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

Good morning, and thank you for attending JPMorgan's 20th Annual Technology Investor Virtual Forum here at the Consumer Electronics Show. My name is Harlan Sur, I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have David Zinsner, Chief Financial Officer at Micron, here with us today. Let me go ahead and kick it off with the first few questions for clients tuning in. Again, feel free to use the Q&A button on your digital dashboard, type in any questions. So thanks for joining us today, Dave.

Thanks for having us, Harlan. Appreciate it.

Yes, no problem. So a week ago, the team put out a statement regarding the COVID-19 related Xi'an, China, city closure. And you mentioned a reduced workforce at your DRAM assembly and test facilities in Xi'an, leading to some impact to output levels from these factories. Number 1 is, can you give us an update on this? And secondly, what types in -- how much of your DRAM revenues actually flows through the Xi'an facilities?

Okay. So both good questions. First of all, before I start, let me just say that at some point during this conversation, I might make forward-looking statements and to the extent I do, I encourage investors to look at the Risk Factors section of our 10-Q and 10-K that have been most recently filed. And also, I might make GAAP and non-GAAP comparisons. And so the reconciliation of GAAP to non-GAAP is on the Investor Relations section of micron.com. So let me give you an update a bit on Xi'an. Xi'an is one of our DRAM assembly and packaging facilities. It is a meaningful part of the DRAM volume that goes through there from an assembly and packaging perspective, although there are -- there is other capacity beyond that. As you pointed out, on December 23, the government closed down the city and restricted movement. Of course, we have -- while maintaining good protocols and safety protocols for our team members in Xi'an, we do have the ability to continue to operate that facility. But it was at a reduced level in terms of headcount and capacity that has continued now since that date. We do expect to get back to normal sometime later this month. COVID cases are down in Xi'an, and so we do expect some of the restrictions to kind of relax and that will allow us to fully staff that facility. I would say that specific facility, despite the fact that they've been under resourced, has done a pretty outstanding job of continuing to drive volume, albeit there's a reduced volume level, but what they've been able to accomplish has been pretty amazing. And we have been able to -- we have had a couple of these things happen in the past. And so we have been able to flex the global kind of infrastructure that we have in terms of assembly and packaging, and that's enabled us to at least reduce the impact of this. As it stands today, assuming that we do get back to normal production later this month, we feel that while there is an impact in terms of timing of shipments, that we think by the end of the quarter will be largely recovered from this and that it won't have any material impact to our revenue for the quarter, it will affect linearity. We will ship less likely in January. We will ship more in February. Overall, we'll be recovered, but linearity obviously will get impacted and of course, that affects the cash flows and so forth. And then what was the second part of your question, Harlan, that you asked? Is there anything else?

What types of the -- are there particular SKUs of DRAM that Xi'an supports, like mobile or server or...

Not necessarily. Obviously, with Xi'an being in China, obviously, that drives us to deliver probably more of our Asia and, in particular, China needs through that facility. I think as a lot of people know, when we produce in Xi'an and bring that product back into the U.S., it incurs a tariff. So we try to avoid shipping to U.S. customers from our Xi'an facility. So it's a broad array of products that we produce in that location.

So is the -- so is the view that Q2, both from a shipment perspective, and I know the team was planning to build -- use Q2 to also build inventories to support a strong second half. So is the view from where you're sitting at right now is both from a shipment perspective as well as from an inventory build perspective that we should be -- that the Micron team should be relatively okay for Q2? It might be more back-end loaded, but nevertheless, from a guidance perspective, things should still be pretty much on track?

That's right. Yes. So it will be more back-end loaded than we had originally anticipated for the quarter, but we'll be on track.

Okay. And then...

Obviously, I'd just point out anything could change. Obviously, if things got worse, obviously, that might further impact how things play out for the quarter. But assuming that we do get back to full production later this month, assuming the COVID cases remain low there and movement is allowed, we should be fine.

So the bottom line is you were targeting to grow calendar '22 bit supply growth in line with the industry at up mid- to high teens type of growth. So I think the overall conclusion from what you're telling me is that view still doesn't change.

