The operator introduces the speakers and explains the format of the call. Satya Kumar, Corporate Vice President, Investor Relations and Treasurer, welcomes listeners to Micron Technology's Fiscal Second Quarter 2024 Financial Conference Call. He is joined by Sanjay Mehrotra, President and CEO, and Mark Murphy, CFO. The call is being webcast and non-GAAP financial measures will be used. A reconciliation of GAAP to non-GAAP measures can be found on the company's website. Forward-looking statements will be made, and listeners are directed to the SEC filings for a discussion of potential risks.

Micron has reported strong financial results for fiscal Q2, thanks to improved market conditions and strong demand for AI servers, HBM, DDR5, and data center SSDs. The company expects pricing levels for DRAM and NAND to continue to increase throughout 2024 and is at the forefront of ramping up advanced technology nodes in both areas. Over three-quarters of their DRAM bits and over 90% of their NAND bits are now on leading-edge nodes.

Micron expects cost reductions in DRAM and NAND to track in line with long-term expectations, driven by the ramp-up of new technologies. They are also on track for volume production of 1-gamma DRAM and next-generation NAND in 2025. Inventories for memory and storage have improved, and Micron anticipates normalization in the first half of 2024. The company is well-positioned to benefit from the growth of AI, with a focus on creating artificial general intelligence and improving AI models for edge devices. Micron's memory and storage technologies are key enablers of AI and they are poised to capitalize on these trends in both the data center and the edge.

Micron is well positioned to benefit from the growth in AI servers, with their portfolio of high-performance memory and storage solutions. They are seeing strong demand for their HBM3E solution, which offers significantly higher memory bandwidth and lower power consumption compared to competitors. This solution will be used in Nvidia's next-generation AI systems and is being qualified by multiple customers.

Micron is expecting significant revenue growth from their high-bandwidth memory (HBM) products in fiscal 2024, with strong demand already seen for 2025. They have also introduced a new 12-high HBM3E product, which will increase memory capacity and enable more powerful AI solutions. They are confident in their technology leadership with the upcoming HBM4. In addition, they have completed validation of a 128 gigabyte server DRAM module with industry-leading capabilities and are also sampling a 256 gigabyte module. They have achieved record revenue share in the data center SSD market in 2023.

Micron saw a 50% sequential growth in revenue for their 232-layer-based 6500 30 terabytes SSDs, which are ideal for AI data lake applications. They expect modest growth in PC unit volumes for 2024 and anticipate next-generation AI PCs to become a significant portion of total PC units in 2025. At CES, they launched a low-power compression-attached memory module for PC applications. Micron also launched their 232-layer-based Crucial T705 Gen 5 consumer SSD, which received multiple awards and was recognized as the fastest M.2 SSD ever. They have established themselves as the leader in client QLC SSDs, with QLC representing two-thirds of their client SSD shipments. Smartphone unit volumes are expected to grow in 2024 and demand for on-device AI capabilities is driving the need for increased memory and storage capacity. Micron expects AI phones to have 50-100% more DRAM content compared to non-AI flagship phones.

Micron's mobile solutions are leading the way in providing high performance and power efficiency for AI capabilities. Their second-generation LPDRAM and NAND products are being widely adopted in flagship smartphones, such as the Samsung Galaxy S24 and the Honor Magic 6 Pro, which feature advanced features like real-time translations and large language models. In the automotive and industrial sectors, there is strong demand for memory and storage as new vehicle platforms and advanced capabilities are launched. The industrial market is also seeing healthy demand and pricing benefits due to tight supply for leading-edge products.

The industry is experiencing strong demand growth for DRAM and NAND in 2023 and 2024, leading to an increase in pricing and an increase in absolute level of demand. The supply-demand balance is tight and Micron's bit supply growth is expected to remain below demand. The company's CapEx plan and WFE spending are projected to decrease in fiscal 2024. Micron's approach to node migration has resulted in a reduction of wafer capacity for both DRAM and NAND. By the end of fiscal 2024, the company's wafer capacity is expected to be lower than peak levels in fiscal 2022.

The industry has seen significant supply reductions, leading to a pricing recovery. While the company's financial performance has improved, profitability levels are still below long-term targets. They will continue to focus on improving profitability while maintaining market share. The ramp of HBM production will limit supply growth in non-HBM products. There is expected to be strong demand for HBM due to AI, and the company is carefully planning their global capacity requirements. They have announced projects in China, India, and Japan, and are considering U.S. expansion plans. The company's financial results and outlook will be discussed by Mark.

In fiscal Q2, Micron had strong financial results, with revenue, gross margin, and EPS exceeding expectations. Improved market conditions and strong execution on pricing, products, and operations drove the success. DRAM revenue increased by 21% sequentially, and NAND revenue increased by 27%. The Compute and Networking, Mobile, Embedded, and Storage business units all saw significant growth. The gross margin for fiscal Q2 was 20%, a 19 percentage point increase from the previous quarter, primarily due to higher pricing. There were also modest underutilization charges related to legacy manufacturing capacity.

In fiscal Q2, the company saw a decrease in underutilization charges and operating expenses, resulting in positive operating income and a net benefit for income taxes. Non-GAAP diluted earnings per share were positive, benefiting from the favorable income tax effect. Operating cash flows were at 21% of revenue, with capital expenditures and free cash flow near breakeven. Inventory levels are expected to decrease and be within target by the end of fiscal 2024, with further improvements projected for fiscal year 2025.

