美光科技 (MU) 2022 Q3 法說會逐字稿

Thank you for standing by, and welcome to Micron Technology's Fiscal Third Quarter 2022 Post-Earnings Analyst Call. (Operator Instructions) I would now like to hand the call over to Farhan Ahmad, Vice President, Investor Relations. Please go ahead.

Thank you, Latif. Welcome to Micron Technology's Fiscal Third Quarter 2022 Sell-Side Analyst Callback. On the call with me today are Sumit Sadana, our Chief Business Officer; Manish Bhatia, our EVP of Global Operations; and Mark Murphy, our CFO.

As a reminder, the matters we will be discussing today include forward-looking statements regarding market demand and supply, our expected results and other matters. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. We refer you to the documents we filed with the SEC, specifically our most recent Form 10-K and 10-Q for a discussion of the risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements to conform these statements to actual results.

Latif, you can now open the call for Q&A.

(Operator Instructions) Our first question comes from Tom O'Malley of Barclays.

I just wanted to ask, on the long-term, through-the-cycle model. You guys laid out 30% from an operating margin perspective. I understand that there are some China headwinds that are impacting, that I think are slightly more exacerbating this down cycle. But you are already, in the guidance, moving below that 30%. And it sounds like there may be some more weakening to come.

Can you just talk to if you think that 30% is still viable, now that you've seen these cuts? And just any of the moving parts as to how you think that, that can sustain through the cycle?

Tom, hey, Mark. I'll start. I mean it is a through-the-cycle model, so it's not intended to be a floor, it's not intended to be any point in time. So I think the way to look at it is we're not going to base any given quarter on where it stands relative to the long-term model because there are a lot of conditions that impact obviously the short-term results.

We are -- we have entered a period where the market weakened considerably in a very short period of time, and we're just -- we've given a fourth quarter guide to reflect the best view we have at the moment and we'll update through the quarter.

Got you. I appreciate it. And then my follow-up is just, on the cost side, going into the quarter, you guys had talked about just limited cost reductions in both DRAM and NAND. Can you just give any color on just the reported quarter, on how costs kind of shook out between the 2 buckets?

Yes. Well, on -- we do expect for the full year for our cost to still outpace industry costs. But in the third and the fourth quarter, improvements have been flattish, a little bit better on the front end because the leading node activities and those benefits, a little bit of inflation or -- inflation, but that inflation is more manifested in the back end, where -- and the net is that we end up with basically flattish costs down in the third and fourth quarter. Long term, we're still planning to be in line with industry cost trends.

And I'll just -- Tom, I'll just add in there that a lot of that has -- the reported COGS obviously have a lot of mix adjustment. So when we have strong growth, record quarter in SSDs, we have strong new growth in some of these high-value solutions, obviously, the COGS number is mix-adjusted. But when we talk about outperforming the industry in terms of cost reduction for the year, we're talking about at the memory level where our technology leadership in 1 alpha and 176-layer has allowed us to outpace the industry this year and perform well at the front-end level.

But obviously, mix of -- movement towards high-value solutions, and as that happens over the last quarter and this next quarter, those are impacting the all-in cost, but obviously providing higher margin as well or higher price.

Our next question comes from Joe Moore of Morgan Stanley.

I wonder if you could quantify at all the impact of the supply reduction that you guys are looking to do, the utilization impact of that. And I guess, is it -- can you compare it to what you did in 2019? Do you think it's something similar to that, more significant and not less significant than that? Just any color would be helpful.

And at this time, not really ready to compare it. We're still working to finalize what our plans are. As we mentioned, we're going to have a combination of trying to manage CapEx, manage utilization, particularly for some of our legacy nodes, and take a look at maybe less cost-effective nodes, how we can optimize those, how we can optimize the manufacturing footprint space as we condition to more advanced nodes. And we're going to be ramping our 1-beta and 232 technologies. We think it's very important to make sure that we continue to maintain leadership and launch those technologies so that we can have the product portfolio benefits from those as well as the cost benefits from those.

And then the other piece, of course, is managing inventory, as Mark was talking about on the call, so we'll kind of look at all those areas together to be able to determine what the right mix of supply bit growth, CapEx utilization and inventory is -- and cost reduction is for next year. And we'll provide more color, I think, on the next call.

