Micron: HBM3E Mass Production Underway, Supplying to Nvidia (2QFY2024 Earnings Call Summary)

The summary of Micron Tech's 2024 fiscal second quarter financial conference call is as follows. For financial report analysis, please refer to " Micron Tech: Storage Prices Surge, Unleashing HBM3E Battle 》

I. Review of Core Information in Micron Tech's Financial Report:

II. $ Micron Tech(MU.US) Financial Conference Call Detailed Content

2.1 Key Points from Management's Statements:

• Profitability Recovery Achieved Ahead of Schedule: Micron Tech achieved higher-than-expected revenue, gross margin, and earnings per share in the second quarter of the 2024 fiscal year, with a positive operating profit margin achieved one quarter ahead of expectations.
• Improvement in Market Conditions Driving Price Increases: Strong demand for AI servers, improved end-market demand environment, and reduced industry supply collectively drove improvements in market conditions and significant price increases.
• Record Revenue and Profitability Expectations: It is expected that DRAM and NAND prices will further rise throughout 2024, with record revenue and significant improvement in profitability expected in the 2025 fiscal year.
• Leading Technological Nodes: Over three-quarters of Micron Tech's DRAM bits are utilized at 1-alpha and 1-beta nodes, while over 90% of NAND bits are used at 176-layer and 232-layer nodes.
• Cost Reduction in Line with Long-Term Expectations: Cost reductions in the 2024 fiscal year are expected to meet long-term expectations, with mid-to-high single-digit reductions projected for DRAM and low double-digit reductions for NAND.
• Improvement in End-Market Inventory: Significant improvements in data center memory and storage inventory are expected to normalize in the first half of 2024; strong demand is maintained in the automotive and industrial markets.
• AI-Driven Growth Opportunities: AI technology will drive growth for several years, with Micron Tech well-positioned to leverage these trends in both data center and edge markets.
• Market Recognition of HBM Products: HBM products have gained market recognition for their low power consumption and high performance, with expected revenues in the hundreds of millions of dollars for the 2024 fiscal year
• Capital Expenditure Plan: Micron Technology plans to spend between 7.5 billion and 8 billion US dollars in the 2024 fiscal year, continuing to invest in maintaining technological leadership and capacity optimization.
• Maintaining Technological Leadership and Improving Profitability: Micron Technology expects to maintain its leadership position in DRAM and NAND, while focusing on improving profitability through strict supply and capital expenditure discipline.

2.2 Management Overview:

2.2.1 Market Dynamics and Price Trends:

Due to strong demand for AI servers, improving demand environment in most end markets, and reduced supply across the industry, market conditions have improved, leading to a significant increase in prices. The demand for AI servers has driven rapid growth in HBM, DDR5, and data center SSDs, exacerbating the shortage of DRAM and NAND supply. It is expected that DRAM and NAND prices will further rise in the full year of 2024, with record revenues and significantly improved profitability expected in the 2025 fiscal year.

2.2.2 Technology and Product Development

Micron Technology is at the forefront of the industry's most advanced technology nodes in DRAM and NAND, with over three-quarters of DRAM now deployed on leading 1-alpha and 1-beta nodes, and over 90% of NAND used on 176-layer and 232-layer nodes. It is expected that the front-end cost reduction in the 2024 fiscal year (excluding the impact of HBM) will meet long-term expectations, with high single-digit decreases in DRAM and low double-digit decreases in NAND, supported by the continued production of 1-beta DRAM and 232-layer NAND.

2.2.3 End Market Outlook

• Data Center Market: Inventory levels of memory and storage in data centers have significantly improved, and are expected to normalize in the first half of 2024. In 2024, driven by strong growth in AI servers and moderate growth in traditional servers, the industry's server unit shipments are expected to grow in the mid to high single digits.
• Personal Computer (PC) and Smartphone Market: After experiencing two years of double-digit declines, PC unit volumes are expected to grow moderately in 2024. Smartphone unit volumes in 2024 are expected to achieve low to mid single-digit growth, driven by the demand for personalized AI capabilities that require higher memory and storage capacities.
• Automotive and Industrial Market: The automotive sector continues to experience strong demand for memory and storage, with the memory foundation in the industrial market healthy as non-memory semiconductor supply constraints ease and new vehicle platforms are launched. Distributor inventories, order ratios, and demand visibility are improving, especially for products built on leading nodes.

