MU - Micron Technology Inc. (MU) 51st Annual J.P. Morgan Global Technology Media and Communications Conference (Transcript)

2023-05-22 11:45:20 ET

Micron Technology, Inc. (MU)

51st Annual J.P. Morgan Global Technology, Media and Communications Conference Call

May 22, 2023 08:00 ET

Company Participants

Mark Murphy - Chief Financial Officer

Conference Call Participants

Harlan Sur - JPMorgan

Presentation

Harlan Sur

Alright. Good morning and welcome to the first day of JPMorgan’s 51st Annual Technology Media and Communications Conference. My name is Harlan Sur. I am the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Mark Murphy, Chief Financial Officer at Micron Technology here with us today. Mark will start us off with some opening remarks. And then we can go ahead and kick off the Q&A. So Mark, thank you very much for joining us this morning.

Mark Murphy

Thank you, Harlan, and good morning to everybody. I’ll start with the Safe Harbor. I will be making forward-looking statements. Those statements have risks and uncertainties associated with them. I refer you to our risk factors disclosed in our public filings. So this morning, I will open my comments with a brief discussion about the trends in the business and then I will separately address recent developments in China.

So on the business itself, overall, we are seeing trends that have been consistent with the overview or the outline that we provided on our last earnings call, which was at the end of March. Pricing and volume trends have generally been consistent with our expectations. We are seeing bit growth across DRAM and NAND. As we said in March, we feel that we are closer to a period of sequential growth revenue growth. The bits bottomed in November as we had expected. We saw bit growth in the February quarter and then we see bit growth again in this May quarter.

We expect bit growth to continue in the second half of calendar ‘23. So in our view, we do see the supply demand balance improving. Supply growth is slowing and demand continues to increase. The trend this quarter, again, things are progressing generally consistent with what we expected. There have been more signs this quarter of industry suppliers cutting supply. So now we have all suppliers have indicated that they have reduced supply from previous levels. We are seeing pockets in the marketplace of price stabilization. In some isolated cases, we’ve actually seen some price increases. An area of positive price has been DDR5 which has had better price trends than some other areas in the marketplace. Importantly, we are also seeing customer inventories coming down at a gradual pace, down from levels that we have seen over the past year. Q4, we expect pricing declines to moderate from the sequential declines that we have been seeing in the last several quarters and we expect bit shipments again to increase May to August quarter, improving sequentially.

Now this – we are in the process of assessing the China decision, which I’ll talk about momentarily. But these comments on the trends of the business, of course, do not contemplate that at this time. So we received notice yesterday morning that the Cybersecurity Administration of China concluded its review of Micron’s products. This review commenced on March 31. The CAC concluded Micron products present a cybersecurity risk. As such, the CAC notified operators of critical information infrastructure in China to stop using Micron products. We will continue to cooperate with the CAC and are working to understand the details about their security concerns with Micron products. We remain unclear as to what security concerns exist. And we’ve had no complaints from customers on the security of our products. We’ve served customers and have operated in China for over 20 years, providing the most advanced products of the highest quality. And we look forward to enabling our customer success in China within the confines of course, of local laws and regulations in China. These are very new developments and we continue to assess the CAC’s conclusions and are evaluating its impacts on our operations and our business.

As we have disclosed in our filings, China and Hong Kong headquartered companies represent about 16% of our revenues. In addition, we have distributors that sell to China headquartered companies. We estimate that the combined direct sales and indirect sales through distributors to China headquartered companies is about a quarter of our total revenue. We are evaluating what portion of our sales could be impacted by a critical information infrastructure ban. Depending on what type of customers, products and end applications are included in the definition of critical information infrastructure, the potential impact would vary. But we are currently estimating a range of impact in the low single digits percent of our company total revenue at the low end and high single-digit percentage of total company revenue at the high end. But we have work ahead of us to get a more precise view on the impact of the restrictions. We will continue to assess the situation and work with our local authorities agency officials to get greater clarity. and of course, our customers.