Our next question comes from Toshiya Hari of Goldman Sachs.

I have one quick clarification and then one quick question. On the clarification, for the fiscal Q4 guide, based on your commentary, it seems like the sequential decline in revenue, that's mostly coming from bits, and pricing is perhaps down low singles or something like that based on sort of the strategy that you're taking. Is that a fair assumption?

Yes. If you do the math on things, you'll see that volume is roughly 2/3 sequential.

Got it. Okay. That's helpful. And then -- got it. And then as my question, this one is for you as well, probably, Mark. On OpEx, you talked about some of the initiatives having a bigger impact in fiscal '23. I guess last time, you were kind of in the ZIP Code from a revenue perspective. OpEx was kind of in the low $800 million dollars. And I realize there's been broad-based inflation. But how should we think about OpEx in the early part of fiscal '23 as you guys flex down?

Yes. I -- we -- you can back into OpEx long-term as a percent of sales through the model. I won't give you a number for OpEx in '23 because we haven't done our plans. We'll give guidance on that at a future call. I think the comments today were meant to reflect that it is an environment that's changed very quickly and the demand environment is weakened. And we've responded quickly across all major areas of spend.

And we are -- the OpEx number is down from what it was in our original forecast here. So that gives you a sense of we're already dealing with it. And our expectation is that as the market outlook becomes clearer, we will adjust our OpEx spend appropriately. Now it's not a -- this isn't a -- the company is in great position of leadership across technology products and manufacturing. So it's -- this is not a take a sledgehammer to OpEx. It's a scalpel exercise, and we work to get OpEx down and for an appropriate level for the conditions of the business.

And Mark, sorry, just to be clear, the sequential increase in OpEx this quarter, that's just timing of quals, as you guys noted on the call?

Yes. We had -- in the third quarter, the OpEx was low. It was actually about $100 million off of the, I think, the guidance. And 2 major drivers, one, product and technology spend, as you talk about, and that was actually not due to sort of fewer programs, it was due to actually very good performance and fewer wafers required for technology qualification. That was the largest part of the variance.

The next was just, as you can imagine, our forecast came way down. So the incentive comp was adjusted. And since we're this far in the year, it was a sizable accrual adjustment. So those 2 things were drivers. In the fourth quarter, of course, those benefits become headwinds for the fourth quarter. So we're kind of back up to this level, just over $1 billion, and sort of makes it look like more of a sequential decline. In reality, it is. And we'll just continue to work it in a disciplined way from here.

Our next question comes from C.J. Muse of Evercore.

I wanted to just follow up on a prior question around cost-downs and whether you're contemplating any material kind of change to utilization rates and how we should think about that impacting cost-downs in the coming quarters?

Hi, C.J. So we are -- I think as I said, we are evaluating utilization. I would say that we're really -- with having technology leadership, we definitely believe that the inventory at the leading edge that we're generating is very cost-effective relative to the rest of the industry, relative to even what will be available for us in future quarters. So we're really, on the utilization front, focused on thinking about optimizing older nodes, legacy nodes, of course, keeping in mind the legacy demand that we have for certain customers as well.

But it's not as if I think we're at a position where, on the leading edge, we're going to be making significant action or drastic action and then -- and as I mentioned before, when -- previously, when I think Joe or Tom had asked about this, we're still planning on ramping our 1-beta and 232 technologies later this year. We think it's very important that we maintain the technology cadence and the learning and the -- drive the adoption of those technologies. And that will happen in fiscal year '23 as well.

Very helpful. And I guess, just a quick follow-up. Are there any targets you have for inventory that you can share with us and in what kind of time frame?

C. J., the only target that we can provide is the previous level of discomfort target, I guess, maybe you call it, the -- I think we would like to keep it below 150 days. We do think it will go up in the -- it will go up in the fourth quarter on DIO. I think I gave a number of a couple of weeks. And we'll just have to see where it goes from there. That's a function of market conditions, as you know.

Our next question comes from Srini Pajjuri of SMBC Nikko.

