Micron Technology (MU) Presents At Stifel 2017 Technology, Internet And Media Conference (Transcript) – Seeking Alpha

Micron Technology, Incorporated (NASDAQ:MU)

Stifel 2017 Technology, Internet and Media Conference

June 05, 2017 12:10 PM ET

Executives

Ernie Maddock - Chief Financial Officer

Analysts

Kevin Cassidy - Stifel Nicolaus

Presentation

Kevin Cassidy

Okay. Good morning, and welcome to Stifel 2017 Technology, Internet and Media Conference. My name is Kevin Cassidy Im one of the semiconductor analysts at Stifel. And it's my pleasure to introduce from Micron Technologys, Ernie Maddock. Ernie is the Chief Financial Officer. Welcome Ernie.

Ernie Maddock

Good morning. Thank you.

Kevin Cassidy

Thank you for coming. And were going to start off everyone of our key note presentation on -- our fireside chat presentation with three basic questions to talk about your Company, your competitive landscape and your growth opportunities. So Ernie, if you could, if there isnt anyone in the audience that doesnt know about Micron, Ernie will give you an overview.

Ernie Maddock

Sure. So we provide a broad array of memory solutions encompassing three or rationally four core technologies; so first of those is DRAM; second is NAND; third is NOR; and the forth 3D XPoint. I would say that DRAM and NAND are the vast majority of the Companys -- the basis of the vast majority of the Companys solutions. But in terms of and market, we play in a very broad array. We have leadership positions and automotive market share, which tends to be products that combine NAND, DRAM and NOR. We have a very strong position in the SSD market, competing in the clients all the way through the enterprise scale SSD space. Mobile solutions both had a component level, as well as in MCP level, for predominantly Asian customers. And then obviously in the client compute datacenter segments more plastic DRAM.

Memory, I think is beginning to be appreciate as a really big component of the future that all of us, I think, live each day both in terms of the capture and storage of the vast amounts of information that are being captured about us and about the world in which we live. And then the conversion of that information into meaningful business insights and memory plays a vital role in each step of the way as we go through that transformation. So the memory right now, if youre conservative, its probably outgrowing overall semi by 3 to 4 times, if you want to be on the more aggressive end of the estimate, you should say that memory in general is outgrowing the basic semiconductor TAM by as much as 5 times. And thats a statement of a 2016 to 2018 expected TAM.

So really a renaissance of usefulness of memory and I think some very, very high profile companies are beginning to publicly talk about the fact that memory performance and memory capacity and capability is as important to them as the process or performance that underlies whatever application or whatever solution theyre trying to bring to the market. So its a great place to be in.

Kevin Cassidy

I agree. And thats been our thesis for many years on Micron. But the importance of memory, if you want to get a higher speed, phone is that more DRAM and it gives you better performance, I am just putting in a new processor. And so with that, whats also interesting in the market has been the consolidation. And maybe, if you just talk a little bit about the competitive landscape of where Micron stands now, maybe where it was five-10 years ago, and what does it look like for the future?

Ernie Maddock

Sure. So there are three fundamental IP holders and competitors in the DRAM space, Samsung, Hynix and Micro. That share position has actually been relatively constant. We are all producing at the 20 nanometer and the 1x node, Micron probably little more on 20, a little less on 1x that will be changing considerably over the course of the next 12 months or so.

And then you have four fundamental IP holders that are distributed among six participants; so Micron and Intel jointly own IP, but both address the market separately; Toshiba and WD jointly have IP, they address the market separately; and Hynex and Samsung as well. So a fairly consolidated industry, certainly, compared to the way the DRAM industry in particular look even five to eight years ago where you had multiple competitors. I think at one time there were as many as 32 DRAM companies, and that we know it's way down to three and a lot of that Micron was able to leverage by scaling and taking advantage of the exit of other players from the industry.

