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

Good morning, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets, and we are pleased to have Mark Murphy, CFO; and Farhan Ahmad, VP of Investor Relations, from Micron with us. Thank you guys for joining us.

Thanks.

Looks like you guys put out an update this morning on changing market conditions. So Mark, I figured I'd just give you a few minutes to kind of update us on just how we should be thinking about your outlook going forward.

Sure. Thanks, John, and good to be here. And thank you, everyone, for joining us this morning. Before I start, I want to provide a safe harbor. I'll be making forward-looking statements. Those statements have risks and uncertainties associated with them. I ask -- or I refer you to our more complete risk factors disclosed in our public filings. We did file an 8-K this morning. But what I'd like to do is maybe start my comments with comments we made on our third quarter earnings call. At that time, we pointed to challenging market conditions and weakness particularly in PCs and smartphones. We -- at that time, in this August quarter, we anticipated there would be inventory adjustments in PC and smartphones and then some isolated adjustments in some other areas like enterprise. And that happened, of course. But actually, in the quarter here that we're in, the August quarter, it's broadened and actually weakened more. We're seeing inventory adjustments across most end markets. That includes the cloud. Now the cloud is a bit of a unique case because we still see strong end market demand. So cloud adjustments are likely just customers taking stock of the macro uncertainty, maybe the market conditions, and thus adjusting their inventory levels down. We do see some isolated supply chain disruptions affecting cloud as well, but it's principally macro and market conditions, inventory adjustment. We're also beginning to see some inventory adjustments occurring in automotive and industrial markets. And so that's beginning, and we'd expect that to continue through this quarter and into our first quarter. And then, of course, we see PC and smartphone and enterprise continue to be weak. So it's a challenging setup for this quarter that we're in and our first quarter. In conditions like this, you -- we've chosen to build up our inventories even more as a function of just the pricing in the market is -- I think is not reflecting fair value for the products. And so as a result of market conditions, we believe -- our August quarter, we believe, will be -- come in at or below the low end of our guidance range. Looking out into the first quarter, we expect sequential bit decline shipments, and that will lead to a substantial reduction sequentially in both revenue and margin, a combination of that lower income in the first quarter, the inventory build that we're doing and then some CapEx for critical programs. It's very difficult to stop CapEx in the very short term, and we have some very critical technology programs we need to invest in. As a result of those three things, we do expect to be negative free cash flow in the first quarter. If we step back to the industry with this market backdrop, we now see calendar year '22 bit demand growth to be below the long-term trend. We believe DRAM will be mid to high single digits growth. We believe NAND will be low- to mid-teens growth. That's contrasting what we view as the long-term demand, DRAM, mid to high teens, and NAND about 28%. So substantially down off the long-term trend. As a result of that slower bit growth, we are adjusting our supply, and we're doing it quickly. We said it in our earnings call. For the third quarter, we said we are reducing CapEx. We -- actually, we said we're reducing -- WFE would be down. Now we're seeing our entire CapEx across all different forms of it to be down, and we expect to be down in FY '23 versus FY '22. So that's -- happy to answer questions. But before we go to questions, let's look longer term because the position of the company is very good. In fact, as we go into this downturn, what gives us some confidence is that the company is better positioned than it ever has been going into a downturn. The balance sheet is rock solid, the technology leadership is clear, and that's evidenced by even the latest 232 announcement ramp there and 1-beta later in the year. The product portfolio is as strong as it's ever been, and we're targeting the right markets. Our manufacturing capabilities are outstanding, and we're adapting very quickly to this environment. So long term, I would encourage folks. We're certainly stepping back. We're doing what we can do to control the short-term situation. But long term, I would refer you to the model. Through cycle, what we expect this business to deliver, we expect the business to outpace broader semi growth. We think memory and storage are underpinning a lot of the advances in technology today, be it AI, automotive applications, others. Just increased compute generally. And then our margins, we expected over the cycle to be 30% operating margins, low 50s EBITDA margin. We expect to generate free cash flow over 10%. Our -- thinking even longer term, company announced today the investment plans in the U.S. with the help of the CHIPS Act, and that's to support what we think is durable DRAM growth. And that's investment out to support DRAM demand in the back half of the decade. So dealing with the short term, the market's worse than we thought it would be it went -- on our third quarter earnings call, but we're responding both with our cost structure and the supply side. And -- but the company is in a fantastic position for the long term.

Great. Thanks for that update, Mark. Maybe just to follow up on a couple of things that you had talked about. First, about the inventory correction broadening. I wanted to clarify, are you also seeing the inventory correction worsen in your core markets that you previously talked about being weak in PCs and smartphones? Or is this more of a broadening effect across the other end markets that you're seeing?

