美光科技 (MU) 2022 Q4 法說會逐字稿

Thank you for standing by, and welcome to Micron's Fiscal Fourth Quarter 2022 Financial Results Conference Call.

(Operator Instructions)

As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Farhan Ahmad, Vice President, Investor Relations. Please go ahead, sir.

Thank you, and welcome to Micron Technology's Fiscal Fourth Quarter 2022 Financial Conference Call. On the call with me today are Sanjay Mehrotra, our President and CEO; and Mark Murphy, our CFO. Today's call is being webcast from our Investor Relations site at investors.micron.com, including audio and slides.

In addition, the press release detailing our quarterly results has been posted on the website, along with the prepared remarks for this call. Today's discussion of financial results is presented on a non-GAAP financial basis, unless otherwise specified. A reconciliation of the GAAP to non-GAAP financial measures may be found on our website. We encourage you to visit our website at micron.com throughout the quarter for the most current information on the company, including information on the financial conferences that we may be attending. You can also follow us on Twitter at MicronTech.

As a reminder, the matters we are 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, including 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.

I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon, everyone. Micron delivered record annual revenue in fiscal 2022 with solid profitability and free cash flow despite a challenging environment in the latter part of the year. In 2022, we ramped our industry-leading 1-alpha DRAM and 176 layers NAND nodes across our portfolio and returned a record amount of cash to shareholders. We strengthened our product portfolio significantly during the year as evidenced by record revenue in mobile, auto, industrial and networking end markets. Our share gains in client and data center SSDs contributed to record revenue in SSDs and also in our consolidated NAND business.

We also ramped new product categories like high-bandwidth HBM2E memory and GDDR6X. In addition, a record number of customers recognized Micron as the industry leader in product quality. Our fiscal Q4 financial results were impacted by rapidly weakening consumer demand and significant customer inventory adjustments across all end markets. We are responding decisively to this weak environment by the decreasing supply growth through significant cuts to fiscal 2023 CapEx and by reducing utilization in our fabs. We are confident that the memory industry supply-demand balance will be restored as a result of reduced industry supply growth combined with the long-term demand growth drivers for memory.

Micron's technology and manufacturing leadership, deep customer relationships, diverse product portfolio and strong balance sheet put us in a solid footing to navigate this industry down cycle and position the company for strong long-term growth. Our industry-leading 1-alpha DRAM and 176-layer NAND nodes drove strong cost reductions in fiscal 2022. In fiscal Q4, we led the industry again in introducing our 232-layer NAND, becoming the first company to enter volume production on a node with more than 200 layers. We also remain on track to begin the ramp of our 1-beta DRAM node in manufacturing by the end of calendar 2022. Both the 1-beta DRAM node and 232-layer NAND node will provide us with robust cost reduction when they ramp in high volume.

Artificial intelligence, cloud computing, electric vehicles and the ubiquitous connectivity offered by 5G and our strong long-term demand drivers for memory and storage. As we have discussed previously, to support memory demand in the second half of the decade and beyond, we will need to add new DRAM wafer capacity. The recently passed CHIPS and Science Act will help to reduce the memory manufacturing cost disparities that exist between the U.S. and Asia. Following passage of the CHIPS Act, Micron announced our intent to invest $40 billion through the end of the decade in leading-edge memory manufacturing in the U.S., contingent on CHIPS Act support. These investments will ultimately create tens of thousands of American jobs, strengthen U.S. supply chain resiliency and further diversify our global fab footprint.

Earlier this month, we announced that we have chosen Boise as 1 of 2 leading-edge DRAM manufacturing fab sites that we are planning in the U.S. and we expect to invest approximately $15 billion at this site through the end of the decade. The co-location of this new manufacturing facility with our existing R&D site at our headquarters in Boise, provides multiple strategic benefits, including improving efficiency across both R&D and manufacturing, simplifying technology transfer and reducing time to market for leading-edge products.

We will soon announce a second high-volume U.S. DRAM manufacturing site. These new fabs will fulfill our requirements for additional wafer capacity starting in the second half of the decade and beyond. We plan to build these sites in stages. Tool installation and production output will be ramped in line with industry demand growth, which is consistent with our goal to maintain stable bit supply share as well as supply discipline.

Now turning to our end markets. Micron's product portfolio has become significantly stronger and contributed to our momentum in the most attractive markets. In fiscal 2022, data center and graphics revenue grew approximately 35%, and auto, industrial and networking revenue grew approximately 40%. The combined revenue mix of these important markets grew from approximately 45% of our total revenue in fiscal 2021 to 52% in fiscal 2022, putting us on track to hit our target of 62% by fiscal 2025, as outlined at our Investor Day earlier this year.