Kevin Cassidy

Great. And weve talked a little bit about the growth outlook, things right now that were in the shortage period and the capacity increases that both Micron and the industry is putting out for DRAM. Can you say what that is and whats the limiting factor of increasing capacity?

Ernie Maddock

Sure. So we believe that from a supply point of view that you will have somewhere between 15% and 20% bp growth at the supply, and that is a combination of two things; one is advancing technology nodes, which are progressively yielding fewer and fewer bits. But probably if we were only dependent upon simply the bits provided by the incremental technology nodes, you might be at the lower end of that range or maybe even slightly below the low end of that range. And then all the competitors tend to want to do what they can to hold the way for output flat. So anytime you do a technology shrink, you essentially get more bits off of each wafer, but you have fewer wafers that you process because it takes longer to process a wafer on a smaller technology node.

And so the result is that you would simply add wafers such that your aggregate output from that fab or that facility would remain flat. So that you at least get the full benefit of the bp growth across however many wafers you were producing prior to the technology transition. And that would move you into the, probably to the middle, to the upper end of that range of 15% to 20%. I think beyond that, you have to think about adding fairly significant amounts of wafer capacity. And certainly as we see the supply growth that is governed by an influence by what we think is happening on the demand side and the demand side right now feels as if this between 20% and 25%. And so there really isnt a very strong reason to add significant capacity based upon the view of the demand as we go out over the next few years.

Kevin Cassidy

And maybe if you could just touch on that, what were the Greenfield fab costs to put new wafers on?

Ernie Maddock

Well depending on the size and scale, youre probably conservatively looking at $5 billion to $10 billion. And again it depends upon the specific scale, but it's quite an investment. And dont forget that even if you were to make that decision today that a two year to 2.5 year decision, so youre -- and the economic return horizon on something like that is probably 15 years, because certainly in the first four or five years, youre not going to have positive NPV coming from that investment. Youre going to count on that investment providing NPV for you out in the terminal value calculation in a traditional financial analysis. So it's a very interesting set of economics.

Kevin Cassidy

And key to that calculation would be the gross marginally that you get for the product. One of -- when Microns talked about at the Analyst Day about, what things you can control with the market the end average selling price, you cant have control over. But you can control your costs. Can you talk about some of the improvements youve made to costs of DRAM, in particular?

Ernie Maddock

Sure. Well, you get a benefit with every successes of technology shrink and we have talked about over the course of fiscal 16 through 17, we have provided an aggregate cost reduction on CAGR basis of 15% to 25% for DRAM. We said the same CAGR would likely apply if you wanted to measure from say 2016 through 2018 its actually -- a little higher than that for NAND because the bp growth is higher. We talked about this out over the prior two year period, ending with fiscal 17, that was somewhere in the 25% to 30% range; so averaging right at or slightly above market as a result of fully implementing the 20 nanometer technology node, which the Company get at a later time than its competitors. And then as we go forward, we said that we expected to grow at about the same rate as the industry. So we are pursuing our technology roadmap. Were comfortable with the technology position we have and were deploying capital to roll that out.

Kevin Cassidy

And maybe as we talk about that, it seems average selling price, at least in our read through, are continuing to be at least flat, if not up, so gross margins are improving. But can you talk about -- you said 20% to 25% demand. Can you say whats different in the market? What are those end market demand drivers, what market segments growing the fastest for you and which was, do you think, youre adding the most value?

Ernie Maddock

Sure. So if I think about, what I would consider to be the core of that market demand today, certainly, that is roughly evenly split between the mobile business and between the datacenter server hyper scale, there is a few things that people call it. But its basically that datacenter environment no matter where it's realized or implemented, and then the mobile business. And then on the fringes of that is obviously the classic PC space, which I would put to the less of that continuum. And then on the right of that continuum is a really important market for the Company, which is the embedded in automotive space, which from a size perspective is not the largest of the Companys markets but which has some very solid growth potential and probably will outgrow some of these other markets over the course for the next three to five years.