That view is intact. Assuming that obviously, the situation is fluid, not only in Xi'an, but across the globe, and we will continue to have to likely flex our supply chain to be able to manage through situations that develop over the course of the year. But as we stand today, we're on track.

Well, kudos to the operations team for the strong execution. So you were already facing some gross margin headwinds, right, from COVID-19 mitigation costs. Do these maybe add near term to potentially further add some gross margin headwinds, maybe just in Q2?

Yes, I think it will be relatively minor, but there could be some increased expenses associated with this. I would tell you that we have budgeted, quite honestly, for a lot of these circumstances to arise, quite honestly. And part of the way we're flexing our supply chain on the back end in assembly and test is having redundant capacity available to us. And so by having this -- we're paying the bills, so to speak, for a lot of what we're doing to enable us to recover from this by just having that, what was underloaded and now has to be more loaded to be able to overcome this. There might be a minor impact. I would tell you, our first priority is the team members. Our second priority is making sure we deliver on the shipments. And if it costs us a little more, so be it.

Okay. Absolutely. So -- no, I appreciate the update there. That was a great update. Thank you for that. And congratulations to the operations team for being able to work through this. So as we start the new year, the fundamental setup looks pretty strong for the team, right, strong underlying global macroeconomic growth, cloud and hyperscaler is looking to increase CapEx spend by about 30% this year. You've got 5G. You've got enterprise recovery on top of that, strong 5G shipment, smartphone growth this year. And PC shipments are expected to remain relatively flattish off of strong growth in '20 and '21. So given that backdrop, what end markets do you expect to drive the strongest demand for Micron? And what areas do you think are going to be relatively weak as you look at calendar year '22?

Yes. I think notwithstanding the risk, I guess, as it relates to COVID over time. And hopefully, that is manageable for us. I think the setup for this year looks quite, quite good. In fact, Sanjay mentioned on the call, I think he mentioned it in the prior call as well, that we felt really confident that we would get a record in terms of revenue. If you remember, 2018 was our prior record, it was $30.4 billion. So we think we'll beat that number. I think, if anything, exiting the first quarter, we felt even more confident about our ability to achieve record revenue for the year. So we're in a good place, and it's really largely what you're talking about. Really all the markets look healthy. The markets that we know are going to grow at a relatively brisk pace through the year is for one data center, both in terms of cloud and enterprise. As you mentioned, the CapEx investments look quite strong. When you look at AI and machine learning workloads, they carry more memory. So as workloads transition to those type of activities that's certainly going to be beneficial to us from a content perspective. As the new architecture, CPU architecture has come out, they have more cores. Generally, memory per core is a fairly consistent ratio. And so we would expect content growth there. So we're expecting a good CapEx cycle for the data center and a good content cycle all happening at one time next year and so -- or I'm sorry, in '22. So that looks to be a great market for us this year. Secondly, as you pointed out, the automotive and industrial markets are screaming, quite honestly, from a memory -- from a content perspective, really across the board, but certainly in the memory and storage space. And I'd say, in particular, in the automotive space, not only as ADAS becomes more attached to the vehicles, but also even EV is just driving more -- a lot of the newer EV cars have come out with significantly more bells and whistles and digital screens and so forth, and all of that requires more memory and storage. And so we're seeing significant content increases in automotive. And the great part about that, that is, at least from a unit perspective, it's a 90 million unit a year roughly market, and so if those evolve to data center on wheels type applications, which certainly at the premium level is starting to happen and probably will proliferate down through the other tiers of automobiles, that's going to be a tremendous driver of growth. And we're going to see that. I think a lot of that happen in '22. We're also -- a couple of markets we don't talk a lot about are the graphics and networking markets. Those also look like they'll have very strong growth in '22. We have a good position, obviously, in graphics with our GDDR6 and 6X product offerings. And so that looks like that will also drive good growth for us. As you point out, on the mobile side, we're going through this 5G transition, likely be somewhere in the 500 million units in '21 going to 700 million units of 5G handsets in '22. The content increase in mobile is 50% more DRAM on average, 2x the storage on average, some of the SKUs are even significantly higher than that. So mobile will be a strong driver of growth. It may not grow as fast as some of the markets I talked about before, but it can certainly be a driver of growth for us. And then as you mentioned, the PC market, obviously, is -- has had a couple of years of pretty significant growth relative to history and is now running in 330 million, 340 million dependent accounts kind of unit levels. And while it's hard to envision that has another year of 10% growth, I think, clearly, this is a new normal for the PC space. There's just more PCs per household and that will just kind of continue and then there'll be refreshes of those, and it's the new era of working from home and educating online and so forth that I think exists. I think the other aspect of the improvement on the PC side for us is last year, while it was a strong year for PCs, also was more Chromebook than it was kind of enterprise level PCs. And this year, we kind of see Chromebook probably not being that strong, but the enterprise grade being a lot stronger with refreshes and so forth. And that's good for us because the content is higher in, obviously, a more robust PC. And so even while the units might be flattish or plus or minus a bit, the content growth for us just because of that transition is going to be quite healthy. So again, it probably grows the least out of all of them, but still is not going to be flat for us year-over-year. And also, at some point here, we'll start to see the logjam of what's happened in the PC space with the inability to get max set a parts. That's going to -- I mean we already started to see that stabilize as we exited the first fiscal quarter, second fiscal quarters, probably trying to getting the sea legs back on that business, and the third and fourth quarter could actually be a little bit more of a tailwind for us. So we're set up for what I said at the beginning, a really good year because pretty much every market is working for us this year. And then on top of that, we have a much more robust set of product offerings, including the recently announced NVMe, SSD into the data center space that I think really also helps drive some momentum for the business.