Question-and-Answer Session

Q - Harlan Sur

Perfect. Thanks for that, Mark. So on the Cybersecurity Administration of China, or CAC review and decision, I know this just happened yesterday, U.S. time. Micron is still trying to assess the situation. So I really appreciate the transparency with the limited information. So you did level set us China direct exposure plus indirect exposure on distributors that ship into those customers about a quarter of your business. There are a number of value chain manufacturers in China that build systems in China, ship them outside of China. Are these value chain manufacturers also subject to the CAC restrictions even if the systems are built for export?

Mark Murphy

We don’t know. And I think we’re working to assess and get greater clarity on the restrictions. They are customer-driven restrictions. So we’re not restricted. It’s the customers that are unable to buy from us. So we will learn more about the range of customers impacted. What we’ve tried to do is apply what we think are reasonable expectations of what those – what the range of outcomes could be based on what we know at this time. And we’ll continue to evaluate. And to the extent there’s a material change, we would work to update the market at the appropriate time.

Harlan Sur

You were able to give us – and I know this is an early and rough approximation of the potential impact to the business. Did the CAC spell out what they mean by critical information infrastructure. The end markets, at least that come to my mind is China data center and enterprise markets, but did they provide you a list of end customer applications that fall under that definition of critical information infrastructure?

Mark Murphy

We do not have detail at this time. And again, we took what we believe was a reasonable and sort of classic definition of what that could be. At the lower end of that range, you can envision that’s principally networking companies at the higher end of the range, it’s some different markets. But what is not included in our range are, for example, smartphones. So we tried to draw the line and range this in a way that we felt was reasonable.

Harlan Sur

Have any of your customers in China already communicated with Micron? And what types of products still stop procuring from the team? Or are you still gathering that information at this point?

Mark Murphy

As of the last information I have, no, but we’re still – again this is a very new developing situation, and have nothing to report on that at this time.

Harlan Sur

So what’s the next step from here as it relates to your dialogue with the CAC team?

Mark Murphy

We continue to work constructively respectfully with the CAC, provide them any additional information they would need work to clarify what the security concerns are with our products. And again, just work to do all we can to serve China in the proper way.

Harlan Sur

And then my final question here. And obviously, I know the team will keep us up-to-date on the situation as it becomes more clear. My final question here is did the CAC decision, in your view, given the trends in the business, is the CAC decision going to impact the May quarter?

Mark Murphy

It’s, of course, happened very late in the quarter. And as a result, we have no update on the quarter. The quarter was trending in a good way. And again, this happened at the end of the quarter. Now in the August quarter, we need to take stock of how this will play out. So we will provide an update on the August quarter during the earnings call in June, so nothing, but as far as the May quarter, no update to our previous guidance.

Harlan Sur

Okay. Well, I’d like to move on to some of your commentary on the fundamental environment, but I do think the CAC thing is important. So before I move on to the business fundamentals, are there any questions in the audience about the CAC review and decision. Any of the prepared commentaries by Mark? If you do, please raise your hand.

Okay. Perfect. So let’s start off at a high level. So we’ll go into the detailed end market dynamics a bit. But obviously, you gave us a great update. It sounds like things are, broadly speaking, tracking to plan. But at the highest level, the team talked about on the last earnings call, broad-based expectations of broad-based improvement in customer inventories and expectation that inventories would continue to improve as the year unfolded, driving sequential bit shipment growth in both DRAM and NAND to the second half of the year. Is that how the team continues to see it play out in the second half profile based on the demand signals, based on the inventory, excess inventory work-down?

