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

All right. Great. Good morning, everyone. Thank you so much for coming. I want to welcome you to the Goldman Sachs Global Semiconductor Conference. My name is Toshiya Hari. I cover the semiconductor and cap equipment space here in the U.S. Very excited to kick off the conference with Mark Murphy, EVP and CFO for Micron. I will kick off with some questions, but I want to keep this fairly open. So for those who'd like to ask a question, please have them ready. Mark, thank you for hosting the conference -- the conference.

Yes. Good morning.

I wanted to kick off near-term and then as we progress, go longer-term and then more structural. In terms of the near-term, I guess, since your last update, what have you seen in terms of demand across DRAM and NAND? And if you can kind of talk through some of the key applications, that would be super helpful. And as you answer that question, talk a little bit about the dynamic in China. We saw the headlines from the CAC last week. You've had a week to potentially digest and maybe reach out to a couple of customers. So any feedback from them would be super helpful.

So good morning, everyone. Thank you for joining us so early. I'll start with the safe harbor. I'll be making forward-looking statements. These statements have risks and uncertainties associated with them. I refer you to our risk factors disclosed in our public filings. So as far as trends in the business, the third quarter of the trends in the business have been consistent with what we outlined in our third quarter or in our March earnings call for the second quarter. Volumes and prices have been generally consistent with what we expected. We are seeing a bit growth and [indiscernible] growth for DRAM and NAND as we expected. Now the CAC decision came very late in the quarter here. So -- and there was some effect from that. But since it happened so late in the quarter, we didn't feel there was a need to update the guidance. It will be more of an effect as we look pro forma. We do think, as we said in March, we do think that the market is bottoming. We are seeing -- we do believe that we're seeing that growth in bits as we expected. We bottomed in bits in the November quarter, had an increase in February quarter increase in the May quarter. We still see second half being stronger on bits. Customer inventory trending down as we had expected. We've had broad-based reductions in supply. So every industry participant at this point has reduced CapEx and utilization. So in the end, we see that the market is beginning to find its footing on supply-demand balance. And as a result, we're beginning to see some indications of price stability in some areas. In fact, in some isolated areas we've had price increases, which we saw right after some utilization reduction announcements, but generally, it's just indicative of there's some more firm areas than others on pricing. So for example, DDR5 is firmer than DDR4. On the CAC, so the cybersecurity administration of China, their review and conclusion, we talked about last week, we were notified that they concluded their review. And in their conclusion, they notified operators of critical information, infrastructure that they were to not use Micron products. So it's still very early in this. We are still customers and Micron are still working to fully understand the effects of this decision Initially last week, we provided an indication of what we thought the impact would be. And we gave that as low single-digit percent of revenue to high single-digit percent of revenue -- total revenue for the company. As we've had a week of additional time, we've had some initial customer discussions. And as that information becomes clearer, we'd say that the better estimate is at the high end of that range or a better estimate is at the high end of the range. We will continue to assess it here and provide more at earnings, but it's an uncertain period right now. It's -- it's an evolving situation, and it's very challenging. But over time, we would expect that we would be able to replace some of this impact. But again, it's very early still taking an info and a situation that's evolving and that we're working through. Back to the core business, this was a very severe downturn that we've experienced. We're still in -- but we do feel, again, that it's bottoming. As I mentioned earlier, we are seeing signs of supply demand beginning -- balance beginning to improve. But it's going to take -- given the severity of the downturn, that's going to take quite a bit of time. So we're working through it. Fortunately, Micron's technology leadership, the breadth of our product portfolio, our manufacturing excellence, that's helped us greatly work through this downturn. The balance sheet has also provided us an advantage in that we can still invest in critical technologies and make the right long-term decisions, but we're focused on executing well at the moment, dealing with the short-term challenges we have in the business and elsewhere and then also just positioning ourselves for long-term opportunity. On the other side of this downturn, we're very excited about the market. I mean, we've got artificial intelligence, we have automotive, we have a number of other high-growth areas. And I -- and we just believe that with Micron's technology our products, our manufacturing capability that we're very well-positioned to take advantage and serve those markets well. and then deliver better financial performance more in line with our long-term financial model through cycle model.

That's great. I guess a couple of follow-ups on the CAC dynamic. You talked about the impact potentially being towards the higher end of what you had provided last week. Is it both DRAM and NAND? And I know the definition of critically -- critical information infrastructure is still kind of vague. But what's included in that potentially high single-digit impact? Is it server, networking, and nothing else? Or is it a blend? Or how should we think about that?