The team talked about on the earnings call, data center and enterprise has been the largest drivers now for the Memory and Storage industries. For Micron, specifically, in DRAM, the Mobile historically has been the biggest market, right? But with cloud spending up 20% last year, up 30% this year and with the additional tailwind of the enterprise recovery, is data center and enterprise, i.e., server and networking DRAM, now the biggest part of your DRAM business, surpassing your Mobile DRAM business, in terms of bits and revenues? And is this mix shift actually also accretive to your margins?

Yes. So good question. Obviously, we're pretty bullish about the data center space and the growth rate of data centers on a go-forward basis for all the reasons I just discussed. And that's likely to be an increasing part of our business. And since it will grow at a faster rate than I think some of these other markets, for sure, it's going to become a more dominant part of our business. It's good, obviously, in terms of profitability. It -- I think also we have done, I think, a very good job of getting better customer engagements, really understanding customers and application needs and really trying to drive solutions that give customers to the performance they want. And our DDR5, which I'm sure you'll ask about DDR5 here at some point, but our DDR5 has got -- we got a good head start on that, and it's a really good product. So I think we have the opportunity not only to see a market grow really well, but, for us, I think, execute quite well in that space.

Along with the strong demand backdrop entering 2022, the team and your customers were also dealing with, as you mentioned, non-memory component shortages, right? But it looks like component shortages are easing for your customers in both PCs and servers, at least, if we look at the recent sort of ODM production data. Do you expect your customer situation to improve as we move through 2022? And Micron, obviously, is also component constrained, especially on DDR5 components and SSD controllers. So how do you see the situation improving as we move through this calendar year?

Yes. So it's a good question. Fortunately, I think we already see some improvement on the PC side, and that was the market that we were seeing the most challenges, at least, on their side in terms of procuring all the parts necessary to build an application. And of course, though, the situation that has been challenged in all the markets, to some extent, and there's been obviously widely reported challenges in the automotive space. So this wasn't unique necessarily to PC, although I think much more pronounced in the PC space. We already start to -- we're, as I said, already starting to see things stabilize in the PC space, and we would expect things to improve over the course of the calendar '22 year. And I think that's true in all the other markets. We do expect things to gradually get better through '22. We also have our own where we're buying PMICs and so forth. And there have been some tightness in supply there. I think we've done again back to the operations team and just the excellent work they do. They've done a lot of work to make sure that we have continuity of supply, and we're getting the right mind share from our suppliers to make sure we can build the parts when we need them. It's tight. It's sometimes day-to-day at times. But I think we've done a fairly good job, and I would expect also that situation to improve over the year. Of course, the only caveat to that is we just don't know if there will be another disruption somewhere that affects things. We'll have to keep our ears to the ground and make sure we're close to the -- close to our suppliers to make sure that we don't run into any issues and stay close to our customers to make sure that we understand where their ability to build is relative to their demand, and we have kind of shifted around the business accordingly.