A couple from me as well. First, on the PC and smartphone weakness, you talked about inventory correction. Just curious, I mean, do you think it's a 1-quarter event? Meaning, do you think the inventories will -- customers will normalize after this quarter? Or do you see further potential for kind of a correction going forward, if assuming that demand kind of stabilizes this year? Then I have a follow-up.

Typically, we see that, in any given segment, when customers start to correct inventory, it is a couple of quarters worth of a process that takes several months to get down to their own internal target levels of inventory.

That, of course, assumes a predictable macroeconomic environment and demand trends in their own segment. And so obviously, there is concern about the trajectory of the macroeconomic environment. So that can further create another vector of uncertainty that has to be dealt with. But typically, it takes a couple of quarters for the inventory to get normalized.

And we're talking both PC and smartphone, Sumit, that started this quarter, so we're talking 2 quarters basically from current quarter?

Yes. I mean that's the reason we said that we see this playing out sort of in the second half of calendar '22 as the biggest portion of the impact of the lowered sell-through rates in the end markets in those segments as well as the inventory correction.

Okay. Got it. And then on your own balance sheet inventory, Mark, you talked about $150 million is kind of where you will start getting uncomfortable. But if I look at your historic inventory, I think it peaked out around 130s, in the mid-130s. So I'm just curious, what changed in the last, I guess, in a year or 2, that you are more comfortable even at $150 million, I guess? Why has that level gone higher?

And then the other side of the question is that you did say that you want -- kind of you're going to maintain pricing discipline and also use your inventory to kind of supply into the market next year. So I guess, at some point, the inventory will come down as you lower your production growth. What is the minimum level that you're comfortable? I mean I'm looking at, I guess, a few quarters ago, you're in the low 90s. So I'm just curious, what is the minimum level that you're comfortable? And when do you have to ramp up production again, at what level?

Yes. So there is no news today on the call actually. It was more a validation of ranges that have been set before. I did comment on there are some headwinds in the sense of on DIO, around more complex processing and that the cycle time in the Fab would be longer and more [whipped]. There's more complex modules, and there's the associated components with those and assembly times and so forth.

So I think all that is a headwind, but at the same time, the team is doing a lot of things to offset those. And so I was validating that the number that we've provided before of about $150 million is a maximum level. Normal levels have also been talked about before, around 100 days. So the number that you cited in the low 90s is a level that we would view as good, lean inventory levels for our business.

Yes. I'll just add one comment there, just -- Srini. I mean these things always are -- the trend in the industry, and it doesn't matter whether you look at the logic, in this logic side, or you look at memory, the trend is longer and longer processing time and cycle time in the fabs, right? So that's more Fab [whip].

For us specifically then, you add in the fact that we're transforming more of our business and in general, more industry demand moving towards high-value solutions, like SSDs, like data center DRAM modules. These things have longer cycle time in the back end as well as more component inventory required to be held for the back end as well.

So when you think about all of those things, all of these, whether you're talking about the lean inventory range or the max comfortable inventory range, those are things that, generally across this industry as technology becomes more complex and products become more complex, are going to continue to keep going up over time.

And the other thing, just to keep in mind, and we talked about this at our Investor Day, is one of the trends in the industry over the last several years now, again speaking about memory, it's helpful to allow us to hold more inventories. The cost declines are lower now than they were a decade ago from technology transition.

So that's another one of the areas where we're able to hold more inventory because we have very good cost-effective inventory, especially being at the leading edge now of the industry, and we expect that inventory to continue to be cost-effective through the next -- through this next period while we're working down our inventories.

Our next question comes from Steven Fox of Fox Advisors.

2 questions. First, on the gross margin guidance for the quarter. I think you're guiding down about 500 basis points roughly quarter-over-quarter. Can you sort of break that out between -- I assume a bulk of that is just sheer volume, but anything you can provide color on how much is related to mix, pricing, et cetera? And then I had a follow-up.

Yes. I won't go into the details, but the sequential decline, third to fourth, is just driven by market trends or dynamics in the market. The second quarter to the third quarter was driven by a higher mix of NAND, that decline. Third quarter, fourth quarter -- go ahead.