Yes, that -- we're still assessing it, and it's, again, it's fluid and unclear and very much evolving -- that high single-digit estimate would principally be networking and server. And then is that the boundaries for the principal amount we're trying to get a sense of that. And we'll learn more here as we engage with more customers, they give us feedback and we work to get clarity from the CAC and we'll just have to continue to work through it and provide an estimate. We'll, of course, have a better estimate in -- at the earnings call.

Okay. All right. And then I guess in terms of customer inventory, I think depending on the application or the end market, your customers and yourselves are kind of a different place in the cycle, if you will. I think PCs and smartphones are further along that dynamic in servers, maybe less so. But maybe talk a little bit about that dynamic. And at what point would you expect your sell into match or converge toward true consumption or end consumption?

Yes. So we have, of course, on our own balance sheets and across the industry, the inventories are unprecedented levels. we can talk more later about that effect and why it's maybe an indicator of future health of the industry. I know it's counterintuitive, but I actually think it's -- it's an interesting way the industry has responded to this environment versus previous decades in the space. But as far as customer inventories, we do view that PC and smartphone since they went into a downturn earlier, they've had longer to work through and rightsize our inventory. So we see those inventory levels sort of at this midyear time being healthier. So really, in the case of PC and smartphone, it's going to be a function of their end market growth, less so they're worried about inventory adjustments. And unfortunately, for PCs and smartphones, the growth is still elusive there. In fact, in our last call, we called down our calendar year '23 view for smartphones and PCs. We had PCs as flat to down slightly, and we moved PCs to down mid-single digits percent year-over-year. And on smartphones, we had flat to up, and we've moved from smartphones to down slightly year-over-year. So I think the inventories are okay in that -- in those markets, but it's about demand. In the case of data center, it's -- the demand is robust, particularly in certain parts of the server market, as you know. But the inventories are still elevated. So we're still seeing either inventories being reduced or they don't have the same need with our inventory levels where they are to purchase product. But we think this shakes out through the back half of the year and by the end of the calendar year, we think all markets, inventory should be in a better spot. Our inventories hopefully will begin to move down at that point.

Got it. Earlier, you talked a little bit about pricing in DDR5 being a little bit more resilient than in DDR4. Curious how you're thinking about the transition to DDR5 and your competitive position there. I think there were some concerns about server platforms, the new platforms being a little bit delayed, but what were your thoughts on crossover to DDR5 more so in the server space?

Yes. So we're really excited about our product position in DDR5 and our 1-beta technology is sort of design for DDR5 in way and HBM. So we're -- we've got an outstanding technology that's ready to ramp and serve these two product lines, both of which we see increasing here at the back half of the year and then next year. And 1-beta as -- 1-alpha was a good node, but 1-beta has 35% better bit density, 15% better power. So it's an extremely good node. But as the server platform rollout goes, we see DDR5 being about 30% of volumes or close to 1/3 by the end of the year. It's about 20% now. And then a crossover point, we expect to be mid next year.

Okay. Got it. And then HBM, I think there's obviously a lot of focus around AI, and we'll certainly come back to your exposure there and what you're doing there. But in terms of the competitive landscape in HBM with the current NVIDIA platform and servers. I think one of your Korean peers or competitors has a really good position there. But talk a little bit about what you're doing? And at what point should we expect you guys to benefit?

Sure. We're going to benefit. Unfortunately, we just -- we've got a bit of a timing issue. There's some history here on HBM and Micron actually had a very good technology may be a better technology. Five years ago or more, I think it was called Hybrid Memory Cube. And we had worked on that product, and we're moving forward on that and the industry standard went to HBM. So we found ourselves behind, but it's -- fortunately, the volumes are still very low. We've got an HBM product coming out end of year. It's on 1-beta, which I talked about is just a terrific node. So we're excited that we'll be able to hit this at a decent time, which we are there right now, but we will hit it. AI has got a lot of legs. It will be a strong business for us. And so again, we think that the product that we have, that we're going to deploy later in the year, we've done our own competitive assessment. We think we'll have a very competitive product entering the market.

Okay. So later in the year, you'll have the product down. Okay. Got it. The topic of AI is hard to go around at the moment. There's a lot of focus on it. Talk a little bit about AI as a percentage of your business. I think in your [ Ks and Qs ], you disclosed that servers account for about 20% to 25% of your revenue. I don't know if you have perfect visibility, but what percentage of that is AI today? And as you think about the implications for content growth in servers and contribution to overall DRAM industry bit growth. How do you think about that internally?