This portfolio transformation will increase our exposure to the most attractive and stable profit pools in the industry. In fiscal Q4, data center revenue was down both sequentially and year-over-year, driven primarily by declines in ASP. In fiscal 2022, we set a new revenue record for our cloud revenues, which grew more than 30% year-over-year. Cloud end demand remains healthy, driven by secular growth in AI and the digital economy. However, the data center market, including both cloud and enterprise, continues to face some supply constraints that are limiting server bills. And customers are reducing memory and storage inventory due to macroeconomic uncertainties.

With a diverse set of products across DDR4, DDR5, graphics memory, high-bandwidth memory and data center SSDs, Micron offers a wide portfolio of solutions targeting this market with industry-leading quality. Building on our recent momentum of market share gains in data center SSDs in the first half of calendar 2022, we continue to make solid progress in ongoing qualifications of our 176-layer NVMe data center SSDs at hyperscalers and OEMs around the world.

Fiscal Q4 client revenue was down both sequentially and year-over-year as PC unit end demand declined and customers reduced inventory. We now forecast calendar 2022 PC unit sales to decline by an approximately mid-teens percentage year-over-year. In fiscal Q4, we began ramping 16 gigabit DDR5 in high-volume production ahead of anticipated client platform launches. We also commenced volume production of Gen 4 QLC NVMe client SSDs, and are the only company with a full portfolio of 176-layer TLC and Gen 4 QLC NVMe SSDs qualified and shipping to PC OEMs. In fiscal Q4, graphics revenue declined both sequentially and year-over-year. Micron continues to hold an excellent position as the performance leader in the graphics market. In fiscal Q4, we began shipping the industry's fastest graphics memory with 24 gigabits per second GDDR6X shipping in high-volume production. We are excited to see our proprietary GDDR6X memory featured in the recent launch of NVIDIA's GeForce RTX 4090 and 4080 GPUs.

Fiscal Q4 mobile revenue declined both sequentially and year-over-year. Despite the weakness in end unit sales, we achieved 2 consecutive years of record mobile revenue in fiscal 2021 and 2022. We now project calendar 2022 smartphone unit volume to decline by a high single-digit percentage year-over-year. 5G continues to drive digital content per device and we project 5G penetration to exceed 50% of the smartphone unit TAM in calendar 2022. We continue to execute well on our mobile product road map. In fiscal Q4, 1-alpha comprised over 70% of our LPDRAM mobile bit shipment and 176-layer made up approximately 95% of our mobile NAND bit shipments.

Micron is exceptionally well-positioned as the leader in automotive and industrial markets, which are attractive because of strong long-term growth and relatively stable margins. In fiscal Q4, our automotive business delivered another record revenue quarter, and fiscal 2022 auto revenues grew 30% year over year, setting a new all-time high. In fiscal Q1, we see some slowdown in our automotive demand as our customers rebalance DRAM and NAND inventory levels as they deal with nonmemory semiconductor shortages and production challenges. However, we see continued strong growth in our second half of fiscal 2023 with volume ramp of advanced next-generation in-vehicle infotainment systems as well as the broader adoption of more advanced driver-assistance systems. We are extremely excited by the long-term prospects for memory and storage in the automotive market and expect long-term CAGR for DRAM and NAND in autos to be at about twice the rate of the overall DRAM and NAND markets.

While long-term fundamentals remain strong, our industrial IoT business saw sequential and year-over-year revenue declines in fiscal Q4. Softening macroeconomic conditions have led some customers to reduce overall purchases of DRAM and NAND. Nevertheless, our long-term outlook remains strong for our industrial business driven by the proliferation of factory automation and digitization.

Turning to the market outlook. The memory and storage industry environment has deteriorated sharply since our last earnings call. Calendar 2022, industry bit demand growth for DRAM is now expected to be in the low to mid-single-digit percentage range; and for NAND, slightly higher than 10%. An unprecedented confluence of events has affected overall demand, including COVID-related lockdowns in China, the Ukraine war, the inflationary environment impacting consumer spending and the macroeconomic environment, influencing customers' buying behavior in multiple segments. In addition, inventory adjustment at customers across all end markets are also contributing to demand weakness. These factors are depressing demand for DRAM and NAND to well below end market consumption levels. We are also seeing an extremely aggressive pricing environment. Due to the sharp decline in near-term demand, we expect supply growth to be significantly above demand growth in calendar 2022, contributing to very high supply inventories for both DRAM and NAND.