The company ended the quarter with $9.7 billion in cash and investments and $12.2 billion in liquidity. They refinanced $1 billion of debt and have a low net leverage. In the third quarter, they expect modest declines in DRAM shipments and increases in NAND shipments. They anticipate improved gross margins due to price increases and a $30 million increase in operating expenses. The company expects continued improvement in operating income and a higher tax forecast. Capital expenditures will be higher in the third quarter and the company plans to generate positive free cash flow in the third and fourth quarters.

Micron's non-GAAP guidance for fiscal Q3 includes expected revenue of $6.6 billion, gross margin of 26.5%, operating expenses of $990 million, and tax expenses of $240 million. Earnings per share are projected to be $0.45, and the company expects positive free cash flow in the second half of fiscal 2024 and record revenue in fiscal 2025. Despite technical difficulties, the Q&A section began, with the first question regarding Micron's market position in HBM, which is expected to remain in line with their overall position in DRAM by 2025.

Sanjay Mehrotra, CEO of Micron Technology, discusses the strong demand for their new product, HBM3E, which is expected to drive significant revenue growth in fiscal year '24 and '25. The company is currently sold out for calendar year '24 and has already allocated most of their supply for calendar year '25. They are working on increasing capacity and improving yield and quality. Mehrotra predicts that fiscal year '25 will see a significant increase in revenue compared to fiscal year '24, with HBM being a major driver of this growth. However, he is unable to provide specific numbers. The company also plans to reduce wafer capacity by low double-digits by the end of this fiscal year.

In the current quarter, HBM3 is expected to be accretive to gross margin. The company is also seeing demand for traditional servers and the forecast assumes an improvement in shipments for that market.

Sanjay Mehrotra discusses the accretive nature of HBM, stating that while it carries a higher cost, it also brings significant value in terms of performance and power. The company's yield ramp is going well and they expect HBM to be accretive to their gross margins in the current quarter and in the future. Mehrotra also mentions that traditional server demand is expected to grow modestly in 2024, with AI servers driving higher growth. The company is seeing strong demand for both DRAM and NAND products in the server market, particularly for high-density DIMMs and data center SSDs. They predict that customer inventories in the data center market will be normalized by the first half of 2024.

The question is about the impact of wafer movement from Big 3 to HBM on the supply-demand outlook for DDR5 and the customer engagement and longer-term contracts. The response highlights that HBM is a highly silicon-intensive technology and its demand is increasing rapidly, leading to a three-to-one trade ratio between HBM and DDR5. This is putting pressure on the non-HBM supply, as HBM is in high demand and more profitable.

The company expects leading-edge nodes to be in tight supply, leading to improved profitability for DDR products and a strong position for HBM. The company's supply is already locked up for '24 and '25, giving them confidence in their D5 and LP5 positions with customers. The past year and a half has been tough in terms of timing differences, lower node transitions, and underutilization effects, but the company expects more normal conditions going forward with mid to high-single-digit cost downs and improved efficiency.

Sanjay Mehrotra, CEO of Micron, discusses the impact of HBM on the company's cost down performance. He also mentions that the industry is experiencing a tight supply due to factors such as CapEx cuts, utilization cuts, and a shift to newer nodes of equipment. He notes that this has resulted in a structural reduction in wafer capacity in the industry. The company is also seeing a substantial increase in shipments in fiscal year '24 compared to '23, and they are having discussions with customers about potential contract structures to address the tight supply.

Sanjay Mehrotra, CEO of Micron, discusses the tight supply situation in the market and how it has impacted their discussions with customers, particularly in regards to HBM. He notes that contracts for 2024 and 2025 are already locked in for both pricing and volume, which is unprecedented. This tight supply environment is also positively impacting their discussions with non-HBM customers. The company is focused on maximizing output and running leading edge at full utilization. Mehrotra does not comment on any prepays this quarter. Analyst Timothy Arcuri asks about the recently qualified 128 gig market, which is important for AI.

Sanjay Mehrotra, CEO of Micron, discusses the company's new product and its reception in the market. He explains that the product has a strong customer pull due to its improved latency and energy efficiency. The product's mono die architecture is preferred over a stacked architecture, resulting in power efficiency and greater performance advantage. Mehrotra also mentions that the product will contribute to significant revenue in this fiscal quarter and several hundred million dollars in fiscal 2024. He emphasizes the company's goal to shift the mix of their products towards more profitable parts of the business, such as data centers, solutions, and high-capacity DIMMs. This shows the company's successful efforts in strengthening their product portfolio and targeting more profitable markets. A question from an analyst asks about the potential growth of the product, to which Mehrotra responds that the company is focused on managing the mix of their business in a prudent manner and increasing their profitability.

The speaker is discussing the potential impact of HBM on Micron's gross margins. They mention that HBM currently accounts for 20% of Micron's DRAM revenue, but it could increase to a higher percentage next year. The speaker cannot provide specific numbers, but they mention that price is currently the biggest factor in gross margin increase, followed by cost downs and favorable product mix. They expect HBM to become more significant in the fourth quarter of this year and continue to contribute to margin expansion in 2025.

The speaker addresses a multipart question on margins, stating that underutilization charges related to legacy manufacturing capacity have decreased significantly and will likely remain at low levels. They also decline to project gross margins for HBM products, but emphasize their focus on increasing production and maintaining discipline to meet their share target for HBM and DRAM. The speaker believes this will lead to high revenue growth and profitability for HBM in the future.

The speaker believes that certain factors will play a crucial role in their future execution and success. A participant named Chris Danely thanks the speaker and the operator ends the question-and-answer session.

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