Micron Technology Inc. (NASDAQ:MU)
NASDAQ 34th Investor Program Conference Call
June 16, 2016, 08:15 AM ET
Ernie Maddock - Chief Financial Officer and Vice President, Finance
A - Unidentified Analyst
Good afternoon. And I hope everybody had a nice lunch. I'd like to introduce our next presenting company all the way from Boise, Idaho, we have Micron. Micron is a world leader in memory and semiconductor technology and they offer the broadest portfolio of silicon to semiconductor solutions, started of course with DRAM. They are also a NASDAQ 100 Company, so we're excited about that.
Joining us today, we are pleased to welcome Chief Financial Officer of Micron, Ernie Maddock. Ernie oversees global finance and accounting and is joined at the conference today by Ivan Donaldson, who heads up Micron's Investor Relations. So please join me in welcoming Micron and CFO, Ernie Maddock. Ernie?
Thank you. Appreciate it. Good afternoon. I have a few slides here and then we can open it up for Q&A. My lawyers tell me that I have to read the Safe Harbor statement. I'm not going to do that, but I am going to ask you to read it and recognize that what we're talking about here today may in fact be our expectations and results could be different.
I wanted to give a real quick update on the Inotera transaction; certainly, we’ve been getting a lot of news coverage on this and certainly a lot of questions. So essentially what we have talked about we've previously set an expectation that the transaction would close in mid-July.
The timeframe for closing, we just can't get across the finish line during that time. There were some things that are a part of the transaction that need to be completed that simply can't be done by that period of time. And we will provide an update on the transaction further toward the end of this calendar year. But I can tell you based on the number of questions that I've been asked, the delay is not related to the ability of Micron to obtain financing.
There's been some speculation that perhaps there's a pending deal with China. I can tell you that our position relative to China hasn't changed. This really is just work that the two parties need to do to get across the finish line, predominantly on the Inotera side and we want to allow them the time to do that in a complete way that will allow us to move to closing as quickly as can reasonably be achieved.
On more broad based topics, we’ve provided a perspective of the worldwide semiconductor market. Memory is about $78 billion of the $334 billion space. Although the numbers aren't all that large, it continues to be a growing space. So in a worldwide semiconductor market that contracted by a couple of percent the memory space essentially flat, down about 1%.
And you can see the dissection of that market with DRAM still being the preponderant revenue share of the market, roughly flat, down just ever so slightly year on year. And you can see the division of that market between PC and non-PC. And I think this surprises a lot of folks in the sense that all of the pricing discussions and everything we read in the paper focuses on that $10 billion PC market. And we don't have nearly the visibility or discussion on the non-PC market and the reality is that market is actually holding up reasonably well in the context of what we all recognize as a pretty tepid demand stream coming out of the PC world.
On the non-volatile side, which includes NOR and NAND as well as 3D XPoint, which is de minimus here relative to 2015 results, that market is actually growing by about 3% and the reality is NAND slightly faster than that; the NOR market more flattish, but that certainly as you look out over the course of the next three to five years is a significant focus for the company and a driver of top line revenue growth.
This breaks things out a little bit more, so this talks about what we believe the bit demand forecast for memory will be over the course of the next – through the end of the decade, let's say. DRAM, we believe, is going to be running at a CAGR of about 25%, I’d put a range around any one of these specific numbers, so let's say 20% to 25%.
And the NAND CAGR, as you can see, is markedly different, so normalizing in that 40% range, plus or minus. The big driver of NAND growth is the transition to 3D technology. And unlike prior technology transitions where you sacrifice a little bit from a performance point of view but you get a lot of benefit from a cost point of view, with 3D NAND, you actually get a part that from a performance and reliability and quality point of view is as or better than the prior generation of its planar technology at a cost which is significantly less.
We believe that the combination of those cost and performance factors will really expand the SSD market, for example, the storage market where you will see a very strong trend towards NAND-based storage that will more rapidly replace spinning disks here than has been the case in the past.
We think the DRAM is less elastic. Our belief is that the technology transitions that we and our competitors will be making over time would be sufficient to satisfy the end market demand for DRAM bits. And that if you look sort of what's next, I think 3D XPoint is a great example of new emerging memory that has been productized and certainly as you look out over this period of time will become more significantly relevant as you get into 2018 and 2019 as a new form of memory, and ecosystem needs to be developed around that and that is very different than sort of a subsequent generation of DRAM where you already know exactly what the slot is, you're going to plug that new version of DRAM into.
Markets for the products, I mentioned earlier the preponderance of our thought around DRAM end up being focused around PCs and PCs, as you can see from the chart, are a significant minority of what the DRAM market looks like. So a very significant part of that goes into the server and networking space and the mobile space. PCs are the bottom blue box and at the top end of the range you see the auto and embedded segments. And those are – the auto and embedded segment is perhaps the most sticky because once you go through a qualification process with a supplier that is typically a multi-year market share win that you are able to achieve.
