MU - Micron Technology Inc. (MU) KeyBanc Technology Leadership Forum Conference (Transcript)
2023-08-07 17:45:24 ET
Micron Technology, Inc. (MU)
KeyBanc Technology Leadership Forum Conference Call
August 7, 2023 11:00 ET
Company Participants
Samir Patodia - Investor Relations
Mark Murphy - Executive Vice President & Chief Financial Officer
Conference Call Participants
John Vinh - KeyBanc Capital Markets
Presentation
John Vinh
Well, 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 Samir Patodia, IR, from Micron. Welcome, guys.
Mark Murphy
Thanks, John.
Samir Patodia
Thanks. Glad to be here.
John Vinh
Mark, maybe you can kind of kick us off by just kind of giving us an update of just demand trends that you're seeing across your key end markets for now.
Mark Murphy
Sure. Maybe I'll just start with a general opening, cover the market. So first, I would Safe Harbor. I'll be making forward-looking statements. Those statements have risks and uncertainties associated with them. I refer you to the risk factors disclosed in our public filings.
Our current quarter, actually August or fourth quarter, is tracking consistent with what we communicated in our June earnings call. Pricing and volume trends are generally consistent with our expectations. Growth is happening in bits and bytes across DRAM and NAND as we said it would sequentially. We continue to execute well, and that's with both good cost and CapEx discipline.
On the outlook beyond the quarter, it's also -- there's no update from our June earnings call. Industry demand, we expect to increase through the calendar year. Customer inventories continue to improve. Supply cuts have been made across the industry, and our call and subsequent calls in the industry have all pointed to continued supply discipline, which is a positive. So the supply/demand balance is improving. Supply is slowing and demand continues to increase.
As a result of this improvement, we do expect price to inflect in the second half of the calendar year, and we're seeing pockets of that already. Putting HBM aside, you're seeing that in DDR5 products and some other areas. And we have said that we do believe that recovery will occur steadily over the next period, and then we expect to have record TAM for the industry in CY '25 with more normal levels of profitability.
Now Micron specifically, given the CAC ban on the use of Micron products and critical information infrastructure in China, that ban is weighing on our results, but we are not updating our disclosure or our exposure. And also, we just continue to work to mitigate that risk. Yes, so the market is bottoming out. There are certainly signs of improvement. John, I was here last year, and we had done an 8-K with the guide down as a result of the early stages of the downturn. And if you remember, we were one of the first.
And certainly, at that time, the worst was ahead of us, and we were saying that. This time is different. I mean the signs now going forward is it looks like a recovery, and we're going to continue to monitor supply as we've done and manage our costs prudently as we've done. We've continued to innovate, of course, and position ourselves well for the recovery. We've been doing a lot of work around data center. There were 2 announcements we did just in the past few weeks.
One was related to some CXL technology, the CZ120 memory expansion modules that we did for CXL, and then we provided more color and did a release on our HBM3 Gen2 product, which is going to be -- both those products highlight our position and technology and importance of the market. Also around data center, as we talked about on the call, we're introducing LPDDR into the data center, which is a novel application, given the power intensity of the markets. And then we're also doing high-capacity DIMMs, so got a good product portfolio progress there.
So as market conditions continue to improve, Micron is very well positioned. In fact, we've never been better positioned. We've got leading technology, and our 1-beta process node is a great example of that. We're going to build on our DDR5 leadership. HBM will be built on that. So it's a very strong node. That technology leadership has allowed us to develop great product breadth and the best products in the business, and HBM, we believe, is by far and away the best product that will be in the market when it ramps.
And then our manufacturing excellence is clear. Our yield is very good. On 1-beta and 232, we achieved mature yields faster than any other time in the company's history, so shows the efficiency of our operations in [ph] good shape. So we -- as we look to this recovery, we -- again, we couldn't be in a better position. We believe and we have great confidence in our through-cycle model growing above the broader semiconductor industry and free cash flow margins over 10%.
So as far as, John, your comment about the markets, yes, really no update. We did say that we saw smartphones being down mid-single digits in the calendar year. There have been some reports of smartphones being a bit weaker. We're not adjusting our numbers, but we do see the weakness in that market. We were clear that it's going to take some time, more time for the inventories to clear in the data center market. We expect those inventories to be cleared by the end of the year or soon thereafter.
So it's just a case principally of -- the inventories are in good shape in PC and smartphones, so it's just a case of demand coming back. And then in the case of data center, it's working down those inventory levels. There's been some crowding out of spend, probably related to the training server activity, but that will pass and that demand will broaden out. So we think that we're going to see things in good place near the end of the calendar year into early next year. And then some other markets are doing well. Automotive is doing well still. And so -- and we are in a good position there. So, really no update from our June call.