Looking ahead, in calendar 2023, while macroeconomic uncertainty is high and visibility is low, we currently expect demand growth to be closer to the long-term growth rates of both DRAM and NAND, bouncing back from very weak levels in calendar 2022. We expect the inventory at our customers to improve in early calendar 2023, causing demand to rebound starting from the second quarter of calendar 2023. We expect calendar 2023 industry DRAM supply to grow well below demand growth. We are modeling a mid-single-digit percentage growth in DRAM industry supply in 2023, which would represent the lowest ever industry supply growth. NAND supply growth in calendar 2023 is also expected to fall below demand growth.

Given the elevated supplier inventories entering calendar 2023, we expect industry profitability to remain challenging in 2023. Following a weak first half of fiscal 2023, we expect strong revenue growth in the second half of fiscal 2023 as bit demands rebounds following substantial improvement in customer inventories. Projections for long-term demand trends remain strong across multiple end markets. We expect long-term demand bit growth to be in the mid-teens percentage, slightly lower than our prior expectation of mid- to high teens due to a moderation in the expectation of long-term PC unit sales. We continue to expect the NAND market, which benefits from elasticity, to grow around 28% over the long term.

Turning to our supply. Given the change in market conditions, we have been taking immediate action to reduce our supply growth trajectory and align it to market demand.

We made significant reductions to CapEx and now expect fiscal 2023 CapEx to be around $8 billion, down more than 30% year-over-year. CapEx would be lower if it were not for more than doubling our construction CapEx year-over-year to support the supply growth required to meet demand for the second half of this decade as well as investments for EUV lithography systems to support 1-gamma node development. WFE CapEx will decline nearly 50% year-over-year, and reflects a much slower ramp of our 1-beta DRAM and 232-layer NAND versus prior expectations. Fiscal 2023, WFE CapEx is focused on developing the technology capability of our leading nodes and new product introductions.

To immediately address our inventory situation and reduced supply growth, we are reducing utilization in select areas in both DRAM and NAND. Our CapEx and utilization actions will have an adverse impact on our fiscal 2023 costs but they are necessary to bring our supply and inventory closer to industry demand. We will aim to grow our DRAM and NAND supply in line with demand over time while continuing to optimize our cost and portfolio to improve our profitability.

Before passing it over to Mark, I want to reflect on the tremendous progress that the Micron team has made over the last few years. Today, we are a technology leader in both DRAM and NAND with a very competitive cost structure. We have leadership products and a strong portfolio that is transitioning towards high-value solutions. And we are gaining share in products that represent a more attractive profit pool in our industry. Our balance sheet is strong and allows us to invest appropriately to maintain technology, product and manufacturing leadership going forward. Our world-class quality and manufacturing expertise is recognized by our customers worldwide. We have delivered record revenues in multiple end markets in fiscal 2022 and while returning record levels of cash to our shareholders.

While the near-term environment is challenging, we are confident in our ability to emerge stronger and deliver financial performance in line with our long-term financial model. The long-term manufacturing investments we are making will further strengthen our diversified fab footprint and position us to capitalize on the exciting long-term opportunities ahead of us.

I will now turn it over to Mark.

Thanks, Sanjay. Our fiscal Q4 revenues stand consistent with our August 9 update, while EPS was within the original guidance range. Fiscal Q4 capped off a strong fiscal year in which we set a record for total revenue, generated substantial free cash flow and returned $2.9 billion to shareholders. Total fiscal Q4 revenue was $6.6 billion, down 23% sequentially and down 20% year-over-year. Fiscal 2022 total revenue was a record at $30.8 billion, up 11% year-over-year. Fiscal Q4 DRAM revenue was $4.8 billion, representing 72% of total revenue. DRAM revenue declined 23% sequentially and was down 21% year-over-year. Sequentially, bit shipments decreased by roughly 10%, while ASPs declined in the low teens percent range.

For the fiscal year, DRAM revenue increased 12% year-over-year to $22.4 billion, representing 73% of total fiscal year revenue. Fiscal Q4 NAND revenue was $1.7 billion, representing 25% of Micron's total revenue. NAND revenue declined 26% sequentially and was down 14% year-over-year. Sequential bit shipments declined in the low 20s percentage range and ASPs declined in the mid- to high single-digit percentage range. For the fiscal year, NAND revenue increased 11% year-over-year to a record $7.8 billion, representing 25% of total fiscal year revenue.