And if you look at NAND, the bottom chart reflects exactly what I've just articulated, which is the dramatic improvement and increase in SSDs being represented across the breadth of the NAND market. So it's going to be sort of a mobile SSD market with a little bit of consumer left over here.
On the right hand side of the page, we’ve given a perspective of what you're looking at in terms of both the current content of memory in some key devices as well as what we see in terms of bit growth over the next few years. And PCs sitting there with an SSD, you can see the most modest growth of DRAM of any of the applications and then slightly above average NAND with the propensity of transitioning to SSDs.
If I look at the supply outlook, I think there's been actually a lot of press released about this over the last few days. With no additional wafers added, we believe that the supply growth in the DRAM world will be somewhere in the high teens as we look in 2017.
And again without new wafers added, we expect that to continue to decline because while you get fundamentally an improvement in the number of bits, there is an increasing penalty related to processing time that serves as a limiter on the raw improvement that you get with any given technology shrink. And that process time penalty, if you will, tends to increase as you shrink to smaller and smaller geometries.
If you look at the NAND side of the equation, we're undergoing this period of transition from planar to 3D capacity. We think that that will cause the growth curve to smooth out, but then as 3D capacity is put in place, we would expect that you would see supply growth at least keep up with what we expect on the demand side.
Relative to Micron, this is no new news. These are our 2016 investment priorities. DRAM memory investment, which we expect to be roughly a third or so of our aggregate CapEx is designed around the implementation of 20 nanometer technology as well as taking the steps necessary to move our 1X Process Node into manufacturing by the end of the year and then further advanced work on 1Y and 1Z.
Non-volatile, which we expect to be roughly half of our investment, predominantly relates to ramping our Gen 1 of 3D NAND, the completion of our [fab 10X Shell] in Singapore and then enabling generation 2 3D NAND in the fall of 2016, so that we're prepared to ramp that in 2017.
More than 50% of the bits the company produces will be from 3D sometime in the fall of this year. So that's an improvement from some of the things we've previously talked about which was the end of the year at our last analyst day which was earlier in February, we actually moved up the target date for bit crossover from the end of the year to fall.
And then the final bucket is around technology and product enablement. We are doing a small R&D fab expansion in Boise, together with investments in advanced packaging and emerging memory. Net-net, $5 billion of net CapEx from a Micron perspective in fiscal 2016 and that remains unchanged.
To talk a little bit about our 1X DRAM node, there's been a lot of interest in that. We think that you're going to see production on that product ramp in our fiscal 2017. From a cost expectation, it’s about a 20% cost reduction that is enabled as we transition to that 1X node from our existing 20 nanometer node.
And next generation 3D NAND, so our Gen 2 is on track. It's double the density of our first generation product, which is going to allow for about an incremental 30% cost reduction. We’re beginning to see some wafer out on that, but it will predominantly be ramped as we move into calendar 2017. And you can see here on the bottom of the chart the bit crossover, so we're expecting in the fall of this year generation 1 3D crossover, but then very rapidly seeing crossover on Gen 2 as we move out into 2017.
And then finally just a quick word about 3D XPoint, this emerging memory, the focus of the company for the year is around technology enablement, component sampling, ecosystem development. The comment I made earlier, we are having to work with our partners to develop the entire ecosystem around this memory product line.
It’s not as if we have a roadmap that shows a cadence that every two years there's going to be a processor coming out with these requirements from memory so that you know what you're designing, we are essentially both advancing the technology for 3D XPoint and at the same time enabling the ecosystem.
And so that is not an extremely rapid process and we're also having to develop the controllers and firmware so that you can essentially make a memory solution out of this technology and we can see it being applicable in the markets that we see here, mobile data center as well as clients. We will be providing more information on this as we exit this fiscal year into 2017 as some of these enablement take place, but we are making progress with respect to our objectives around 3D XPoint.
This is a chart that we showed at our analyst day and I think it's kind of a great conclusion to things. As we have been aligning our DRAM technology roadmaps that resulted from the Elpida acquisition and the work that was done to ensure that as we go forward there is one technology roadmap for DRAM and on the 3D NAND side, we’ve been spending a lot of time focused on the execution of 3D NAND, the company's ability to participate in the market in terms of bit share has declined and you can see that graphically represented there in terms of the first fiscal quarter of 2014, the first fiscal quarter of 2015 and 2016.
With the bit growth that comes from the 20 nanometer transition as well as the 3D NAND transition first and second generation, we see the opportunity to return to participating in the market in a way that the company was able to do a couple of fiscal years ago. So we don't exactly know where the market is going to be in terms of size, but based on the estimates that we've seen here and the comfort we have with our bit growth we believe that we will be able to participate in the markets in a more significant way than we do today and have the ability to then generate some top line revenue growth that results from being able to have an increased amount of bit share.
And with that, I'll conclude my comments. It looks like we have ample time for Q&A and so we will open it up to the floor.
Q - Unidentified Analyst
We have a question here, just allow for the mike.
It looks like over the last few years we've gone down from multiple competitors in NAND to something close to [indiscernible] I’m sorry, in DRAM [indiscernible] to a duopoly, do you see the Chinese potentially coming in and being disruptive?
