and it makes you sort of a national sort of champion. But the odd thing is most of your fab network is not inside the U.S. So when you think about the CHIPS Act, how are you positioning Micron to try to benefit from that?

So memory is certainly at the leading edge of semiconductor memory -- semiconductor manufacturing. And within memory, Micron is certainly leading as we discussed, with our 1-alpha, 176-layer and advanced road map ahead. So I think the governments around the world certainly recognize the importance of semiconductors. And we have made sure that they also recognize the importance of memory within the semiconductors. After all, it represents nearly 30% of the semiconductor industry. And as we look ahead, I think it's very important that CHIPS Act does get across the finish line. Because to have leadership for U.S. and semiconductors, CHIPS Act and government incentives and support is certainly going to be important, and it will be important for memory as well. So we are engaged with the governments around the world, including the governments in U.S. And we will, of course, be making our decisions regarding future capacity addition needs, which we'll need, let's say from 2025 and beyond time frame. We have done a great job meeting the supply bit growth requirements to meet the industry demand through technology transitions at some point, particularly in DRAM. We will need to add wafer memory capacity for production in 2025 and second half of this decade time frame. And government incentives in terms of where best to drive that will be important, and we are engaged in these dialogues. We announced that over the course of the decade, we plan to invest more than $150 billion in leading-edge semiconductor, memory R&D and manufacturing. And there are a lot of opportunities for us across the globe, but we are very well engaged with the U.S. government and very pleased with the efforts of the U.S. administration towards recognizing the importance of semiconductors, including that of memory, and appreciative of Biden administration as well as Secretary Raimondo towards these initiatives. And we are continuing to work, along with the rest of the industry, to get the CHIPS Act and the FABS Act across the finish line.

It's refreshing to see something that has truly bipartisan support.

Absolutely.

With that, we've ended our time in this session. I want to thank everyone for joining us, but especially for Sanjay and for Dave. This was a great conversation. Thanks for the time this morning.

Thank you, John.

Thank you.