Turning to our fiscal Q4 revenue trends by business unit. Revenue for the Compute and Networking Business Unit was $2.9 billion, down 25% sequentially and down 23% year-over-year. The sequential decline was primarily driven by client, while declines in server and graphics were less pronounced. Networking revenue hit a new record in fiscal 2022. Revenue for the Mobile Business Unit was approximately $1.5 billion, down 23% sequentially and down 20% year-over-year. Mobile revenue for fiscal 2022 set a new record. Revenue for the Storage Business Unit was $891 million, down 34% sequentially and down 26% year-over-year.

For the fiscal year, NAND revenue in the Storage Business Unit was its highest ever with share gains in both client and data center SSDs. Finally, revenue for the Embedded Business Unit was $1.3 billion, down 9% sequentially and down 4% year-over-year.

For fiscal 2022, EBU delivered $5.2 billion of revenue supported by revenue records in automotive and industrial markets. The consolidated gross margin for fiscal Q4 was 40.3%, down approximately 7 percentage points sequentially. Lower pricing was the primary driver of the decline. For the fiscal year, the consolidated gross margin was 45.9%, up approximately 6 percentage points year-over-year.

Operating expenses in fiscal Q4 were just over $1 billion and below the guidance range provided on our last earnings call, due in part to lower variable compensation in the quarter. Sequentially, OpEx was up around $60 million, due primarily to the timing of technology development spend. For the fiscal year, operating expenses were $3.8 billion, up approximately $500 million year-over-year driven by R&D to support our product and technology road maps.

Fiscal Q4 operating income was $1.7 billion, resulting in an operating margin of 25%, down approximately 11 percentage points sequentially and down 12 points from the prior year. Fiscal 2022 operating income was $10.3 billion, resulting in an operating margin of 33.4%, up approximately 6 percentage points from the prior year. Fiscal Q4 adjusted EBITDA was $3.6 billion, resulting in an EBITDA margin of 53.5%, down 390 basis points sequentially. For the fiscal year, adjusted EBITDA was $17.4 billion, resulting in an EBITDA margin of 56.7%. Fiscal Q4 taxes were $74 million or over 4% of pretax income. For fiscal 2022, total taxes were $793 million or approximately 8% of pretax income. Non-GAAP earnings per share in fiscal Q4 was $1.45, down from $2.59 in fiscal Q3 and $2.42 in the year ago quarter. Non-GAAP EPS was $8.35 for the fiscal year, up from $6.06 in the prior year.

Turning to cash flows capital spending. We generated $3.8 billion in cash from operations in fiscal Q4, representing 57% of revenue. For the fiscal year, we generated $15.2 billion of cash from operations, representing 49% of revenue. Capital expenditures were $3.6 billion during the quarter and $12 billion for the fiscal year. We generated $196 million of free cash flow in fiscal Q4 and $3.2 billion for the fiscal year.

Fiscal year 2022 was the sixth consecutive year of positive free cash flow for Micron. During the quarter, we completed share repurchases of $784 million or 13.2 million shares. For the fiscal year, we completed share repurchases of $2.4 billion, representing 35.4 million shares. Including our dividend payments, we returned $2.9 billion to shareholders in fiscal 2022, representing 90% of free cash flow. We remain committed to returning 100% of free cash flow across the cycle through a combination of share repurchases and dividends.

Our ending fiscal Q4 inventory was $6.7 billion, and average days of inventory for the quarter was 139 days, reflecting weaker market conditions during the quarter. Our balance sheet is rock solid with strong liquidity, low leverage ratio and a net cash position. We ended fiscal 2022 with $13.6 billion of liquidity, exceeding our mid-30s percentage of revenue target. Fiscal Q4 ending cash and investments were $11.1 billion and total debt was $6.9 million.

Now turning to our outlook for the fiscal first quarter. As a result of the demand challenges described by Sanjay earlier, we expect fiscal Q1 bit shipments and pricing to decline in both DRAM and NAND. We expect that inflationary pressure will continue to be a headwind to costs in Q1 in fiscal 2023. We remain disciplined in our expense management and have taken specific actions with more planned. As we look ahead, macroeconomic uncertainty is high and visibility is low. In fiscal Q2, we currently expect revenue to be in a similar range as fiscal Q1 with bit shipments up but still weak for both DRAM and NAND. We also expect a recovery in volumes and revenues in the second half of the fiscal year. We expect our inventory to increase in the fiscal first half of 2023 and days of inventory to improve as demand recovers in the second half of the fiscal year.