I think you can conclude that if the Chinese entered the market as a manufacturer of their own right, it likely would be disruptive. But as we've said before, there are extremely significant intellectual property hurdles and knowledge hurdles to them doing that. As you mentioned, right, there are three players in the market.
Samsung, Hynix, Micron and each of us has hundreds and thousands of people years invested in the knowledge and IP necessary to do what we do. I don't think that that knowledge can be replicated very easily at all and as a result of that I think there will be some challenge for China to organically enter the DRAM market.
Are you referring to manufacturing knowledge above all, because with DRAM it’s more difficult to see high intellectual property content, or am I wrong about that?
I would say that it's actually quite tough, right. If you think about the curve we just talked about with respect to DRAM and the fact that it takes a year or more to sort of come up with the next generation and that time is stretching out, it's not compressing. If it were really like manufacturing a crock or a piece of steel or something like that, you’d see very rapid cycle times. So I would say it's both an IP hurdle as well as a manufacturer hurdle.
I tend to look particularly relative to China with the manufacturing piece being easier, right, because there's lots of capital and willingness to invest, but without the IP that manufacturing ability is really for no good end.
Can I sneak one more in?
What do you see as the lowest geometry where DRAM can be manufactured?
I don't think we have a view on that. I think if you add the word economically, and by economically I mean with this idea that we all have that every generation will be 30% less than the generation before, certainly it’s some finite number that's probably limited by one hand, whether it's a few of those fingers or all of those fingers, I don't think anybody is able to say. But from a pure technology point of view, I believe that the lifespan is much longer. The question is how do you deliver that and deliver the cost reduction that has become almost a de facto expectation that comes along with every shrink.
Capabilities of XPoint, I know it’s early stage, but 3D XPoint as a technology, is it [a long map] to become a significant portion of sort of in between DRAM and NAND products in the long run or is it something else that will be bit niche in the long run or is it too early to say?
I think it's pretty early days. I do think we're comfortable with the perspective that if it cannibalizes either of the two it would predominantly be DRAM and I think we believe that that cannibalization as we go out to say 2019 or 2020 at this point could be as much as 10%. But we don't see that as being the, if you will, the ubiquitous replacement for DRAM under any circumstances. But as I said, it is very early days and we'll have to sort of give this a little more time to see how it develops to see if our assessments are correct.
You talked about 3D SSD adoption in PCs and in servers, can you just touch on consumer electronic adoption? And I guess are we going to be expecting a wave of adoption through next year and the year after in consumer electronics? And I guess from that perspective, has the industry got the capacity to actually meet that demand?
Yeah, I think that you are going to see proliferation into consumer electronics and obviously our view is that the culmination of all of the demand that we see will result in this bit growth CAGR of around 40% and we are very comfortable that supply will be put in place to enable that sort of bit growth. But if we're wrong about that and the CAGR is 70%, then it's heavily skewed to the front end of the line, then for sure there will be a period of time where there will be an adjustment and 3D NAND will be a short supply.
I know of several people who believe that that could be the case. But our company view of this is that you have these sorts of bit growth CAGRs and that between our investment plans and the announced investment plans of others that there will be supply put in place that will be sufficient to meet that market demand.
The number of players in DRAM has gone down to three today as you mentioned, how concerned are you that in this new environment Samsung continues to be disruptive despite the smaller number of players and the more benign conditions which we hope for will materialize?
So listen, it's always something that you think about whether it's that competitor or any other competitor is that someone is going to invest for reasons other than economic return, but at least thus far many of the public comments that have been made, a lot of which have been made by the equipment companies collaborate this idea that there is a general reduction in DRAM CapEx planned by our Korean competitors and that we believe is very consistent with other messages that we're hearing in the marketplace. So am I concerned? We’re always concerned. Do we believe that that disruptive behavior is a high likelihood? It just doesn't feel as if that's the case right now.
What are your thoughts on the use of EUV in your 1X DRAM roadmap? At what stage are you in the evaluation of that?
We have a DRAM roadmap right now that we feel can be executed without EUV and I would look at EUV as being something we think more about, for example, if we were planning a green field DRAM fab because that's where the economic return is potentially at its highest. But certainly as I look at our roadmap right now, we're comfortable that that can be achieved without EUV. Anything else? One more here.
[indiscernible] about your balance sheet structure and are there any constraints in your investment from where you are at the moment?
So certainly the company has taken on some additional leverage with our recent borrowing and I would say that planning around a cash flow neutral year for FY2017 is a pretty high priority and I'm not saying that that is a goal, I'm saying that's sort of a fallback position.
Ideally, we'd like to be free cash flow positive, but that's certainly thinking that a firm line in the sand would be placed around this cash flow neutrality given the planning process that we're going through. So we're trying to, as we always do have a relatively conservative plan, drive to free cash flow neutrality based on that, then reality happens and it – we may be a little off or a little above, but certainly that's an important consideration for next year.
All right. Well, if there are no more questions, I appreciate your time and attention. Thanks so much.
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