John Vinh
Great. Well, thanks for that overview, Mark. Maybe you can touch on supply. Obviously, I think you had predicted kind of early on this year that it was just a matter of time before the industry would have to cut back on capacity just given the oversupply situation. I think you're absolutely kind of dead on there. So given that both of your peers have announced reductions in capacity, you guys have also announced reductions in capacity. Is that enough to kind of support kind of the recovery that you guys are envisioning? Or does there still need to be more capacity taken offline here?
Mark Murphy
It all depends on how the market develops, of course. But I will say that it's been encouraging that there's been broad-based supply actions at this point. As you mentioned, we led the industry. We acted very early on supply, taking action around your conference last year. And we've steadily increased the supply response through the year. And again, it's been encouraging to see the whole industry doing it because fundamentally the industry is not in a healthy place at the moment. But you're seeing as a result of that broad-based supply response and recent indications of continued discipline around that. You are seeing the early signs of a recovery. I mean we're seeing price declines have begun to slow.
And we're -- as we said on the last call and this morning, we're seeing price inflect in our outlook. So we do not expect any more inventory write-downs. And I think it's just important that there's still a decent amount of inventory to work down in the system by the producers and select parts of the supply chain have still got inventory. So we need to work those inventories down. Utilization still needs to be brought back up. So there's ample supply ready. So it's just important that we all -- that there's an awareness that the supply response needs to be -- continue as it's been done.
John Vinh
Great. Maybe we can touch on China. I think on your last call, you had updated the potential exposure from the China CAC ban to be kind of low double digits. I know Sanjay said that you're aware that the government in China and some of the telcos were having conversations with some of the China smartphone OEMs. So, I just wanted to clarify. Does that low double-digit exposure contemplate that some of the Chinese smartphone OEMs are buying memory away from you? And then you had also talked about potentially finding kind of a new home outside of China for your capacity. Maybe just give us an update on how that's progressing.
Mark Murphy
Sure. So not much has changed here since we did an 8-K prior to earnings on the CAC exposure. So as you mentioned, we've identified what we believe is at risk, equates to about half of our China direct and indirect headquartered company sales. So that yields about 12.5% or so of what we view as a risk. We're managing that best we can, working closely with our customers and monitoring the situation. It continues to evolve, and it's challenging, of course, because the market's not tight. But we will continue to work that.
That -- our view of the exposure or what is being realized in our results is reflected in our guide and our comments. But we've had no update since the 8-K. There's nothing to update. Yes, as you mentioned, on smartphones, we did call out smartphones specifically in that 8-K. So we're seeing some activity there. But again, I think it took us a bit of time to get a good read on the exposure and how we're going to mitigate that and how it may play out, and I think you'll see that we just -- we've not updated that disclosure since that 8-K. So we don't see any difference from that view at this time.
John Vinh
Great. Are there any questions?
Question-and-Answer Session
Q - Unidentified Analyst
What have you learned in this last year? It seems like there's just been a lot more -- it's been softer than you might have thought. Is it just your competitors have not had better capacity to add? Or just there's just way more [indiscernible]? And then secondly, what happened to HBM stuff? [Indiscernible] guys behind in the area? And what are you actually doing to catch up? What's this new product [ph]?
Mark Murphy
Sure. So good questions. I think that on the first one, if you go back to last summer, it was an extremely unusual period. You had this demand shock related to the fact that demand had been sort of overstated or unusual during COVID. That fell off very dramatically as consumer spending shifted and as the economy weakened. So you had an extreme demand shock that was unamplified and additional supply chain turmoil through the war in Europe, and China reopening. And there's -- it was just a lot of effects at that time.
And the industry got out of balance, and severely so. I think the sort of direct response as well, that shouldn't have happened. But the fact of the matter is it was an extremely unusual period. And I think the interesting thing to think about is that the industry in a downturn responded very differently than it would have in previous severe downturns. And if you go back 15, 20 years, the industry would have shed inventories, would have continued to invest in the latest nodes because they needed the cost downs. And that would have -- and that had disastrous consequences on the industry.
What's happened this time is that all the players built inventories. Because the cost downs on products are harder to achieve, and so the inventories will last longer. So that building up of the inventories allowed all of the competitors to -- or all the producers to drop their supply and cut CapEx and fix structurally the supply issue, and that's happened, and it's happened broad-based. So I actually think it's encouraging how the industry responded.