Got it. And then in terms of -- third quarter from second quarter, yes. I got it -- got that. And then...

No, I was just -- I'm sorry, just one thing to add. So beyond the fourth quarter, as we've talked about as these inventories are elevated and the market works through this period, we would expect that to weigh on gross margins. So I just want to make sure that's clear.

That's helpful. And then just on the long-term agreements, I mean, I understand this is unusual times. But I mean, you just spent the last several quarters putting some long-term agreements into place and they seem, as soon as things got tough, to unravel a bit.

So I guess, you would -- it sounded like you were kind of describing some benefits that are still coming through from the long-term agreements even as demand slows here. I'm just not clear on what those are. So can you maybe talk to the, I guess, that comment in the question I just put out there?

Sure. So in terms of the long-term agreements, we have been working on these for several years, used to be just over 10% of our revenue under long-term agreements 5 years ago and it's now 75% of our revenue in the long-term agreements. So substantially, all of our large customers are under long-term agreements in terms of purchases.

And I have mentioned this in the past, that these agreements were never structured to be take-or-pay agreements, that our customers would buy the volume come hell or high water. It's more like a very strong good level of planning between our customers and us to ensure that we are driving alignment between their demand, our supply, allocation of bits to different customers, different segments and the mechanism to drive share dynamics and different customers in different segments.

So our goal with these agreements is really to use these as a mechanism to drive the portfolio mix to where we want it to be. And we have mentioned in the past that our goal is to keep our supply bit share consistent over time, in both DRAM and NAND, and strive for a bigger and bigger portion of the industry profit pull-through moves in our product portfolio and mix.

And that's where we have had tremendous success, not just in improving our product portfolio, but also using these agreements to drive our product portfolio mix into a place which gives us better profitability and improved stability. One example is that in the auto, industrial, networking, graphics type of segments, the margin stability through the cycle is much better compared to other segments of the market.

And so our goal has been to drive higher share in those segments and these long-term agreements become critical over time in driving that share. Now that does not mean that we don't work with customers to have them purchase and that is consistent with these long-term agreements. Of course, we do. But I think, to be fair to our customers as well, when these kinds of significant macro events occur, it's not like that is a feasible outcome.

So I think we use these in a way that meets our overall company goals in a very effective manner, recognizing what the limitations are of these agreements and what they are meant to do and what they're not meant to do. So hopefully, that helps.

Our next question comes from Vijay Rakesh of Mizuho.

Just a quick question here. I know you mentioned inventories are high on PC, handsets and I think people are seeing that. But I was wondering if you could give us some way of quantifying that. What are the inventory levels on the PC, handset and on the cloud side now and versus what are normal levels?

Yes. So I think in terms of PC and smartphones and then you look at cloud, I think it's a generalized comment across the industry that as the industry over the last -- semiconductor industry, and this goes beyond memory and storage. As the industry went through a significant shortage in semiconductors, definitely, that was one driver of customers wanting to have higher levels of inventory.

Another was all of the geopolitical risks in terms of impact to shipments. And then the last piece was shutdowns happening in different parts of the world due to COVID-related restrictions being put by individual, local and federal governments around the world. So all of these conspired to cause customers to feel like they need to have a better level of inventory and customers who couldn't get to those inventory levels. And one good example of that is automotive companies. You can see the significant impact on revenue that those segments and those companies have suffered as a result of not having adequate inventory.

So I think, across several segments, there has been a higher level of inventory than what was -- what existed pre-COVID. And the question is how will that trajectory of inventory in terms of weeks of sales change over time especially as the industry gets to a phase -- the whole semiconductor industry gets to a phase where fewer and fewer components are in short supply. So I think that thought is different customers and different parts of the market will make their own determination on these things.

But coming specifically to the PC and smartphone portion of the business, the volumes in each of these in terms of TAM for '22 are down roughly 10% from the expectations for '22 at the start of this calendar year. So with that degradation in sell-through expectations, obviously, the inventory levels, consequently, from weeks of sales perspective, appears even bigger. And so there is a need for that adjustment.

So I think those were some of the catalysts that created that impact on our Q4 and what we have projected for the rest of the calendar year this year in terms of when we expect the inventory correction to sort of play out in those segments.