We see even more weakening in smartphone and PC. I can't say it's the most intense weakening we've seen, but we are seeing weakening. And we're certainly seeing broader weakening.

And then just to follow up on that, can you talk about what sort of visibility you guys have in terms of customer inventory levels? And you obviously talked about kind of the quarter outlook. Do we have any sort of visibility that, that could be the bottom at this point?

Well, we've said before it takes a few quarters for these things to work out. So it's hard to say. This is more severe than we thought when we were doing -- during the earnings call. So whether that's a couple of quarters from now or 3 quarters, it's hard to say. Our visibility with customers is mixed on inventories. It's certainly better than it would be otherwise if we did not have long-term agreements. So we have long-term agreements with most of our customers. That's a very helpful formal agreement to establish good working relationship for both of us to make sure we have ample supply and have good visibility on their demand. Those LTAs are being very helpful right now. So to the extent that a customer is having difficulty making their commitments under the LTA, there's escalation in that document that goes all the way to Sanjay. And Sanjay will have CEO-to-CEO discussions with customers. So that helps. And then it also helps us give some visibility -- these LTAs help to get visibility on inventories because if a customer is trying to work with us, they will normally indicate what sort of inventory levels they've got and what their outlook is. So we do our best to get visibility through that and other means on inventory levels. Inventory levels have been coming down versus the levels they were. They're still not down to pre-COVID levels. We wouldn't necessarily expect them to go that low given changes in supply chains and people's sensitivities around inventories. But we have been seeing them come down.

I did want to follow up, Mark, on the LTAs. I think the hope that a lot of investors have with a lot of companies talking about entering into these LTAs is that it would help companies kind of navigate going through these cycles. But in your case, it seems like, at least in the beginning right now, it's -- it hasn't really helped with kind of the visibility upfront. So maybe can you just talk about how you're expecting these LTAs to kind of help you get through this correction here?

I think they have helped, actually. It certainly helped relative to not having them, right? I mean they're not take-or-pays. Certainly wish they were, but they're not. And that's not the way the industry works. But they serve a very valuable purpose to establish formal relationships with customers, that improve the ability to work with customers on not only supply/demand but get close relationships to work on technology. And then as it relates to supply/demand, it's important that we're getting clear demand signals that are not overstated and that we can, at the same time, give customers assurance that we will have product for them. And these are serving very effectively for that purpose. And then, as I mentioned to your inventories question, they are serving a good purpose to just get better visibility on the customers' view of their own inventories and their particular market segments' inventories.

Great. Are there any questions? Just a few more follow-ups, and I'd love to move on to kind of maybe more longer-term stuff. Just on auto and industrials. I think on data center, you're pretty clear that there's an inventory correction, but you think end demand is robust. What's your view on auto and industrials? Is that also an inventory issue? Or are you also seeing end demand weaken in those end markets?

That's a good question. And I'd tell you, it's a very recent development. So it's one of these things where early on, you're trying to get a signal as to what's the nature of the adjustment. And in this case, what pops up is some sort of supply chain disruption or kitting issues. And so there's certainly that effect. But we are seeing pockets where there's probably end market demand issues maybe related to consumer. The -- at a minimum, companies are -- given the macro setup, companies are being more cautious about inventory levels they hold. And so you're probably seeing that begin to move into those spaces. But we'll see. We'll learn more about that over the next several weeks. But we're seeing clear signs of weakness in those markets. And thus...

Obviously, with the weakening outlook, WFE, you're saying it's going to be down more meaningfully than you previously expected. Can you just give us more color in terms of what does meaningfully mean? And is there a way to kind of frame that into next year?

We'll quantify it most likely at earnings. We are in the process now of avoiding reducing delay on CapEx. I mean we are pushing things out. We are canceling. We're actively doing that. I spoke with our VP of Operations last night. So the -- it's very difficult to change the CapEx in this current quarter, which is contributing to a free cash flow-negative quarter forecast, But in time, we see total CapEx being down year-over-year fiscal '23 to fiscal '22.

Okay. and with...

And the -- just one last thing. I mean we're responding to a market condition where supply needs to be adjusted. And these toolmakers are our partners. They're important for us as we are for them. And they understand that we need to work through this and figure out a way to rightsize the capacity.

In terms of free cash flow turning negative in Q1, do you still feel you'll be able to hold to the cross-cycle model that you recently talked about, 30% op margins and 10% free cash flow margins in this cycle?