But both, depending on how you want to slice it, Id say, that the mobile business and the datacenter business today are roughly equivalent in terms of the amount of contribution they provide to the bits, and the bp growth that the Company is going to experience from a sales perspective. And they actually both provide some interesting opportunities for the Company to further differentiate and provide a solution based approach as opposed to simply commodity or a component based approach. And the server segment, in particular, also has a small sub-segment related to graphics and very, very high performance memory that is particular strength of the Company given our position in video and the well recognized leadership position that we have in graphics and high performance related memory.

Kevin Cassidy

And maybe if we even add on to that, I think, we mentioned Nvidia as part of the excitement around is the deep learning or machine learning. And all of that requires high speed memory?

Ernie Maddock

Yes.

Kevin Cassidy

So, thats -- Nvidia is getting a great valuation multiple, and if Micron could get that, what people appreciate that the DRAM involves in every one of those designs. And maybe if we turn a little bit to the flash market

Ernie Maddock

Sure.

Kevin Cassidy

NAND flash, and again were short of product this has been an industry transformation over to 3D NAND. And I think out of all the flash companies Micron is one that benefit the most for this transition to 3D. Can you talk about where Micron was with planar NAND and where you are with 3D NAND?

Ernie Maddock

Sure. So I think Micron benefited tremendously from 3D transition. We unlike many of our competitors, we did not do what would be considered a quote-on-quote final generation of planar shrink. And so we had a very significant cost decline from our last generation of planar to our first generation of 3D, many competitors companies actually had to go to a second generation of 3D before they saw that same cost benefit. So 3D has been absolutely essentially in terms of changing Microns competitive position relative to addressing the most important parts of the flash market, which I would consider to be mobile and the SSD space.

Kevin Cassidy

And where are you right now as far as your bp output planar versus 3D NAND?

Ernie Maddock

So, we talked on our last earnings call that by the end of year wed be somewhere in the 75% range. And then as we role forward through 2018, closer to 85%. The reason that number isnt a 100% is that really important automotive business that we support is supported with planar NAND right now. We are now just in the qualification process of 3D NAND. For those of you who may not be familiar with automotive design cycles, those youre calling now for cars that will be produced in 2019-2020 and then once youre called, you have to keep production at that same level of technology for decade or so. So the automotive systems providers are much more interested in stability of supply, quality of supply than they are on any cost reduction benefit they may get by a subsequent generation.

And so the reason the Company doesnt expect in the near term to have a 100% of its output of 3D is not that were not capable of getting there or dont think we have great technology, it's that we have a very, very stable requirement for planar output that were going to try to provide as efficiently as possible. And that part of the business generates the appropriate returns to accounts for the fact that that cost of producing is a little bit higher.

Kevin Cassidy

Maybe if you could just do the same type of demand versus supply that you had talked about for the DRAM. Whats the industry supply output that youre expecting for this year, and where is the demand?

Ernie Maddock

So, weve centered around the 40% bits growth for this year. I know we tend to be slightly on the higher end versus what you might hear from some other competitive companies. But the range tends to be 30% to about 40%, were at the upper end of that range. We think at that level of output you are limiting demand, that demand actually in a very natural way, if you were following a more natural price curve, would be higher than that 40% level, maybe as much as 50% give or take. Its hard to tell, because youre not producing that but there are certain modeling techniques that you can use to get you to a reasonable conclusion there.

And I think that that is a result of the fact that this is a year when many competitors are going through the brunt of their 3D transitions. And if you look whats happened in the industry in the first part of the year, theres been very slow bp growth, because of course you have to take planar capacity offline to do the conversion or you maybe ramping up a new 3D fab. And we expect that bp growth in the back half of the calendar year and certainly as we go forward into 18, we expect that bp growth from a supply point of view is going to be increasing as best we can see. You still dont have a situation where bp growth increase or bp growth supply increase is going to be materially in excess of what reasonable demand looks like based upon all the modeling that we can do. And so we think that while next year will be better in terms of the balance between supply and demand we certainly do not subscribe to the idea that there will be a vast oversupply of 3D NAND here over the next four to six quarters.