Got it. And so it looks like you're talking more to a 10% discrepancy, but -- and is there -- if -- are you seeing a higher inventory level on the DRAM side or the NAND side? If you can give a little bit of color around that, then that's it.

So just for clarity, right, that 10% was a number -- it was the number of units that are lower in the TAM expectation for calendar '22 for PC and smartphone global unit sales versus expectations from 6 months ago. And the impact on our revenue, of course, is not just on the reduction and demand sell-through, but also on top of that, the inventory reduction, right? So I just wanted to clarify that the inventory reduction is on top of the reduction on the end market weakness. So I just wanted to make sure that it's not just that 10%.

Yes. And 10% is for the full year, I guess, then back to us in the second half is more.

Yes.

As we said in the call.

Yes, that's a very good, very important point that, for us, most of the impact of the full year is going to occur in the second half of the calendar year.

Our next question comes from Sidney Ho of Deutsche Bank.

So in terms of the demand side of things, you talked a lot about PC and smartphones, but you also made a comment that enterprise OEMs are adjusting the memory and storage inventory because of shortages in nonmemory components and macro. I want to see if you can give us a little more color and any precedence that you can point to, to see how long this correction could play out and maybe the magnitude of those kind of adjustments in the past. And I have a follow-up question.

Yes. I think the issue on that side is different than the issue on the PC and smartphone side. So whereas in PC and smartphones, the end demand trends are clearly weak and the sell-through is clearly weak, and there has been a substantial degradation in expectations for this year's TAM from 6 months ago to now. The -- by contrast, the server business and the trends of end demand, even an enterprise server on our OEM customers in that space, are healthy. And our customers continue to report robust backlog and good server demand.

I think the concern is that some of them are obviously data center, generally, across cloud and enterprise and including small and medium businesses. The builds of servers are not being able to be completed to the extent of the end demand because of shortages of certain parts that are still persisting, including, for example, network interface cards as one example and then there are others. So that's one factor that's preventing them from completing bills and meeting end demand.

And then the other factor is just the general cautiousness that is creeping in driven by some of these macroeconomic factors. But I just -- we are trying to just be extremely transparent and lay out what we see and what we hear very openly because that caution is happening, causing them to reduce some of their inventories or wanting to reduce their inventories in spite of, at least today, what is clearly robust demand on the end customer side.

Okay. That's helpful. Maybe a follow-up question is, Mark, I wanted to elaborate on the comment earlier, that you said beyond fiscal fourth quarter, that the planned inventory build will weigh on gross margin. But I thought it would actually help your gross margin because you keep your utilization higher than the current demand indicates.

But the other question I have, is there a framework that we can use to help understand where gross margin is going to bottom, then when is the -- any kind of inflection point when you think about -- obviously, pricing is the big factor here, but are there things that are within your control, whether it is technology transitions, or maybe utilization starts to improve?

Yes. Yes, there's no comment about the -- and we're not guiding the quarter. Mine was just a market commentary that the market has gotten weak, and these conditions of the market will continue to weigh on margins. That was the only comment. It's not a guide, and I'm certainly not going to comment on the -- anything beyond that.

It was more a comment on inventory in the market, the customer inventory adjustments, and that environment continuing rather than anything about RMA.

Yes.

Our next question comes from Raji Gill of Needham & Company.

Yes. And this question is kind of a follow-up on the sequential decline. So if you look at the August decline, it's 17% down sequentially. That's the biggest decline sequentially for August and kind of recent kind of company history. And you talked about an abrupt change to demand, a considerable change of demand. So I just wanted to see if you could compare and contrast what you're seeing with this level of abrupt change to demand versus, say, when revenue declined pretty significantly back in kind of February of '19 or May of '19, when we were in the middle of the trade war with China and there are sanctions against China.

Is it similar in terms of certain dynamics, in terms of a significant cut in inventory that you're seeing from your customers? Is it more concentrated? It seems to be more concentrated on mobile and PC versus, say, last time, but I'm just curious how you're thinking about that because we've had a few of these very abrupt macro impacts to demand.

