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

Okay. Good morning, everyone. Welcome to day 2 of Deutsche Bank Tech Conference. I'm Sidney Ho. I cover semiconductor, semi-cap equipment and IT hardware at Deutsche Bank. So our first company today is Micron. Micron is one of the largest memory suppliers in the world. Today, we are very excited to have Micron's CFO, Mark Murphy, and welcome Mark.

Yes. Thanks, Sidney, and thank you, everyone, for joining us.

So we'll make this session as interactive as possible. So for those who are in attendance. If you have any questions, you can raise your hand, we'll run a mic to you. So with that, maybe I'll just kick it off with some the interim questions. So a few weeks ago at another conference, you talked about a broadening of inventory adjustments beyond just smartphones and perhaps into other end markets. Can you maybe just walk us through what you've seen since then and give us an update there?

Sure. I'd be happy to do that. I'll start with the safe harbor. So I'll be making some forward-looking statements. Those statements have risks and uncertainties associated with them. I ask that you refer to our more complete risk factors, which you can find in our disclosures in our public filings. We did provide an 8-K on August 9 update market and business conditions. There's no update today. What we saw, as we said in the 8-K was that we saw a widening of inventory adjustments, which we had previously seen primarily in the consumer space. We now see those in this quarter across most market segments. And in addition, we saw the consumer space weaken more. We indicated that our fourth quarter revenue would be at or below the revenue guidance that we provided at the earnings call, so below -- at or below 6.8, which is the low end of our range. We also said that we expect for there to be bit shipment decline from the August to the November quarter. As a result, we expect significant revenue and margin decline in the November quarter. As a result of the revenue decline, the inventory build we're seeing and the short-term effects of trying to cut CapEx, which takes a bit of time where we said that we would see negative free cash flow in the November quarter. So the business conditions are as we set in the 8-K are weak and the financial performance is challenged in the near term. We're taking aggressive action. We immediately have -- we've been building inventories out of a position of strength as the business conditions are unfavorable. We've let our inventories increase to maintain price discipline and we're walking away from business. We've also aggressively revisited our CapEx plans. It's difficult to do things in the short term. So we're going to have this elevated CapEx in the November quarter, which will contribute to negative free cash flow. However, we're confident that we will be down on CapEx fiscal year '23 to fiscal year '22. And that will be down total CapEx, and it will be down WFE. I mentioned inventories. We said that inventories are going to grow in the August quarter and then they would grow again in the November quarter. We now expect, given the market conditions for that -- those inventory levels to be over 150 days DIO in the November quarter. And finally, we're -- we've taken some actions on utilization. We will continue to evaluate that and respond as market conditions require. And we're also working OpEx, as you can imagine, given the market conditions. Now as much as the market conditions in the near term are weak and the financial performance challenged, we're both confident and committed to delivering the financial performance as the company laid out at its Investor Day. In the end, we're -- we enjoy a market where memory and storage underpins the digital economy. So we believe that memory and storage will outpace broader semis. We enjoy a product and technology leadership position, which we intend to maintain. With the long-term demand prospects on DRAM, we do see, as we've stated before, the need for additional capacity at the end of the decade. So we've communicated before on our plans to invest approximately $40 billion in the U.S. across a number of different phases, again, to support very long-term demand requirements. And that's made possible in the U.S. by the bipartisan and very effective CHIPS Act and the associated grants and investment tax credits with that legislation. So we're pleased to see that. And as you saw today, we've taken the first step on that $40 billion through announcement of an investment in Idaho for expanded capacity there. It has the benefit of being co-located with our R&D center. And it's, again, to support the growth that DRAM requires at the end of the decade. So I think my final comment would be the near-term challenge. There is a supply-demand imbalance, which is severe at the moment. We are doing our part to get supply/demand back in balance. Longer term, we would modulate our investment plans to grow with the demand requirements and maintain a supply-demand balance in the industry.