Mark Murphy

We do. And as you know, Harlan, we acted very early when the downturn hit. And I’d looked to any other company to compare to on how well we responded. We from last summer, we began to take down CapEx utilization expenses. We intensified those efforts through the fall even through the last call, we indicated taking utilization down more and spend discipline continues. Yes, the profile of the recovery, I’d say, is largely the same as we laid out last fall. Now as – or I’d say the December call, now what we communicated in the March call was that the sort of recovery, so to speak, or the improvements were a bit elongated and inventories were still coming down more in that February quarter than we expected. So the profile is still the same. We see customer inventories declining, albeit gradually. We see supply actions being taken across the industry. And ultimately, we believe that combination of supply working out of the system, along with continued demand growth in memory will drive memory and storage will drive a more balanced market and improve financial picture into next year.

Harlan Sur

Yes. I want to drill down into – I appreciate that. I want to drill down into some of your end markets. Your PC and mobile business started to see the weakness first. Last year, you’ve been working down inventories expected to see those inventories improve through the year, the expected PC and mobile bit shipments to improve in the second half of the year as well. Most semi companies, I think, have seen that have PC exposure reported recently that yes, they are seeing signs of second half improvement. However, it looks like the component inventory burn in mobile is taking a bit longer. So has the mobile – talk about the PC profile, has the mobile profile changed at all relative to your expectations back at earnings.

Mark Murphy

Yes. So PCs and mobiles are sort of ground 0 for all of this last year and got hit very hard in the summer. The inventories have been getting worked down in PCs and smartphones for a long time now. So actually, the PCs and smartphones inventory levels are, we believe, healthier than, for example, data center. And unfortunately, though, and the market is still finding its footing. And in fact, in our March call, for the February quarter, we actually called down calendar ‘23 outlook for both PCs and smartphones. So we believe now that PCs are going to be down mid-single digits before we believe that they would just be down slightly. And then smartphones, we now believe will be down slightly when we thought they’d be up, flat to up slightly. So those markets are still soft, though hopeful that when demand improves and eventually replacement cycles and things will kick in when demand does improve the inventory levels are such that we will see that positive effect.

Harlan Sur

The data center was later to see the spending weakness as you pointed out, and team took proactive measures on the supply side. You called the February quarter, the bottom in your data center business and expected revenue growth this quarter, many quarter and return to normalized customer inventories exiting this calendar year. Data center has been relatively mixed to this past earnings season. So curious to hear if the team’s view for this segment is still relatively unchanged and if you anticipate sequential bit shipment growth in data center through the second half of this year?

Mark Murphy

Yes. There is no change from our last update. The data center was a disappointment in our February quarter. I mean, it was much weaker than we had expected. And it was just customer inventory levels coming down more than anticipated. Was that related to a pause in hyperscale spend? Was it related to enterprise related server, not clear? But it was very weak. Now we expect – we see May quarter stronger we believe, a stronger second half, and that will help the inventories reach relatively healthy levels by the end of the calendar year.

Harlan Sur

You mentioned this in your prepared remarks, but the team has reacted exactly as we would have expected, right, from a supply discipline perspective, cutting utilizations, cutting wafer equipment spending, holding back bit shipments on current output and even slowing the pace of technology migration. Your industry assumptions on supply and overall supply demand normalization, assumes that all of the major memory players act in a similar fashion, right? It seems like they are from a CapEx and wafer start perspective, but based on the metrics you monitor in your end markets, the metrics that you monitor in your channels, are your competitors being disciplined from a pricing perspective as well? And any differences in DRAM versus NAND?

Mark Murphy

Well, we’ve said, and you can see it in the results that the pricing has been really challenging for both DRAM and NAND, probably a bit worse in NAND because the inventory situation is worse in NAND. But we do expect an improving trajectory in the back half of the year. We expect the rate of decline to slow. Eventually, prices will firm up and increase, we believe. Already spot pricing just due to all the supply actions you’re seeing some little positive movement in spinal pricing here and there, which is good and early indications in that causes customers to take note and think about replenishment of their inventories and creates, hopefully, eventually a virtuous cycle as vicious as this last cycle has been. So we are just continuing to work hard to drive the best pricing we can while also bringing value to our customers. But in the end, we’re focused on what we can control, being agile and smart in the marketplace about where we put our bits and the value that we get for our bits. And then reducing supply on our end and rightsizing our inventory. So we expect customers to continue to work their inventories down. We’ve talked about seeing better levels in the second half. And I think we’ve done a pretty good job so far, and we just got to stay focused.