We could talk for the next 28 minutes on this topic. It's a very rich topic. And of course, changing very quickly. What we can say is that right now, it's a relatively low percent growing very quickly but it's very difficult to really size it. And I think it's going to be increasingly difficult to size what's determined to be AI because you've not just got the straightforward training and inference server activity. Eventually, you've got AI in your phone now. You've got -- you will have it eventually in other edge devices. I think there was some news yesterday on the client side. So it's going to be that question of how much AI will be increasingly difficult to answer. We know it will grow. And I think that's the exciting thing for us. It's going to grow. And I think we had already contemplated that in our long-term growth in AI, of course, to drive server activity or server volume. We had included that in our long-term growth CAGR. We had talked about it at Investor Day, and that it was an important part of the mix shift in our business from sort of migration of less consumer to more data center, AI-driven and then automotive and industrial. So right now, with all the advancements just since our Investor Day a year ago with all the advancements. Yes, there's -- it looks like there's a potential that it's above what we had contemplated. So we're deep into revisiting our assumptions, and we'll be able to talk more about it at the earnings call in late June. But it is exciting. I mean in the end, AI is a data science that is very memory-intensive. So -- and the accuracy of these AI models is a function of the number of parameters. And if you just look at the progression of the chatGPT model. So you've got -- I think, chatGPT, too, had 1.5 billion parameters and my numbers may not be exactly right here, but somewhere in that range. I think chatGPT 3 had 175 billion parameters. And chatGPT 4, there's some not real clear if the number has been disclosed. There's some mixed information on it, but it's hundreds of times plus more than chatGPT 3 on number of parameters. These parameters and the number of parameters is highly correlated with the amount of memory that you need. So I think as there's a march towards greater accuracy and utility of these models, by definition, you're going to end up with more memory content. And then just the amount of silicon. If you look at that, I mean there's more silicon versus compute as you look to these AI servers. And an example is an AI server and [ granted ] these are training servers, but you got 8x the memory content of a more traditional server and for DRAM and 3x for NAND. So as a server is designed to be optimized for AI, it's going to, again, consume more memory or need more memory.

And I guess, in the near-term, from your perspective, can you sense sort of this inflection happening in AI servers or because your customers are still to your prior point, sitting on inventory, you don't necessarily see it from where you are today?

No, we see it. I mean we -- and we're working with -- yes, there's a there's a number of different ways that this comes at you, right? And we're working with everybody. I mean this is not just GPUs. And there's, of course, that. And that's been dramatic. I mean, if you look at NVIDIA's generation of AI servers 4 or 5 years ago versus the latest hopper version memory in that has quadrupled. And of course, they're advancing and there's going to be additional need to optimize memory for the great work they're doing. And there's other areas that there's CPU-related activity. There's ASICs so there's all sorts of activity that customers, they see what the advances that they're going to need to deliver. And part of this data-intensive application requires great coordination and utility of memory.

Got it. You talked a little bit about sort of reassessing the long-term CAGR for the DRAM business and perhaps the DRAM market at the Analyst Day. I think it was a mid-teens CAGR that you threw out -- does that feel like this still the right range as you think about your business medium to long-term?

We've not updated it. And that -- I think for now, it seems directionally correct. And in that mid-teens assumption is automotive and industrial, which will be more than double that growth rate. You've got data center, which we just talked about, which will be above that growth rate, and it will be AI-driven. And then you've got, as we talked about earlier, you've got lower growth, but still durable businesses, PC, smartphones. And it will be interesting to see if with greater AI activity and what sort of increased content will happen at these edge devices. That will be interesting to follow.

Okay. All right. I guess transitioning to the NAND side of the portfolio, where I think there tends to be more price elasticity vis-a-vis DRAM. NAND pricing is down more than 50% year-to-year. Do you sense price elasticity kicking in across some of your key applications? Or not so much?

It's hard to say. I mean the pricing environment in NAND is worse than DRAM, inventory levels are higher than DRAM. I think there may be some elasticity and maybe helping demand. I think in some areas like, let's say, as hard drive replacement by SSD, I think folks realize that the pricing in NAND at the moment just isn't sustainable. So while there can be an economic trade-off for that use case in the near-term, the question is, is it being installed by just a price that's just not sustainable at the moment. So that part of the market, we've said that the NAND business -- or the NAND industry will benefit from some consolidation and I think we've said our long-term growth CAGR from that business is low 20s. So we see it being a strong growth business, but it's just hard to say at this point how much elasticity is affecting demand.

Got it. And Mark, that low 20% CAGR on the NAND side, I know NAND is a little more consumer heavy relative to DRAM. Is that low 20s still? Does it feel right as of today or... .

We've had no update on that. Feels okay.

Okay. All right. Maybe one question before I take questions from the audience. On the supply side of the equation, you guys were probably one of the earlier companies in terms of actually cutting CapEx and cutting production. I think you're cutting production by 30% give or take?

25%.