Great. That's a good overview. So I'd love to double click on a lot of things, as you mentioned. Maybe just starting off with the demand side of things. I think the -- on the end market side, you have mentioned that the inventory adjustment is spreading enterprise. I think since you guys preannounced -- a few other companies have mentioned that. So I'd love to hear what you're seeing particularly in the enterprise market. And then on auto and industrial, you also mentioned a few weeks ago that you're just starting to see the trends change. How are you thinking about those 2 markets right now?

Yes. On the -- and on enterprise, you're talking enterprise data center or PC?

Non-cloud.

Non-cloud.

Yes.

Okay. So we have seen the end market demand is healthier in server than not, of course. In the enterprise, and I believe we've mentioned this, we have seen a bit more weakness than we've seen in cloud. Now both markets, because the broader market is weak, both have been doing inventory adjustments. But longer term, we would expect those markets to be amongst the first to recover or begin to purchase memory again. On the -- on automotive, as I mentioned, last public event, it's early on, on what we're seeing. We're seeing some inventory adjustments. And it's unclear at this point as to how much of it is supply-related disruptions and kitting issues, things like that. I presume that it's mostly that, but there could be some indications that often when that begins to happen, there's a demand signal that begins to erode. So we're watching that carefully, still don't have a signal that's better than we had at -- on August 9.

So maybe on the cloud side, you mentioned there are some inventory adjustments. It doesn't seem like it's across the board. But generally speaking, the demand, I think, among investors know that the cloud side is still pretty good. Are you seeing different trends in different regions, different sizes of customers? Any color there would be great.

We're generally seeing customers across most segments adjusting inventories at the moment. And again, it's macro effects. It's some supply chain disruptions. But we know that the end demand in cloud is healthier than most other markets. So again, I think that's a case where we definitely see broad-based inventory adjustments and competitive pressures in cloud at the moment. But again, it's less related to end market demand, more related to, in the case of that market, more related to the market conditions and again, maybe some kitting issues.

And it's the same for U.S. cloud guys and non-U.S.?

Yes, I wouldn't -- we've not called out a distinction.

All right. So when I look at these inventory adjustments, is it -- are there any discernible difference between DRAM and NAND? Is it -- is one weaker than others? And Also, how is the inventory adjustment, the rate of which the inventory is coming down? Is it better on one DRAM versus NAND?

They're both unhealthy, and we expect the inventories to worsen, as I mentioned in my opening comments through the November quarter. DRAM is in a better spot than NAND. So NAND is more elevated on inventory levels. So we'll just have to see how that plays out. We have visibility through the November quarter that inventories will be elevated. But as you know, it depends on a number of factors after that quarter. How quickly the industry adjusts on supply, what happens to demand and then when do customers feel that the market environment and such that there incented then to buy again.

So I was going to ask you when do you think the inventory adjustments will be over, given what you've seen today. That seems like there's a number of factors that you guys are monitoring?

Yes. We're monitoring continuously. And as you can imagine, it's ever changing. We have said that these things take a couple of quarters to work out. So I think that's sort of, I would say, the minimum case. This is a severe supply/demand imbalance at the moment. And the question is, does that lead to actions that rectify the supply-demand imbalance and then that couple of quarters is a decent view? Or does it take time to rectify that? And what happens to the broader economy? So there are factors that could be longer than a couple of quarters to work through, and we're just trying to constantly take stock of that.

Okay. That's helpful. So maybe moving on to your inventory. You mentioned that exiting this -- exiting November quarter, you expect to be over 150 days. At this point, do you think that is the peak level and it will start coming down based on all the actions that you have?

We don't know. And as I mentioned in response to the last question, beyond the November quarter, we just have to see how the supply situation evolves and the demand environment. If the economy -- if there's a softer landing, then I think 2, 3 quarters is a reasonable view. If there's a hard landing than we could see more elevated levels through fiscal '23. We're just going to have to -- there's a lot of variables and we'll see how things develop.