Yes. I mean I think if we look at the environment, and I understand the desire to use the framework from past declines, but if you look at the 2019 environment, that was the time that we have been seeing some weakness in the demand trend, on the backs of 7 or 8 quarters of extraordinarily high increases in DRAM pricing that had caused DRAM margins to become unsustainably high and the pricing to become unsustainably high due to significant shortage in the market.

So I think that environment was entirely different, and the motivations of customers and the actions of the customers were also pretty different. And so each environment brings with it its own sets of unique issues. And so I think the way to think about the FQ4 number, yes, I mean, definitely, the environment worsened quickly late in our FQ3.

And we have had, primarily, the consumer portions of the market, the PC, smartphone and consumer segments channel, et cetera, be the ones that are driving a lot of this weakness, especially in our FQ4. I will call out that within that context, we spoke about it in the Q&A in the -- earlier today, the impact of China has been pretty significant. The weakness in China is very pronounced.

We spoke about the trajectory we were on, that we believe we were on, a quarter ago for FQ4 versus our current guide for China revenue. Our China revenue is down 30% approximately, from that trajectory, to our latest forecast. And that itself has impacted our consolidated revenue by approximately 10%.

So very significant impact coming from China. And then, of course, we mentioned some inventory correction here and there in the other segments that we mentioned in our prepared remarks, with enterprise OEM. So we're -- so that's sort of the big picture that we just wanted to highlight now. Now like we said, every environment is different and how this plays out, you're -- I'm sure you'll be watching for trends when other companies report to try and triangulate where this is going.

Yes. That's super helpful. And just to follow up on that. Sizing up the China impact was -- it was important to understand that. Any kind of fresh data points or insights now that China has reversed the lockdowns? Because this appears to be primarily a China lockdown situation, combined with some of the other factors you talked about. The China lockdown reversed. Are there any indications that, that region is stabilizing? Or is it still to be determined?

I think the recent data points from the last month on smartphone sales in China still continue to be pretty weak. And so a lot of the consumer spending remains to be seen how it actually starts to improve towards electronics and those type of items versus pent-up demand for travel and things like that.

So it's not just about the overall consumer spending. It's also about the categories of those spending, where consumers are choosing to shift their dollars, and a lot of inflation out there, just like everywhere else. So I think there is a lot of that. But also, just keep in mind, that the China economy and its weakness was a lot more pronounced than most parts of the world. And they proliferate beyond just the consumer segment of the market, right?

So the weakness in China was a broader economic weakness when the shutdown just shut down all economic activity, right? Much of the economic activity gets shut down. And so that has been pretty damaging. And even though everyone sort of intellectually knows and understands that, that is happening, this is, probably, is one of the first few data points to understand the magnitude of some of these impacts.

Our next question comes from Nik Todorov of Longbow Research.

2 questions on inventory, and that, Sumit, you touched on one of them. When you speak to your customers, in those conversations, where are they trying to land in terms of inventory on their shelves? Do you anticipate the inventory downstream to normalize to pre-COVID levels? Or do you think there's going to be a new normal?

We think that the inventory will normalize to a level that is higher than where the pre-COVID levels were. I don't think enough distance has been put between the shortages. And the experiences and memories are still very raw of that time. So I would be surprised that the inventories went all the way down to pre-COVID levels.

There is still uncertainty around, for example, China's COVID -- zero-COVID policies and what that means in case more COVID cases come up in different parts of China. So those kind of uncertainties will probably cause customers to have, even after they rationalize the inventory, a higher level of stable base, at least in the near term to medium term, compared to pre-COVID levels at a little bit higher levels.

But then again, how all of this transpires, I mean, this is just something we'll have to see. We are working very closely with customers. And as things improve, sell-through improve over time, China may decide to stimulate the economy in a significant way and that can improve in demand. So those kind of trends then can quickly eat up the inventory once the sell-through improves, right?

So these are all very dynamic numbers. They have their individual weeks of sales targets. But then the absolute value of the inventory is heavily determined by the trajectory of the future sales expectations. And that's really where a change in that trajectory improvement in expectations of future sales can quickly cause things to improve. But again, there is the environment of the macroeconomic weakness that everyone's focused on. So it will take some time.