As Sanjay mentioned, we expect our fiscal 2023 capital spending to be around $8 billion, down more than 30% year-over-year, driven by a near 50% decline in wafer fab equipment CapEx. We expect capital spending to be weighted toward the first half of the fiscal year. And as a result, we project to be over $1.5 billion negative free cash flow in the November quarter. We continue to evaluate ways to improve free cash flow, including reducing CapEx, lowering expenses and managing working capital as we respond to market conditions.

In fiscal 2023, we expect our tax rate to be elevated. Unless Congress repeals or delays recent changes to R&D deductibility, recent legislation requires that for tax purposes, we capitalize and amortize R&D expense this fiscal year. In addition, based on our income mix and U.S. and foreign tax rules, our taxes become more fixed at these lower profitability levels. These factors result in an estimated tax of approximately $300 million at a minimum. Beyond this level, the actual tax expense will depend on the level of operating income through the year.

So in this lower pretax profitability, fiscal year 2023, we expect a materially higher tax rate. Long term, as our profitability normalizes, we expect our tax rate to be in the low to mid-teens percentage range. With all these factors in mind, our non-GAAP guidance for the fiscal Q1 is as follows. We expect revenue to be $4.25 billion, plus or minus $250 million; gross margin to be in the range of 26%, plus or minus 200 basis points; and operating expenses to be $1 billion, plus or minus $25 million. Based on a share count of approximately 1.12 billion fully diluted shares, we expect EPS to be $0.04, plus or minus $0.10.

In closing, we had many meaningful accomplishments in fiscal 2022, including delivering record revenue, achieving clear technology leadership in both DRAM and NAND, increasing share in client and data center SSDs, further strengthening our balance sheet and returning a record amount of capital to our shareholders. While the near-term environment is challenging, the Micron of today is extremely well prepared to navigate it with our competitive cost structure, strong product portfolio and rock-solid balance sheet. Beyond fiscal 2023, a year starting out with a challenging set of external events, we are confident in our ability to deliver financial performance consistent with our long-term cross-cycle financial model, including revenue growth of high single digits, operating margins of 30% and free cash flow margin of over 10%.

I will now turn it back to Sanjay.

Thank you, Mark. The current macroeconomic environment presents an unprecedented challenge for the industry. Our rapid actions to both moderate utilization and sharply reduce CapEx illustrate our commitment to supply discipline and our focus on bringing our supply and demand back into balance. The Micron team continues to execute with agility to changing business conditions. We remain committed to our strategy of maintaining stable bit share and growing profitability with a portfolio of higher value solutions. And we are confident in the long-term technology drivers for memory. New data-centric applications and technology will drive long-term memory demand on the trajectory that outpaces growth in other semiconductor categories. Our strategic investments underscore this confidence and will ensure Micron is able to capitalize on these long-term trends in the decade ahead.

Thanks for joining us today. We will now open for questions.

(Operator Instructions)

The first question comes from the line of C.J. Muse from Evercore ISI.

I guess first question, can you provide a little bit more detail around the magnitude of utilization cuts and how we should be thinking about any other utilization challenges to gross margins in November and February quarters?

So I think I can answer the first part, and then Mark can take on the second part on the margins. So with respect to the utilization cuts, they are across NAND and DRAM, and approximately in the mid-single-digit range. And of course, these cuts are for the products that have been in high inventory.

And so we are cutting production of those products and using the equipment that is freed up and the space that is freed up to deploy it toward the new technology transitions. So that actually helps us with CapEx efficiency.

And Mark can comment on the gross margin impact.

Yes. C.J., as you mentioned, it's really going to hit us not in the first quarter, but later in the year, and it would be between 1 and 2 points of impact at this point. And of course, depending on market conditions, we would either dial that back or bring utilization lower.

Very helpful. And as a quick follow-up, considering your strong net cash position, but your guidance for free cash to be free cash flow negative. What's your near-term philosophy around buybacks?

Well, I think I'll state really no change around -- we're going to continue to focus on returning 100% of free cash flow to shareholders. We did repurchase in the first quarter. And so we will opportunistically repurchase. As you point out, C.J., we are cash flow challenged in the first quarter. It's been an unprecedented downturn, sharp and sudden. And it has, of course, associated inventory builds. It's suppressed our income, of course. And then we've got elevated CapEx as it happened so quickly. So we expect $1.5 billion negative in the first. We'll be challenged in the second as well as we deal with elevated inventory levels and then the revenues that we guided or the bit shipments we talked about.

And then the CapEx will take time to work down. We expect it to be weighted in the first half more heavily. We do expect with the volume recovery in the back half of the year and lower CapEx and inventories coming down. We do expect to return to free cash flow generation in the second half. And of course, we're working -- continue to work CapEx, continue to work expenses down, working our -- managing our working capital best we can, to improve from this first quarter projection we have.

