Micron Technology's Vice President of Investor Relations, Farhan Ahmad, welcomed participants to the company's Third Quarter 2023 Financial Call. He announced that the call was being recorded and webcast, and that the press release detailing the quarterly results had been posted on the website. He also discussed the use of non-GAAP financial measures and encouraged participants to visit the company's website and follow them on Twitter for the latest information. Finally, he reminded participants that the matters discussed during the call included forward-looking statements which may not be accurate due to certain risks and uncertainties.

Micron delivered fiscal third quarter revenue within guidance, with higher margins and EPS. The industry is seeing improved pricing trends due to reduced supply and increased demand, and Micron is well-positioned for growth in AI and memory-centric computing. However, the impact of the Cyberspace Administration of China's decision on Micron's business is uncertain, with approximately half of their revenue from China-headquartered customers at risk of being impacted.

Micron is working to mitigate the impact of a significant headwind and retain its worldwide DRAM and NAND share. It is investing in advanced nodes such as 1-beta DRAM and 232-layer NAND, as well as EUV-based 1-gamma node, in order to maintain its technology competitiveness. Additionally, it is investing $600 million in its operations in Xi'an, China, in order to extend its ability to deliver on global customer demand.

Powertech Semiconductor Xi'an has been working with the company for eight years and they are now investing in assembly equipment and a new building in Xi'an and a new assembly and test facility in Gujarat. Customers are reducing their excess inventory in the PC and smartphone segments and data center customer inventory is also improving. Data center saw strong revenue growth in both cloud and enterprise in fiscal Q3 due to the increased demand for memory and storage for AI servers and traditional server demand.

Micron is well-positioned to capitalize on the growth of AI and data-centric computing architectures, with its product portfolio and roadmap of innovative products. It has developed a low-power DRAM solution with NVIDIA to reduce power consumption in data centers and is also working on high-bandwidth memory for high performance computing, with samples of its industry-leading HBM3 product being sent out to customers. Mass production of HBM3 is expected to begin in early 2024, with meaningful revenues expected in fiscal 2024.

Micron is making strong progress with their D5 memory, and have already qualified and shipped 1-alpha D5 modules to data center customers. They are also ramping up their high-density 128 gigabyte D5 modules using a 32 gigabit die, which offers a lower cost-of-ownership solution for memory-intensive workloads. Additionally, their entire portfolio of data center SSDs is now on 176-layer or 232-layer NAND, and they have already passed qualification for their 200-plus layer NAND data center SSD at a critical server OEM partner. Finally, they are forecasting a low double-digit percentage year-over-year decline in PC unit volume for calendar 2023.

In fiscal Q3, Micron achieved record quarterly client SSD bit shipments, driven by share growth in client SSDs. They also launched Crucial T700, the world's fastest Gen5 PCIe consumer SSD, and expect graphics' TAM growth CAGR to outpace the broader market. For mobile, Micron expects calendar 2023 smartphone unit volume to be down by a mid-single digit percentage year-over-year, but with stronger memory content growth. They are also sampling a new UFS 4 product based on their latest 232-layer NAND technology. In auto and industrial end markets, Micron represents over 20% of their revenue and contributes more stable revenue and profitability.

Micron has seen record revenue in the automotive market and expects continued growth in the second half of 2023 due to easing semiconductor supply and increasing memory content per vehicle. The industrial market is also showing signs of recovery, with inventory levels stabilizing. Industry bit demand growth for DRAM and NAND is now expected to be in the low- to mid-single digits and high-single digits respectively, which is below the expected long-term CAGR. Supply reductions across the industry are starting to stabilize the market, but profitability and cash flow will remain challenging.

Micron reported Q3 results that were in line to better than expectations, with revenue of $3.8 billion and gross margin and EPS exceeding the high end of the range. DRAM revenue was $2.7 billion and declined 2% sequentially, while NAND revenue was $1 billion and increased 14%. Compute and Networking Business Unit revenue was $1.4 billion, up 1% sequentially. In response to the industry environment, Micron has taken decisive actions to bring supply back in balance with demand, including reducing wafer starts to approach 30% in both DRAM and NAND and expecting reduced wafer starts to continue well into 2024.

Qualcomm reported Embedded Business Unit revenue of $912 million, up 5% sequentially, and Mobile Business Unit revenue of $819 million, down 13% sequentially. Storage Business Unit revenue was $627 million, up 24% sequentially. The consolidated gross margin was negative 16%, improving 15 percentage points sequentially, but negatively impacted by $400 million of inventory write-downs. Operating expenses were $866 million, down $50 million sequentially, and the operating loss was $1.5 billion, resulting in an operating margin of negative 39%. Non-GAAP loss per share was $1.43, down from a loss per share of $1.91 in the prior quarter. Operating cash flows were $24 million and capital expenditures were $1.4 billion.

In the third quarter, free cash flow was negative $1.4 billion and the company targeted inventory levels of around 120 days. The company held cash and investments of $11.4 billion, issued $1.5 billion of long-term debt, and had total liquidity of $13.9 billion. In the fourth quarter, the CAC decision is a headwind to the outlook and revenue impact will vary by quarter. Bit shipments are expected to be record in the fourth quarter, but gross margin will be impacted by costs from underutilization, weak pricing levels, and product mix. The company is aggressively managing operating expenses and expects to exit the fiscal year at less than $850 million.