Okay. So as inventory goes up, is there a level that you have to start thinking, hey, I have too much inventory. And in the past, right, all you need is basically one supply saying that we're going to get rid of inventory by lowering prices. How confident are you that this is not going to happen -- or this is not going to happen this cycle?

I mean we're at the point now where we're not pleased with our inventory levels, but we're doing it deliberately because it's part of maintaining supply -- price discipline. And we see the growth over the long term for the inventory. And again, I've mentioned this before, it's leading node inventory. So it's good cost inventory, and it will stay competitive for a long time. So we're deliberately building it. It doesn't mean we're pleased with it. We're just deliberately doing it. And then we will strive between supply actions and product selection and again, pricing strategies that we will over time work it out in the most economic way. And it will work out eventually. It's just -- it's a matter of timing and market condition.

Okay. You talked about the actions that you guys are doing, lowering the production or lowering that, I should say, CapEx. So you did mention cutting CapEx on WFE as well as overall CapEx. Is there any high-level comments you can help us think about, is this a production cut? Is it a CapEx cut? When do these actions start impacting the actual bit supply growth?

I mean they start impacting bit supply growth fairly soon. It's tough to adjust profile this quarter, but increasingly, actions would affect the supply growth early next calendar year. But again, we've got substantial inventories to work through. So we can do that, and that's our intention. I will take this opportunity to note that we're certainly -- we're entering a phase as we begin to build out towards the end of the decade. Some of the early spend over the next few years will be weighted kind of more to construction than usual. So we're trying to deal with that and what's the timing of that construction. But certainly, in the near term, we've communicated to tool vendors, our need for less tool capacity and a change in timing for many tools that are inbound. So -- and I think you've heard that play out through the OEMs in their public comments.

Okay. Well, as you cut equipment spending next year, how should we think about the impact on your transition to technology nodes, whether it's 1 beta DRAM or the -- I think 232-layers 3D NAND? Does that have an impact on them.

Well, we expect to maintain technology leadership, and I'll make that broad statement. As you rightly point out, the CapEx decisions have a couple of dimensions in a principal way or in a simple way, there's the technology node dimension. So are you advancing the technology and being able to do the prototyping and then have HBM for the new nodes. And then there's the capacity required for how much of that new node do you install. So we're working on those -- that balance of, okay, we certainly need less capacity in the near term, but how do we most efficiently -- most CapEx efficiently advance the node. And what's the timing on that? And so we're -- again, we're working through that actively.

Right. So I understand that the equipment spending part being cut, but the non-equipment part, you talk about this, is it -- does that mean just generally slower construction timing? Or are there other maybe back-end capacity that you're not adding? Any color around the non-equipment side will be good.

You're right. I mean these -- there's many levers. There's a tools for capacity on the front end. There's construction in our plans there, and we can modulate that, which we're doing. There's the back end and again, modulating our own in-house versus how much do you do in OSATs. So there's a -- the good news is there are a number of levers that we have to pull and we're working to how to pull those levers most efficiently.

Okay. Maybe switching gears over to talk about your supply chain. The -- I think there's still a lot of COVID control measures in China. There are -- it sounds like there's still a lot of lagging edge IC being a problem for a lot of companies in the industry. And even maybe give us an update on there. Also, you had a power disruption at Hiroshima facility. Just maybe give us an update on that as well.

Not a lot to update on either of those items. The team continues to do a great job of managing all the supply chain factors in China. And I saw today, there was another announcement of a lockdown. So -- and our team has done a great job of maintaining compliance with local regulations, of course, but also maintaining production and not having it significantly disrupt our operations. So that continues. On Japan, no further update to what we said. We did have a power outage there. It did impact some WIP. And there's actions underway to address that brief period that things were down and no update to report on that.