And our next question comes from the line of Timothy Arcuri UBS.

Mark, so it sounds like you're basically calling sort of February as the bottom in earnings. It sounds like revenue is going to be about flat. But obviously, gross margin is probably going to move lower because you said pricing is going to come down, and it sounds like costs are going to go up. But I guess my question is more sort of around the behavior from these cloud customers in light of what's happening to supply. I mean, DRAM supply is, as you said, up only mid-singles next year. Most of that has to be coming out of inventory. So production is probably pretty flat across the industry, if not down. So these are pretty sophisticated customers. So I would think that they're going to come back to the table pretty early next year such that you could see a pretty sharp recovery in pricing. So I'm just sort of wondering if maybe, Sanjay or Mark, you can talk about sort of the behavior from these cloud customers and sort of how you think this plays out through the year as you've sort of called February as the bottom.

So look, we are not going to project future pricing trend here. But of course, we will continue to work closely with customers, not just in cloud, but customers across all end market segments. And of course, as we noted, the inventories are -- at our customers are high across all end market segments, and they are adjusting their inventory levels, including in cloud. We will, of course, most important thing is to take actions, and we have taken decisive action with respect to WFE reduction by nearly 50% and reducing our supply growth. We expect the industry supply growth to be in the mid-single digit in 2023, and our supply growth will also be in line with the industry around the same for DRAM.

So I think what's important is that the supply growth will be less, while the demand growth, once inventory adjustments at customers have normalized or have substantially improved by our second -- fiscal second half, then demand will go up from customers. And we expect that the DRAM demand will be in mid-teens supported by inventory, but the supply growth will be meaningfully less than demand growth. And that's what will bring an improving trajectory of industry supply/demand balance and improving fundamentals for our business as we go through calendar year '23.

Can I just clarify on that, Sanjay? So your supply will be mid-single digits, but your production is actually going to be down year-over-year, correct?

What we are saying is that the supply growth will be mid-single digits. And -- but the shipments will be in the mid-teens range, in line with the demand recovery that we expect. And we are also saying that we expect industry supply growth to be also in the mid-single digit for DRAM next year. Remember, this is -- this would correspond to the lowest on record supply growth for DRAM. So again, the supply growth will be in the mid-single digits. Inventory will be used to supply the demand, which will be higher than the supply growth, we expect the demand to be in mid-teens next year.

Yes. And maybe, Tim, just to maybe provide some color around the quarters, we do expect, as we've laid out that bits and ASP will be down in the first quarter. And they're down about the same, volume may be down a little bit more. Costs are slightly up in DRAM and NAND, and that's just a combination of volume mix inflation and then just node timing.

In the second quarter, as Sanjay mentioned, bits will be up, but they'll still be down year-over-year. And then as we said, the revenue range will be similar to the first quarter. And then in the second half, bits will be up sequentially third to fourth quarter. And then second half should be up a bits year-over-year. And then costs for the full year, we would expect DRAM cost downs to be lower than the long-term average. We do get some benefit from FX, but we get some inflation and some other factors that go against us. And then NAND, cost reductions are challenged, a combination of mix and inflation, and just a more difficult situation there. But I think the important takeaway is from the first quarter, we expect things to improve versus volumes and then the market better in the second half.

Our next question comes from the line of Karl Ackerman from BNP Paribas.

I have 2 questions, please. I guess the first question is just kind of a follow-up on CapEx. I know in the past, you have described capital intensity being in the 30% to 35% range of sales. But it does appear that memory demand for calendar '22 and calendar '23 could still be below your long-term expectations of mid-teens DRAM demand and 20% to 30% for NAND demand.

And so I guess the question is, do you believe that the industry's framework for CapEx needs to consider a lower terminal bit growth rate for DRAM and NAND, and I guess what are your own views on managing long-term capital investments to support bit demand beyond fiscal '23? And then I have a follow-up, please.

So our view on long-term DRAM CAGR is mid-teens and NAND CAGR approximately 28%. And we would always be managing our investments to grow our supply in line with demand. Of course, there can be variations through the cycle, but we will overall focus on making adjustments as needed, just like you have seen adjustments now.

And just keep in mind that -- as we look ahead at CapEx considerations, we should keep in mind that the tech transitions are getting more expensive. And of course, tech transitions are taking longer as well. So the capital intensity is higher, tech transitions are also giving actually lower bit growth. And of course, transition to DDR5 is also contributing to lower rate growth per wafer because DDR5 die, it has to be just bigger than the DDR4 die because of the specifications.