So one question that we constantly get from investors is the inventory situation, right? And I know that your customers' inventory situation, and you guys mentioned in earnings that although inventory strategies may vary from customer to customer, you thought that overall inventory levels at customers are in decent shape. Can you just elaborate a bit more on where you see current level of channel inventories by end markets, servers, PCs, mobile, embedded, and your expectations as we progress through the year, especially as it feels like as we progress through the year, demand is only going to continue to get stronger.

I think when you look at it on a market basis, there is no specific market that has seen a relatively high level of inventory, other than, certainly, as we walk through the first quarter, we were seeing high levels of inventory in the PC space, but that has improved significantly since as we've exited the first fiscal quarter. So I think, in that regard, we're in reasonably good shape across the board in terms of inventory. There are customers that have higher levels of inventory versus others. Some of that is demand shifts and market share shifts between customers. Some of that is their own need to be ramped up. I mean we do think that things will strengthen through the year, obviously, and we will need to strengthen our inventory position over the next couple of quarters to be able to support that. And also our customers, obviously, will need to do that. And also, with all the challenges we all have, in terms of navigating the supply chain challenges we face, it just makes sense to err on the side of having a bit more inventory, particularly in raw materials versus not. And so I'm not too concerned about inventory across the board. I think, when you look at where we think demand will be through the year, it looks appropriate.

So the computer industry is making this move, right, to next-generation DRAM memory architecture called DDR5 faster bandwidth, higher density. We'll see adoption in PCs or we are starting to see adoption in PCs now. Intel, AMD, both announced a whole bunch of new platforms yesterday. Servers adoption towards the back half of this year. At a high level, can you just help us understand PCs, what's the rough average potential content gain versus DDR4 and kind of the same thing for servers when we look at the DDR5 transition?

Yes. I maybe characterize it as we are definitely getting a premium for DDR5. There's no question about it. I would prefer not to mention what level of premium. It probably depends on the circumstances. But for sure, we are getting a premium on DDR5. One of the aspects of DDR5 is that it has a bigger die size. It has error-correction. It needs power. Those things drive increased cost. And our model is to find opportunities where there might be increased cost and engineering and -- but deliver good value to customers and charge appropriately for that. And generally, our strategy is, I think, had been pretty beneficial to our gross margins, which is ultimately what we're trying to accomplish. DDR5, as you point out, we'll start in the PC space, and we'll migrate over to the server space. We would expect by the end of the year, we'll exit with probably a 20% mix. I think Sanjay mentioned this DDR5 in compute. And obviously, it will ramp from there as we progress it'll be with the lion's share of the Server business by 2023 or so or 2024. So it will take some time to ramp up, but we have, I think, a very good position on DDR5 and I think a good approach to how we're going to manage the supply there versus the rest of our DRAM market. The only other thing I'd say is because it has this die penalty, it does constrain output, which is actually somewhat of a positive because that keeps the DRAM market, I think, more disciplined from a supply perspective. We said we felt like it was going to be in balance for calendar '22. And a lot of that's just good CapEx discipline across the industry. But some of the dynamic is the fact that DDR5 is becoming a bigger mix of the business and because of the increased die size compresses the ability to grow bits.

A question from an investor. So on the end markets, it sounds pretty bulletproof for the year. Curious what could potentially cause any downside surprises on the demand side?

I mean this is probably the answer probably a lot of CFOs give, but the thing we worry most about, obviously, is the macro. And I think more specifically, the supply chain and the more it improves, I think the better the circumstances are for us and for everybody in the industry. And obviously, some big perturbation would create probably a hiccup. But I think supply chains, in general, have become more resilient, more robust. Everybody has, I think, invested a lot more in them. And so their ability to take hits from unexpected disruptions, I think, is a lot better.