Harlan Sur

You talked about some green shoots and pricing that you’ve seen some stabilization in pricing and in certain cases, maybe even some near-term pricing improvements. So I’m wondering if you can just maybe sort of give us a snapshot of what are some of the end market or end applications where you’re starting to see these green shoots of stabilization.

Mark Murphy

I think the Claris has been DDR5. There is a new compute platform rollout and then the supply is a bit better balanced in that market. So we have an outstanding DDR5 product on our 1 beta. And that product, our 1 beta technology has 35 – over 35% greater bit density as 15% better power consumption than 1 alpha. So we’re – that’s going to be a good product for us. and the market is healthy, so to speak.

Harlan Sur

Any questions from the audience? I’m going to move on to a little bit more maybe mid to longer-term dynamics. Any questions? Raise your hand if you do. So the adoption of large language models has really catalyzed in AI arms race amongst the cloud titans, right? And while they are all trying to figure out how to monetize the AI, they are all spending on compute, networking, storage and memory infrastructure, right? And AI-based servers represents only about kind of mid-single digits of total server shipments based on our internal analysis, but an AI-based server carries anywhere from 3x to 5x more DRAM and NAND content versus a general-purpose cloud server. So is this AI arms race having a tangible impact on driving a faster work-down of excess inventories in your data center market? Does it change your long-term growth assumptions around DRAM and NAND?

Mark Murphy

Yes. It’s a super exciting area. And it’s hard to know even the opening presentation here. It was heavy on the AI. So it’s hard not to get sort of sucked up and do it all. And we do hope it sucks up a lot of memory. But the reality is we knew that AI would be driving growth. In fact, if you go back to our Investor Day, we talked quite a bit about the mix shift it would create for our business, the growth potential for our business. AI is very memory-intensive applications. And that’s both on the training side and on inferencing. So it’s going to be a strong growth vector for the business. Our – since we were aware of it and had built it into our forecast, we’re right now trying to discern whether all the excitement is – is it incremental? And how large is that incremental change to our outlook. I think it’s safe to say our view is probably neutral to positive but how much we’re still assessing. We may talk more about it on the earnings call. One other note on AI, and it’s going to drive high bandwidth memory. It’s going to drive DDR5 product volume now. On HPM, that’s a very small portion of revenues right now. But we have a good product that’s going to be qualified later this year that we think it puts us in a great position as that market grows out for AI. And then I mentioned DDR5 earlier R1 beta is designed for DDR5. And we just think we’re really excited about the quality of that product built on the high-value technology that we have in 1 beta.

Harlan Sur

From a technology position, the team has done an outstanding job or you’ve got a strong position in DRAM and NAND, first to market 1 beta DRAM, first to market with 200-plus layer NAND. But in response to the supply-demand challenges, I mean, you’ve slowed the ramp of your 1 beta 232-layer NAND our technology road map for subsequent generations of DRAM and NAND technologies. Bears would argue that competitors will use this down cycle as an opportunity to close the gap with Micron, right? So how does the team retain its technology leadership given the near-term slowing down of technology migrations. Is it just as simple as we start to focus more on product performance, differentiation and higher value-added products or how do you guys think about that?

Mark Murphy

Well, you got to start with, we don’t need the bets. So the technology is going to drive more bits. And so our priority at the moment is to get supply/demand back in balance. So we’ve got inventories to clear. And we have good – for example, 1 alpha is a very good node. So we’ve got good inventories, and we’re in a good position with that. And so that’s the first concern is getting the market back healthy inventories down, eventually utilization up. Now as you noted, we did make – we did take the decision to slow the ramp of 1 beta in 2022. So as luck would have it, this downturn hit just as we were installing tools and beginning to ramp to great nodes, both 1 beta and 232 layer NAND. So on 1 beta, as I mentioned, over 35% better bit density, 15% more power efficient. So it’s a fantastic note, and we’re excited when it does ramp, we’re already getting tremendous yields on it because we’ve had lines running and getting yields up in low volume period. So when we’re ready to ramp that thing is going to ramp very efficiently.