So our expectation is a cross cycle on average over long term, our CapEx would be around mid-30s that we have stated earlier, mid-30s percent of revenue. And of course, any given year, there can be variations, but that's a cross-cycle CapEx intensity that we would be expecting.

I appreciate that, Sanjay. I guess for my follow-up, I was curious what portion of your unfinished goods inventory is fungible and can be repurposed to either different end markets or different customers even within that payment end market? Just any clarity in terms of how you can kind of repurpose some of the inventories that you have would be quite helpful.

Yes. I think, Karl, most of it is designed to the way we build it, designed to be repurposed. I mean, there's some limitations, of course. But that strategy is going to yield benefit here because this downturn was so sharp and sudden unprecedented that inventories have grown to levels over what we thought just last quarter when we had our earnings call. We ended at 139 days. We should be down around 100, 110 ideally. But we do expect an increase again in the first quarter to be over 150 days, and it will be elevated through the second quarter and stay elevated probably through the balance of the year until the recovery is meaningful and customers replenish their own inventories.

But we should see it begin to decline in days over the back half. And of course, this view shape the CapEx you as well to take supply out, and -- but we're confident that over time -- it's good inventory. I think it's leading node primarily. And as you point out, it's fungible in a sense. So we're confident that over time, we'll be able to redeploy or use that inventory and eventually get down to our target 100, 110 days.

And our next question comes from the line Joseph Moore from Morgan Stanley.

Great. I wonder if you could talk about the November quarter. At the midpoint, it looks like your cost of sales comes down almost $900 million sequentially. And I think of that as being kind of depreciation, labor overhead, things like that. What's happening there that the sort of fixed cost elements of that are coming down so much? And is that sustainable beyond the November quarter?

Yes, Joe, we're -- I mean, we're -- clearly, we're running the fabs and that's being absorbed into inventories. So I think that's the short answer to your question. Volumes are down, of course. So...

Yes. Okay. But you built $1 billion worth of inventory in the August quarter, almost that much, and you had $4 billion of cost of sales, and it's going down to $3.1 million next quarter. So I guess it's just a pretty significant inventory build as the way to read that?

Yes. I think as I answered in the last question, we're -- inventory levels are high and they're going to be higher. There'll be over 150 days, we believe. And -- again, it's a function of this unprecedented period, and we're doing what we can to affect future supply or future capacity, be in a position to work those inventories down. They're high-quality inventory, so they will be usable. And we're managing working capital expenses, cash flow, all of them aggressively at this time.

And our next question comes from the line of Mehdi Hosseini from SIG.

Mark, just a quick follow-up. You commented that February revenue could track flattish but gross margin would at least be down 2 points because you said the underutilization charges would have a gross margin impact later. Is that -- should I assume that, that will happen in February?

Yes. It would be -- it depends on when the inventory is clear, but -- yes, later in the year, Mehdi. And then you've got -- gross margin, of course, is going to be a function. It's not just that cost element, it's going to be pricing. And at that point in the market we think volumes are recovering -- and we're just -- we're not guiding out at that point on the rest of the P&L -- or the elements of the P&L.

Should I expect 200 basis points of gross margin hit due to underutilization throughout the remainder of fiscal '23?

Mehdi, we're not -- I mean, that's going to be a headwind in the back half of the year, but it's -- but we're not guiding those quarters at this point. Just we gave a framework for how we see our business recovering along with the broader industry and what we believe will be the demand activity with our customers.

Sure. Fair. And I guess my follow-up question is also related to on underutilization rate. You laid out a very conservative view on the shipment for '23, especially on the supply side. But you're also assuming the demand would inflect to be after February quarter. Would there be a scenario that demand actually -- the demand improvement is not as significant? And would you be willing to take additional unutilization charges?

So Mehdi I would say that we would, of course, continue to monitor the macro trends as well as the trends in our industry and the overall business. And of course, we will be prepared to take necessary actions as appropriate to address the short-term as well as the long-term needs. So we will continue to look at, just like we have moved decisively here with respect to underutilization, looking at products that have excess inventory and leveraging that underutilization, as I said before, towards using the tools towards differing CapEx requirements. And we'll continue to look for those opportunities as needed.

And our next question comes from the line of Vivek Arya from Bank of America.

I think, Sanjay, in your prepared remarks, you mentioned calendar '23 bit demand will be in line with historical trends. I'm curious, what are your assumptions about the PC and the smartphone market next year that would support bit demand growth to be in line with historical trends?