Kevin Cassidy

Even within the 3D NAND and solid state drive, with the prices of 3D going up or maybe with costs of solid state drives going up. Have you seen any de-specking in the PC industry?

Ernie Maddock

I think youre seeing some slower conversion to higher density drives, which depending on your definition of de-specking. But thats really about the only place that youre seeing any impact at all and even that is actually relatively limited, because of course, we are really focusing on the mobile and the cloud SSD space and the enterprise SSD space. And in those spaces even add todays SSD pricing, you still have a 30% or so cost of ownership advantage and thats a TCO, not a unit-per-unit cost advantage. But a solid state drive based storage environment can cost about two-thirds of what an HDD based storage environment looks like. And so even at what is a relative supply demand imbalance this year, even with that result and cost and place, youre still seeing some fairly favorable economics for folks in the cloud and enterprise space to implement SSD based storage environments.

Kevin Cassidy

Okay. Maybe similar to the end market for solid state drive, so little bit about the percentages, are they markets for growth also looking out over the next two to three years?

Ernie Maddock

Yes. I mean this is one of those things where each of the markets is growing at significant rates. And its almost little bit of an academic exercise to argue which market is growing faster. Because certainly, I think the one thing you could conclude is that the client market will be more heavily dependent on ongoing technology advancement, and therefore, cost per bp reductions in order to really ubiquitously replace HDDs in all PCs, all laptops, all desktops, et cetera, et cetera. So were not there yet from a costing perspective and a result in pricing perspective. But certainly, if you look at the industry roadmap, youd think that youre going to get there easily over the course for the next couple of years.

And in the other markets youve got 40% plus growth, so whether it's 40% or 50%, its way more growth than many, many, many other markets. So the demand horizon right now looks rather unlimited in the context of that discussion and the ability to reasonably grow bits. And you see the same opportunity on the mobile side, perhaps a little less aggressive growth. But nonetheless, very, very strong opportunity; particularly, for Micro, where we had less market share presence on NAND in the mobile segment a real opportunity for the Company to grow share substantially, which translate for us into similar rates for us as we see in the SSD space.

Kevin Cassidy

And maybe, Ernie, you touched on it a little bit on the competitive landscape. Where do you see yourself right now compared to say Samsung or Hynex and Western Digital? And then whats the gap, I guess, in terms of month well say in technology?

Ernie Maddock

I dont believe that there is a significant gap of any kind. We have very competitive 32 layer TLC base 3D SSDs are out computing in the market effectively from a pricing perspective, and were comfortable with, although, not satisfied with the margin that thats providing to the Company. And we thats only going to improve, we have the world smallest eye size on our 64 layer device that will not necessarily translate into the absolute lowest cost, but certainly it is a further step up in the cost competitiveness of the Company. So I dont think there is going to be very significant differentiation of any kind Mircon vis--vis competitors relative to our cost competitiveness. I think were going to at industry leading cost and therefore be able to provide industry leading solutions based upon that cost platform. And as a result of that I think there is continued opportunity for the Company relative to positioning our output in the highest value added segments.

Kevin Cassidy

And when we speak of the competitors, I dont think theres a day that goes by that I dont get a phone call and a question about Chinese coming into the DRAM market. Whats your view is on Chinas interest in investing into memory?

Ernie Maddock

Well, I mean, you cant raise a paper and not believe that Chinese are not interested in and in deploying capital to address the market. Their real challenge is there is no source of IP other than the existing industry participants. And those industry participants I think are appropriately thoughtful about whether or not they want to license or otherwise share that IP with a potential new industry entrant. And in the absence of that IP I think, that the opportunity for China to successfully enter is significantly hampered, I would never say never, but possessing IP has been key to every other industry participant successfully entering the market. And even then they were not able in many cases to have the wear with all to continue in the market and to compete in the absence of having a viable credit source of IP that challenge becomes even more significant.