And then on 232, same story in a way, but in NAND, of course, it’s also a very good node, double the right bandwidth and nearly double the red bandwidth and then 50% better, faster data transfer than 176, which was a good node, too. So again, and as with 1 beta because we’ve been able to work on manufacturing efficiencies its production yields are already very high. In fact, both of them achieved high yields in record time. So Again, we’re in a position with that node when volumes pick up when our inventories are a good level, we will be able to ramp that very capital efficiently. So we’re working to be capital efficient in the use of our technology advancements. And then we believe that we can sustain our technology position. And we’re – you can see we’re still spending nearly $3 billion on – around $3 billion on R&D. Even in this down period. So, some things to look for, we are still, for example, working on 1 gamma in DRAM. And as we said on the last call, that’s where we see EUV being required. There is a lot of discussion about whether we would be ready for EUV we could – we were able to delay it because of our multi-patterning technology. But we have EUV tools in Taiwan and in Idaho. And we’ve been working with EUV. In fact, we inserted it into one of the layers in our 1 alpha node. And so we’ve been able to demonstrate it in production and are getting good yields. But of course, it’s higher cost. So we will delay deployment in the technology until we in the principal flow until we need it. But these are – that’s just one example of, again, how we’re continuing to invest in technology and advancing it staying ahead.

Harlan Sur

Any questions from the audience?

Unidentified Analyst

Right up here. Hi thank you for the comments. I just wanted to clarify on the DDR5 ramp. How should we think about how you might be influenced by some of the competitors in this space and how you might react to if one of those were to perceive to be get ahead at any point. So just over the medium term, how the interaction between you and competitors in ramping that space, please? Thank you.

Mark Murphy

I mean, we have an excellent product, and we’re – we’ve changed some of our manufacturing configuration to be able to produce more DDR5. And we would expect to gain – have our fair share or more of that product. We’ve got an excellent product.

Harlan Sur

I have a question that came from one of our clients that’s listening in. So given your discussions on end market demand and customer inventory trends, does the team still anticipate sequential improvements in gross margins through the year?

Mark Murphy

Yes. We’ve not given gross margin guidance out through the year. We’ve said that profitability will be challenged at these pricing levels and so as the supply balance improves – supply-demand balance improves we would expect gross margins to improve, and we’ve said that we expect to return to operating margin profitability within our FY ‘24.

Harlan Sur

Last question. Shifting to your cross cycle financial model, you had laid out at your Analyst Day, revenue CAGR target of high single-digit percentage growth, operating margin, 30% EBITDA margin, low 50; capital intensity, mid-30s, free cash flow margins greater than 10%. With the memory downturn in full force, obviously, which wasn’t the case in – at the time, I mean what is your confidence level at these cross cycle targets?

Mark Murphy

We’re confident that we will deliver results in-line with the cross-cycle model over the long-term. But as you said, the downturn was severe caused by a confluence of unprecedented factors. It’s going to take some time for that to normalize. But in the near-term, we’re making the investments in the new fabs and that will pressure free cash flow a bit on the cross-cycle model. But longer-term, we’re confident in the profitability and growth of memory and storage. It serves such a crucial role in the data economy. And as evidenced by our comments on the last call for a record TAM in calendar.

Harlan Sur

Perfect. Well, we’re just about out of time. Mark, I want to thank you for your participation and all of your insights. Thank you very much. We look forward to catching you and catching up with you at earnings.

Mark Murphy

Thank you, Harlan.

Harlan Sur

Yes. Thank you.

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Micron Technology, Inc. (MU) 51st Annual J.P. Morgan Global Technology, Media and Communications Conference (Transcript)