So with respect to PC, this year, PC -- overall PC unit demand is down as I mentioned in the script, mid-teens percentage points. And next year in calendar year '23, we expect it to be flat to slightly down. And with respect to smartphones, we certainly expect that China would be opening up and China economy would be rebounding. The COVID lockdowns have had significant impact on China demand. So overall smartphone unit sales this year down on a year-over-year basis, down high single digits. And we would expect that next year, there would be some rebound in the smartphone unit sales.

Again, I think what's important is that the content continues to be the biggest driver of growth. 5G phones need more memory, need more storage. And as we also highlighted in our prepared remarks, of course, we are extremely focused on shifting the business away from what used to be 55% in consumer side, including PC and smartphone, in fiscal year '21, towards going to 38% by fiscal year '25. And so we are really marching along well on that strategy.

In fact, in fiscal year '22, we reduced that percentage to 48%. So we are increasing the mix of more attractive and more stable markets such as, of course, data center and automotive, industrial, networking, graphics, and we are successfully delivering on that strategy.

It's very helpful. And then on the range of WFE cuts for next year, are you expecting your competitors to also reduce spending by the same level? And where I'm going with that question is at what point does it become a competitive concern? Because historically, most of your spending has been on technology. So if you're cutting that by 50%, at what point does it impact your competitive capabilities and impact your cost down capabilities?

So look, historically, the DRAM industry in recent years have been disciplined in terms of CapEx management and supply growth management. Of course, the current environment is unprecedented with respect to the confluence of factors that we discussed that have impacted demand and the unprecedented level of inventory adjustments by our customers as well. We will take the necessary actions to bring our supply in line with demand. We think it is prudent. It is important to be rational in this regard. Of course, as we highlighted that this is a headwind to cost with respect to delaying the technology transitions for our 1-beta and for our 232-layer NAND as well as using underutilization. But this is the right thing to do for the business to bring supply growth in line with demand growth. And this is what will restore the healthy trajectory of demand supply balance.

So this is the right thing to do. And I just want to also highlight that we would, of course, maintain our share as well. And that is important. But -- as part of that strategy, we will also continue to shift towards parts of the market, as I highlighted in my prior comments, where the profit pool is greater. So it's -- we will maintain share, but we'll also continue to shift towards strengthened profitability. And I think you have seen that from Micron over the course of last few years, whereas we used to be significantly behind our competitors in margins, today, we are matching the margins if you look at past few quarters. So I think that just shows that we remain disciplined and we remain focused on continuing to shift our portfolio towards greater pools of profitability.

And maybe just to add, Vivek, is I think we made the point that of the remaining spend we have, its focus is on technology. So to your point we appreciate the need to invest in advancing the technology in the business. So the remaining spend we have will be focused on that. And then we still can maintain our position in the market with the inventories that we have that we talked about in the prior question, well over 150 days, as we enter the next quarter. And we'll have that to draw on for some period of time.

And our next question comes from the line of Brian Chin from Stifel.

It's related to the last question, but what's then is your assumption for industry memory WFE decline in calendar '23 that translates into a mid-single-digit increase in DRAM bit supply next year?

Look, we have shared with you what we are implementing in terms of WFE decrease, but certainly can't be commenting on parts of others in industry with respect to their WFE actions. But as I pointed out, historically, the industry has been disciplined has been prudent in terms of taking actions to manage supply growth, especially when it gets ahead of the industry demand.

Okay. Yes. I'm just curious what that is, even not knowing what company's plans or what that assumption is because there must be a particular assumption that drives sort of that mid-single-digit supply growth for DRAM bits. Maybe closer to home, maybe just one quick follow-up, you kick start on 1-beta DRAM and 232-layer NAND in the second half of this year. Just curious how long -- how many quarters do you think until those 2 products cross over 50% of bit shipments? And if it's a bit slower than originally planned, how does that compare to a typical time frame to ramp the new technologies?

So I think it's important to understand that we are delaying the ramp of-232-layer and 1-beta technology versus our prior plans. And most of the CapEx, the $8 billion CapEx that we have talked about, or the WFE CapEx that we are talking about is actually going towards preparing those technologies for engineering, learning and producing the products for new -- in production for customer qualifications.

In turn, these technologies will really not be contributing to the revenue shipments through our fiscal year '23 until late in fiscal year '23. They will be the primary drivers of bit growth and revenue growth and, of course, cost reductions in fiscal year '24, because we will be, again, relying on using the inventory to supplement our reduced supply growth to meet the uptick in demand that we expect in fiscal year '23.

And this does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.