Micron's performance in the fourth fiscal quarter has been strong, with leadership products being released and qualified to strengthen their portfolio across multiple markets. Despite near-term headwinds, they have planned for new product introductions to leverage the growth in AI in the future. Their success is attributed to their technology capabilities, manufacturing excellence, financial discipline, and customer relationships. Their guidance for the fourth quarter includes revenue of $3.9 billion, gross margin of negative 10.5%, operating expenses of $845 million, tax expenses of $40 million, and EPS of a loss of $1.19. OpEx is expected to increase in the first quarter of 2024.

Micron recently published its 2023 sustainability report, which outlines its progress and aspirations in environmental, social, and governance programs. In response to a question about customer purchasing behavior, Sanjay Mehrotra from Micron stated that inventories are close to normal in most end markets, with the exception of data centers, which are expected to improve by the end of the year. He also mentioned that customers are interested in the long-term outlook for the business, and that Micron is focused on mitigating the impact of the China decision and providing value to customers through their products.

Micron is excited about their new HBM3 product, which is a generational leap ahead of anything else in the market. It has higher performance, bandwidth, and lower power. The company has received strong endorsement for the product and expects a rapid and steep production ramp in early 2024, bringing in strong revenue growth opportunities. The product is based on their 1-beta technology and advanced packaging and TSV capabilities.

Mark Murphy discussed the impact of the ban on Q3 and Q4 and that mitigating actions are being taken to help offset the effect. Timothy Arcuri asked Sanjay about the relationship between the company and its customers in light of the downturn, and how they are taking advantage of low pricing.

Sanjay Mehrotra discussed the importance of LTAs (long-term agreements) between customers and suppliers for their yearly forecast. He noted that customers may need to adjust their LTAs depending on the changing industry environment. He also mentioned that Micron has a strong product momentum in data center, particularly addressing the growing interest in AI, and they are well-positioned to capitalize on this opportunity. Finally, he emphasized that they work closely with customers to manage their investments in terms of die requirements, assembly, and test requirements.

Sanjay Mehrotra explains that the overall DRAM demand is being driven by AI, automotive, and other end markets, such as mobile and consumer. AI demand in the data center is driving healthy trends for memory growth, although enterprise server and some data center demand has been impacted by macro trends. However, the trend of AI and more memory is still continuing.

Micron is expecting to benefit from the increased demand for memory and storage in 2024, due to the growth of AI applications. AI applications are driving the need for more memory and storage, as parameters increase from 100 million to trillions. This will result in a 6x-8x increase in DRAM requirements for AI servers compared to standard servers, and even higher DRAM requirements for supercluster configurations. Machine-to-machine communication, training and inferencing applications, and edge applications such as automotive are all contributing to the increased demand.

Mark Murphy explains that the reported gross margin and outlook are dependent on many factors, including pricing, inventory write-downs, utilization, volumes, and mix. He states that at lower levels of profitability, the margin forecast and results are more sensitive to slight changes in assumptions. He also notes that in the second and third quarters, they have taken a material write-down of $1.4 billion and $400 million respectively in order to lower the carrying value of on-hand inventories.

The company took a $400 million write-down in the third quarter for inventories produced and realized a benefit of near $300 million from selling through the lower cost inventories. This write-down and the benefits that were realized were close to what the company estimated in its guide. The company also projected a $1.1 billion underutilization impact in FY '23 associated with the front end, most of which will affect the P&L this year. The company expects the second quarter margin to be the trough, and that the margin improved by about 15 points due to the much lower inventory charge forecasted in the third quarter.

Mark provided an update on their guidance for the fourth quarter, which is 5 points better than the third quarter. He then discussed the impact of write-downs, insurance settlements, and pricing changes on the gross margin. He expects the gross margin to trough over the next few quarters and improve off of the low levels in the next fiscal year.

Mark Murphy and Ambrish Srivastava discussed the gross margin guidance for the fourth quarter. Murphy stated that the effects of utilization are already incorporated in the guidance and the period costs in the fourth quarter are about $200 million. He also clarified that the 5% cut in utilization is not primarily a result of CAC restrictions but rather an industry dynamic and an attempt to reduce inventory levels. Srivastava asked if the 16% negative effect was worse than what was expected, to which Murphy clarified that if the insurance settlement was taken into account, the figure was close to what was expected.

Sanjay Mehrotra explains that approximately 50% of Micron's business in China is at risk of being impacted due to the CAC decision. However, Micron is focused on mitigating any share loss by working with global customers who are not impacted by the CAC decision. Their target is to maintain their current share, and customers understand and are supportive of this strategy. Micron will continue to work with customers to increase their share, offering them value through their innovation, supply, and product portfolio.

Sanjay Mehrotra explains that Micron has HBM2E products in the marketplace which has enabled them to gain experience in bringing up their technology and production capabilities. He also states that they will focus on ROI on investments and improving profitability, while still being a strong partner to their customers. Additionally, he is asked about the ability to service the A series market with HBM2E, and the multiplier effect of DRAM in AI servers without HBM.

Micron is well positioned to capitalize on the growing AI market, with their HBM3+ product providing a "generational leap ahead of anything in the industry" and their D5 and LP DRAM products already serving the AI server market. HBM and high-density DRAM modules are expected to start production in early 2024, and Micron is targeting a share of the HBM market higher than their DRAM industry average. Currently, 75% of DRAM on AI servers is DDR5, which Micron already participates in well.

Tom O'Malley thanked Sanjay for allowing him to join the program, and the operator concluded the program, thanking everyone for their participation and wishing them a good day. Sanjay mentioned that their company had led the industry with their D5 products, which were built on 1-beta technology.

This summary was generated with AI and may contain some inaccuracies.