So going back to the businesses. So on your NAND SSD segment, the team has actually driven very strong growth in enterprise and data center SSD. This is even before the launch of your latest generation 7400 NVMe platform, right? And I think this is due to the team's leadership in SATA-based SSDs, which is still a pretty big part of the overall enterprise systemic. So I believe that your enterprise SSD business is probably now about the same size as your client SSD business. First question is, am I in the right ballpark? And then secondly, what sort of the traction you are getting with the new 7400 data center NVMe platform that you introduced in October? And do you expect a meaningful mix shift towards NVMe here this year?

So data center SSDs is still a good chunk of our SSD business. And quite honestly, we've been able to carve out a really strong position, as you mentioned, in SATA. And that's enabled us to, I think, maintain a good level of revenue coming from that business. Now a lot of the markets are transitioning to NVMe. And so to just rest on SATA, while your statement is within the reach of you true is would not be probably sustainable. It didn't have a robust NVMe portfolio. So that was important for us to get there. It was a lot of hard work by the team to get a fully integrated SSD with our own controller to the marketplace. We've been able to do that. I think the calls are going quite well. I think it will be -- will be a needle mover for our SSD business, even in fiscal '22. Obviously, we have to continue to evolve the product portfolio by generation to improve our position, but I think we're really on the right track. And that's one of the other reasons why we feel so good about '22 is now we're starting to see the hard work on the product side, which is hard -- we did, I think, a lot to improve the process technologies, to get to a leadership position on both DRAM and NAND with our 1 Alpha and our 176 layer on the NAND side. What we really needed to do is start getting the products out and have those at the right level of performance. And we have had, obviously, success there, but there have been some gaping holes and one of them was in the NVMe portfolio and in the data center space was kind of our last area that we need to conquer. And we have done, I think, a great job of getting there at this point. And the good thing is it creates a lot of flexibility for us for our NAND bits to -- we tend to look at the NAND bits and try to look at the margin and the profit per wafer, per NAND wafer and try to drive that to as high a level as possible. And you got to have a complete portfolio to be able to do that in data center is one of those markets that has good -- really good profitability on a relative basis in terms of profits per wafer. And so I think we'll see that this comes a tailwind to our gross margins as we start to gain traction in the data center SSD space.

Terrific. And then on the financial front, OpEx is up 9.5% sequentially this quarter. You anticipate R&D spending up 15% this year. You just talked NVMe as a great example of product momentum and innovation. As it relates to R&D spend and the commitments, you've got your EUV development. What other initiatives are you focused on, especially on higher value-added products? I can think of things like SSDs, MCPs, emerging technologies, like CXL, but where is the increased R&D spend going to be directed towards this year?

So you're right, Harlan, we're going to double down on the product side. CXL is great example. Some of them are -- maybe I don't want to discuss at this point. But there's obviously evolutions in MCPs and in SSDs. And as I said, there's more generations to go in NVMe SSDs, and that takes a level of investment that drives some increases in R&D. We also are now working diligently on getting EUV ready for high-volume manufacturing. And so we have bought an EUV tool for the R&D group in their pilot line and we're starting to incur the depreciation from the EUV tool. That's driving some of the activity as well. And then we have our next generation of nodes that we're working on. And as you work on those nodes, sometimes, we are using even the high-volume manufacturing facility run pilot volume through and their incurring expense there. So that's also driving some of the expense. But I'd just tell you, we've generally been, I think, very good at keeping our OpEx as a percent of revenue at a pretty reasonable rate. It's roughly in the low-double digit as a percent of revenue, which is obviously, us being -- we're pretty frugal when it comes to our investments, but it does make sense to make smart investments at the right time to hit the market at the right time. Ultimately, that our goal is to get the highest ROIC possible for investors. And I think this year's step-up in OpEx, we'll find a couple of years from now that, that delivered incremental ROIC.

Yes, absolutely. The team has a good track record on that. Well, we're out of time. Dave, thanks for the insight. Thanks for the update on the Xi'an dynamics. And it looks like 2022 is setting up to be a strong year for the Micron team. Thank you very much for participating.

Thank you, Harlan. Thank you for having us, and thanks, investors.