Okay. Great. So let's switch over to talk about CHIPS Act. I mean in your prepared remarks -- no, prepared -- answer earlier, you talked about the $40 billion investment that you guys announced. You talked about the $15 billion you announced today. How do you -- how should we think about the timing of all this $40 billion and the $15 billion debt when you spend, how do you envision the strategy behind the government credits and how that impacts your net CapEx going forward?

So I would view it more as our financial model is intact. And that's the most important thing that we have. We have a model whereby we're going to spend CapEx that will support the business, the supply growth needed for the space, and we'll modulate that investment based on our view on demand. And again, the supply/demand of the space. We're committed to deliver a model that generates over 10% free cash flow growth. The CHIPS Act which is, again, as I mentioned, is a great piece of bipartisan legislation. That makes the U.S. competitive to build capacity. And the Idaho fab will be the first greenfield memory capacity in over 20 years. And it doesn't really change the outlook on how much CapEx we would spend because if we didn't -- if we were unable to spend it in the U.S., we would spend that money overseas, would expand in our existing sites or build a new site overseas. So I think as it relates to our financial model, I would just go back to that and say, it doesn't change our financial model. It just changes the ability to diversify our supply or our capacity base, which we intend to do, and CHIPS allows us to do that here.

So how does this investment in Idaho in the U.S. impact your plans for investments overseas? So you have a manufacturing base in Taiwan, Singapore and Japan today.

We'll still continue to invest in those sites. I mean, we will still do node transitions at those sites when it's appropriate and expand capacity in that way. What we're talking about here is greenfield capacity. And which, as we look out at the end of the decade, given the slowdown of Moore's Law, we're going to need new wafer capacity. So we are -- yes, that's what we're talking about. And so Idaho is the first step, again, enabled by CHIPS-related legislation. Supported by the R&D, we also do in the -- also do at the site. There are some synergies around that. Makes Idaho a good first step in a large investment. And then we're also looking at several other sites in the U.S. for greenfield expansion, and that process is underway.

Okay. Great. Maybe I'll pause here for a second if there's any questions in the audience, I'll run the mic to you.

I just had a quick question. Given the timing of the inventory issues, as it pertains to the seasonality of the year, does that make you any less more -- I mean, from my perspective, I would think like if NAND is the weakest link right now, we're going into a seasonally stronger period from a consumer demand perspective and Chinese New Year is earlier. So that to me is more a positive way to look at it, glass half full, and I just kind of wanted to get your feedback on that perspective.

Yes. There's a number of unfortunate aspects to this downturn. We were -- and Micron was in the midst of a, somewhat elevated CapEx period, and so trying to rework that and which is very, very difficult in the near term, as we've talked about on free cash flow. And deal with that is just an opportune time for the market to soften as much as it has. Likewise, with inventories, we're going to be heavy on inventories as the market sort of enters, what's traditionally a softer period. So now to your point, maybe sometime in first half calendar '23, maybe Chinese New Year and some demand-related activities, does that help? We'll have to see, but we've got elevated levels of inventories, and we're adjusting our supply, and we are working to just -- we're working through the period.

Okay. Well, maybe I'll just move on to a few other questions. So over the past few years, you have closed the technology gap in both DRAM and NAND. And obviously, the good thing about that is your cost is also much more competitive. How are you thinking about the cost improvement going forward for both DRAM, NAND and, let's say, for fiscal '23, especially given the cuts in your CapEx?

Well, we still believe in fiscal -- in our fiscal '22 or in calendar '22, we believe we're going to outpace the industry on cost reductions. And going forward, we would expect to at least keep pace with the industry. So that's part of the calculations around all these decisions as there are all these trade-offs. I mean we obviously can't bring CapEx to 0 for a number of reasons, but one of which is we have to be in a position over time to maintain cost downs in line with the industry. The company is in a great position today and we want to make sure that we sustain that position. And we think we can do it with a lower CapEx plan.