Yes. Makes sense. And second question is, can you talk about the inventory levels between DRAM and NAND, maybe both internally, in the channel and then the customers? Are there any meaningful differences between the 2?

I mean our inventory levels are higher in NAND than in DRAM. So I think if you look at the impact in terms of the TAM, on all of these changes in unit forecast for PC, smartphones, consumer markets, obviously, that's being felt in both DRAM and NAND markets. But internally, our own inventory is lower in the DRAM segment.

Okay. And then customers, is it fairly similar? Or do you think that there's more NAND again?

I can't see too many differences between DRAM and NAND. When customers go into this inventory reduction mode, they tend to reduce all semiconductor inventory of parts that they feel are readily available. So when different parts, even beyond memory and storage, are not in shortage across the semiconductor space, they tend to go up and down, sort of, in a similar trajectory.

Now the inventory of products at customers may be at different levels, different customers may have different levels of inventory of different semiconductor products. But generally, when they go into inventory reduction mode, it's a pretty broad-based approach.

Our next question comes from Timothy Arcuri of UBS.

I just wanted to go back to this issue of LTAs. And I guess, I'm a little surprised that customers would be able to reduce demand this quickly, unless you're getting something out of it. I mean I certainly understand that it provides you the visibility and it helps you plan CapEx.

But is there something that you're in a better position today versus if the same thing happened 3 or so years ago when you had less on LTA. Are you selling at a higher price, maybe in August, than you otherwise would have if you didn't have these LTAs? I'm just trying to -- because people will say, well, what good are these LTAs if customers can stop buying to this magnitude. And then I had a second question, too.

Sure. Yes. I mean I think if you look at customers, in the past, going back 5 years, there would be situations where customers would not be very clear or specific as to how much they intend to purchase from each of the suppliers. And the end result could, in many cases, be that the amount of bits that these suppliers are targeting to produce for any given customer is 110% or 120% of the customer's TAM.

So when -- and there are these LTAs that are used pretty pervasively in the industry now, it definitely helps to rationalize and bring supply and demand into a better balance from a planning perspective. And the reason I say from a planning perspective is, of course, actuals can deviate from plans when these kinds of macro events occur.

But when they occur, and these LTAs provide us with a very good basis to better understand how our customers are thinking, not just about the next quarter, but about multiple quarters, it just gives us a mechanism to have a dialogue for longer visibility into how they expect things to proceed.

And as you can expect, when we think about our own supply, you think about making changes to our CapEx plans, our supply plans. Any changes that we make have an impact several months out, right? I mean these cycle times are pretty long. And consequently, we need those longer views from our customers in order to understand exactly how best to create a better balance between supply and demand in the industry.

So I understand your concern that, okay, if they're not going to buy based on the LTA volume, what good are these LTAs. And we have repeatedly said that these LTAs are never meant to be take-or-pay agreements. That was not the goal for which they were set up. And there is no pricing in these agreements either. They are more a volume-based agreement, and the price is negotiated every quarter or every month, depending on what kind of customer arrangements there are.

And so I think the way to think about it is it's a very useful mechanism to drive alignment between supply and demand over the medium term, to drive our portfolio direction, share gains and things of that nature and reduce in the parent level of customer -- suppliers targeting 110%, 120% of a customer's TAM because the customer will have LTAs with pretty much all the suppliers. So more difficult to do that in a normal environment.

Can I just follow up on that? So in this case, if a PC and a smartphone customer is taking bits down by -- I mean, they have to be at least 40%, 50% sequentially. If they're doing that, they pay the exact same price that they would have if they took what they said they would. There's no -- there's not even like a little bit of a price-kicker you get if these were down 40%, 50% sequentially for a customer?

Well, there are things that happen on the pricing front, which I can't get into, but those are all things that we discuss with customers based on what their needs are and how it deviates from the LTA and so on. So what exactly we do with these customers when those kind of situations occur, I'm not at liberty to discuss in this call.

But clearly, the intent is that if there are things that are happening that are outside the control of our own customers, we work with them to come to a resolution that both sides can feel good about. So that's what we do. So the details of that and how it changes with price, et cetera, is not something I can address here.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.