And it's -- I think it bodes well for the future, because in the end, if you've got more ability to be thoughtful and circumspect about capital spend, and you can flex inventories, and you can be mindful of your CapEx spend and you can actually modulate node advancement a bit, that provides more flexibility on the supply side than there used to be. That's also especially helpful because the demand side has broadened out.
And now I'll get to the HBM question. So in previous that big downturn, it's largely a consumer-driven market. Well, consumers on consumer-driven markets are well under 50% now. So you've got data center that's growing, you've got -- automotive is over 20% of our business at this point. So you've got more durable and broader growth in memory than you've had before. And so I think both the supply and demand factors are in a better place. And -- so that's -- I think, what was -- it's been [ph].
Unidentified Analyst
Going down the inventory that this dynamic is happening, the down [indiscernible].
Mark Murphy
Well, I don't think you can necessarily conclude that. I think ultimately, what you get is a better supply/demand matching and you get better capital returns over time. And ultimately, that's what matters. Better capital returns, better free cash flow generation over time. On HBM, we're really excited about this product. And you asked specifically how we got here. Micron -- actually, it's not that we couldn't do the product. We actually had gone down a different path where we created a product called Hybrid Memory Cube and this goes back, I think, 5 to 7 years ago. And some would argue it was is the better product. But in the end, the standard ended up going to HBM and we found ourselves behind.
Now we have an HBM2 product, and that has revenue and we've learned a lot in that product, but we've really focused our -- we've really focused our efforts on the HBM3 Gen2 that we're sampling now. And yes, this product is built on our -- fundamentally our 1-beta node, which is an exceptional node. Over 35% greater bit density than 1-alpha, over 15% better power consumption than 1-alpha. So it's a fantastic node and our HBM Gen2 is built on that.
Now our HBM Gen2, it's got at 2.5x the performance per watt improvement versus what's out in the field now. The bandwidth is 1.2 terabytes per second pin speed, and pin speed is 9.2 gigabits per second. That's 50% better than what's in the industry now. And then the product can lead to reducing train times 30%. So there's a very strong total cost of ownership benefit for the customer.
We've got excellent customer engagement. We believe we're going to have a groundbreaking product when it ramps, and then we are working on the next product. So we are -- I think we're in very good shape to take advantage of this. And I think it's important we have a lot -- folks focus on HBM for data center, but let's keep in mind, data center is sucking up a lot of different products.
There's HBM, of course, which is very high profile, and that has a specific need in certain AI-related data center servers. You've got still a lot of DDR5. You've got now LPDDR being introduced into data centers, given the better power efficiency. And then, of course, we've got high-capacity DIMM. So you've got a lot of silicon that's going to be going into data center servers.
For both traditional servers, eventually, because you need to offload this compute at some point. It's going to generate more workloads, so traditional servers will pick up at some point again. But then, of course, training is hot now, but eventually, there needs to be an inferencing [ph] build-out. So we're really excited about the market and feel great about our position in the market.
John Vinh
Great. So, just a follow-up on that. What revenue contribution could HBM be for you next year as it's kind of ramping? You obviously sound very confident about your position there. What market share expectations do you have when it's fully ramped? And then obviously, a lot of investors really want to better understand kind of your positioning in AI once you've got these products in the market. How does the content of an AI server compare to a traditional server?
Mark Murphy
Yes. So a lot of questions there. Maybe take the last one first. Because of the processing requirements of these AI servers, there's a lot more memory required. So the exciting thing is as the number of parameters increase, which they will, because the parameters determine the accuracy of the application. As those number of parameters increase, there'll be a correlation of the amount of memory required. So there's going to be more and more memory required, and right now, we've said that versus a traditional server, it's 6 to 8x for DRAM and 3x NAND. On the -- we expect HBM revenues to ramp through increasingly through the back half of next year, and that will -- we think it will be material revenues. We believe that we will get more than our fair share of HBM.
In other words, we believe our share will be greater than our share of the DRAM market. And I think that follows, given that we do believe that we will have the greatest -- the best technology in the space that's built on the best process technology in the space. And these are -- these engagements with customers are very intimate and require a lot of close collaboration, so we feel very good about our position next year and in the future.
John Vinh
Great. Looks like we're out of time. Thank you, Mark.
Mark Murphy
Thanks, John.
John Vinh
Thanks, Samir.
Samir Patodia
Thanks, John.
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Micron Technology, Inc. (MU) KeyBanc Technology Leadership Forum Conference (Transcript)