Okay. One of the questions I've been getting from investors is that, I understand we're in the middle of an inventory correction. But how confident are you that your gross margin could stay above the last cycle in 2019? I would think cost leadership will help, but are there other factors that we should be thinking about?

Well, the -- I'm not going to give out quarter guidance or we don't know, at this point, the duration of this downturn and don't know what turns it will take. So -- positive or negative. So I'm reluctant to provide anything more than -- we have said that in the November quarter, we do expect a significant decline in revenue and margin. Beyond that, it depends on a number of factors. It's just important for us to work on what we can control. We can control our own capacity, we can control our own investments in technology and drive productivity in the company and do other things that help us sustain the best margin we can. And then we'll provide more out quarter view on the next earnings call.

Okay. So maybe I'll ask about a couple of questions on long-term agreements. One of the more intriguing things you said at your Analyst Day is that your long-term agreements are now covering 75% of your revenue. These are volume commitments, I assume, but the terms could still change if demand changes. Is that the right way to think about it?

Well, they're not take-or-pays. But having said that, it's times like this, you see how valuable they are, because they are commitments by customers. And if they're failing to meet their commitment, there's an escalation path and all the way to the CEO, and there's CEO-to-CEO discussions. And those discussions are helpful. They're helpful in clarifying the inventory picture. They're helpful in negotiating some compromise that works for both parties, and there are discussions that we're able to have that we wouldn't have if we didn't have the agreements. So they've been helpful agreements, and we'll continue to maintain those and part of establishing and maintaining close relationships with customers.

Well, the other big announcement at your Analyst Day was that you -- it's the first forward pricing agreement with, I think, is a top 10 customer. What is the incentive for customers to sign these agreements? Are the terms still negotiable if market conditions change a lot?

Well, there's an incentive for people to -- I mean, as much as we don't like the volatility in pricing at times, customers don't like that either. So there is an incentive for customers to establish an agreement where they have certainty or at least more certainty on what their price curve would be and the margins on their products. So we've got one customer that signed up to this. We've got several others that are have expressed interest. And it's not intended to be a better situation for Micron at the expense of customers. It's to provide both of us some sort of shared road map that we can together reduce the volatility in the business, and it would be mutually beneficial. And that's the spirit of those agreements.

Okay. Maybe one accounting question here. It's related to tax rate. So in terms of the tax rate in fiscal '23 and beyond, there seems to be a lot of different moving parts. So can you just touch on a few of these things, how we should think about tax rate going forward? I understand you're now paying low -- maybe single-digit rate today?

Yes, we are high single digit, but we are -- we have a -- the tax environment is complex today, as I've seen at any time in my career. And there are 2 factors that we're keeping an eye on that relate to Micron over the next few years. One is in the Tax Reform Act of 2017, the nature of R&D deductibility changed. And now it's capitalized, it will be -- sorry, next year, capitalizing then amortized. And so that's going to be a headwind for us and other companies, some other companies, I believe, are being impacted by it today. The second is the book minimum tax, which is part of the Inflation Reduction Act and that would potentially hit us as well. We'll see how that plays out. Again, the legislation is new and there's a number of factors. But the combination of those 2 things could put pressure on our rates, and we could be in the low teens following those.

Okay. Maybe I have 1 minute for 1 question. Your team in the past have talked about the NAND industry needs to see some more consolidation. And I assume that you still have that opening given the current market conditions. How should we think of Micron as a participant in M&A, especially given your history in DRAM, albeit it's a different leadership?

I think as it relates to NAND, the most important thing to us is that we've invested in the technology and enjoy today a technology leadership position. That's clear. And we have strong capabilities on the product side in that area and then of course, our manufacturing expertise. So we're -- we feel very good about our products and our position in the space. Now we don't comment on M&A. Of course, we look at we look at the structure of the space and consider all opportunities, but I wouldn't comment on anything beyond that.

Okay. I think we're just running out of time. So thank you for spending your morning with us, Mark.

All right. Thank you, Sidney. Take care.