Question-and-Answer Session

Q - Kevin Cassidy

Right. Ive got to open it up to the audience for any questions, if not all. Well go on with -- we have a new CEO, we do Sanjay Mehrotra, Co-Founder of SanDisk. Can you say what strategy changes you might be expecting or what change this might bring to Micron?

Ernie Maddock

I think its premature to expect that there would be strategy changes. As the Board articulated when both Marks retirement was announcement and Sanjays appointment was announced, there are comfortable with the strategy of the Company. And I think that, listen Company strategy evolves overtime, it does not -- you dont do in about say as quickly, and I certainly wouldnt expect to anything like that here. I think that Sanjay brings a, what I would consider to be, a Silicon Valley perspective into the business at the very highest level. And by that, I mean, a level of challenge, a level of pushing to do better that weve all become very accustom to if youve lived and worked in Silicon Valley. And which isnt necessarily something that the breadth of the Company experience for a very long time. I think Micron has always been positioned effectively and push hard.

I will tell you that Sanjay pushing even harder, and I think that is net beneficial, whether its Micron or any other company. The most significant achievements are typically made when you have leadership that pushes to do thing, so you didnt think were possible or pushing you to do things that you thought in fact might be impossible, and by the way doing those impossible things a little more quickly than you might have thought. So I think its sort of that energy, that drive.

And then also anytime an enterprise, as big as Micron has to adapt to someone who is new, that in and of itself creates the opportunity for change, and a heightened level of performance. So Im personally really excited and I think that he was exactly the right choice for the Company and a great -- he is looking forward to building on the legacy that Mark left behind. So what a great way to inherent the Company to be in such fantastic shape from a technology point of view, a capital deployment point of view, as Sanjay have the luxury of coming in this Company during that time, which was a result of what market done during his tenure.

Kevin Cassidy

Okay. And maybe if we touch on that when we talked about doing the impossible. But maybe 3D XPoint, first new memory introduced to the market in 40 years or so, and you and Intel have co-developed this. Can you say how is that market evolving and whats Micron positioned in this?

Ernie Maddock

Weve set fairly modest expectations about 3D XPoint. Because we have to work through enablers to enable solutions, and there will be solutions in the datacenter and potential storage solutions. And I would say that we are still exploring. So we really dont have an update for 3D XPoint since our Analyst Day. And at the point in time where we feel its appropriate, well share more about what were planning to do with that.

Kevin Cassidy

Okay, anything from the audience? How about, you mentioned capital allocation, what are you views for capital allocation through this year and then into next year?

Ernie Maddock

Well, we pretty much set the course for this year relative to capital. We have talked about a nominal $5 billion plus or minus CapEx budget and provided the outlet for that, which is somewhere in the 40% to 60% DRAM range, 30% to 40% non-volatile memory and the balance is sort of engineering, backend, test, configuration. Weve also said and have actually reduced that by about $1 billion. So weve deployed about a billion or so of the free cash flow. We said that remains an important priority. So theres possibility that we will do more of that here as we exit our fiscal year. And then of course we typically share our fiscal, what would be our fiscal 18 capital budget towards the end of the summer and we plan to be doing that this year.

Kevin Cassidy

Okay. So youre not going to give any more details on what your future plans are, or the mix be about the same?

Ernie Maddock

Well, well give those details when we finalize our 2018 plan. And there is a massive planning effort going on now in the Company. But listen when you have these two core technologies, its a reasonable thing that youre going to make significant investments in both as you look forward through fiscal 18 budget.

Kevin Cassidy

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Micron Technology (MU) Presents At Stifel 2017 Technology, Internet And Media Conference (Transcript) - Seeking Alpha