2.2.4 Capacity Planning and CapEx InvestmentDespite some improvement in financial performance, the profit level is still far below the long-term target. For the fiscal year 2024, Micron Tech's capital expenditure plan will remain between $7.5 billion and $8 billion, with WFE spending expected to decrease annually. Micron Tech will continue to maintain discipline in supply and capital expenditures, focusing on restoring improved profitability while maintaining market share for DRAM and NAND.

2.2.5 HBM Development

Micron Tech has made significant progress in High Bandwidth Memory (HBM), with the expectation that the HBM business will bring in hundreds of millions of dollars in revenue for the company in the fiscal year 2024, and will positively contribute to DRAM and overall gross margins starting from the third quarter. Micron Tech's HBM products have been sold out in 2024, with the majority of 2025 supply already allocated. With the growing demand for AI and the increasing silicon strength of the HBM roadmap, it is expected that the supply conditions for DRAM in all end markets will continue to be tight.

2.2.6 Growth Phase Driven by AI Technology

We are in the early stages of multi-year growth driven by AI technology. AI, as a disruptive technology, will transform every aspect of business and society. The development of artificial intelligence, especially the pursuit of Artificial General Intelligence (AGI), will require a continuous increase in model size, with tens of trillions of parameters. On the other hand, AI models that are constantly evolving are making it possible to run on edge devices such as personal computers and smartphones, creating new and remarkable capabilities.

2.2.7 Key Role of Storage Technology in AI

Memory and storage technologies are key enablers for AI training and inference workloads, and Micron Tech is well positioned in both the data center and edge computing fields to capitalize on these trends. We believe that Micron Tech is one of the biggest beneficiaries of the multi-year growth opportunity driven by AI in the semiconductor industry.

2.2.8 High-Quality Short Drama Field

The Hello Group has officially entered the high-quality short drama field, launching a short drama star incubation program. By setting up a creative fund of over 100 million RMB, supporting over 100 short drama series, and pioneering interactive short drama formats. This program has already brought significant revenue, with total revenue from several short drama series exceeding 10 million RMB.

2.2.9 Technology and Product Innovation

• Micron Tech has launched the industry's first 128GB server DRAM module based on a single-die mode, providing the highest bandwidth D5 capability in the industry, with energy efficiency 20% higher than competitors' 3D TSV solutions and latency performance improved by over 15%.
• We have made significant progress in the high-capacity server DIMM product portfolio, completing the industry's first 128GB product verification in the second quarter of the fiscal year, and expect to achieve hundreds of millions of dollars in revenue in the second half of the fiscal year
• In the SSD market of data centers, we achieved a record market share in 2023. Our 232-layer 6500 30TB SSD provided industry-leading performance, reliability, and durability in AI data lake applications, with quarterly revenue increasing by over 50% year-on-year.

3. Q&A Analyst Q&A

3.1 Trajectory of HBM Product Growth and Capacity Planning Outlook

Q: Regarding HBM, given the company's revenue outlook for 2024, it seems to imply that the company's HBM business's annual growth rate may be four or five times. (1) Is this growth trajectory accurate? (2) How will capital expenditures and wafer capacity change in the next 12 to 18 months? (3) Considering that wafer capacity is expected to decrease by a low double-digit percentage in the 2024 fiscal year, is it possible for wafer capacity to decrease again in the 2025 fiscal year?

A: The company's HBM3E product has been warmly welcomed by customers for its high performance and 30% lower power consumption compared to other products, leading to full allocation of supply for 2024 and 2025. With production ramping up and expected continuous increases in 2024 and 2025, the company expects significant growth in 2025 compared to 2024. In terms of wafer capacity, the company expects to achieve a low double-digit structural reduction by the end of the 2024 fiscal year and will strictly control supply growth and HBM share while leveraging technological advantages. Regarding capital expenditures, capital expenditures and wafer equipment investment (WFE) for the 2025 fiscal year are expected to be higher than in 2024. Additionally, to support future demand, construction capital expenditures related to new projects will also lead to an increase in capital expenditures for the 2025 fiscal year. The company will continue to follow its framework strategy of capital expenditures accounting for 35% of revenue to ensure competitiveness in the HBM field and the broader market.

3.2 Value-addedness of HBM3 and Outlook on Server Market Demand

Q: (1) Understand the positive impact of HBM3 on gross margin. It is understood that HBM will have a positive impact on gross margin in this quarter. Also, (2) would like to know the view on traditional server demand and whether the forecast assumes an improvement in shipment volume in this end market.

A: HBM has high value due to its high performance and low power consumption in applications, and despite the higher cost, it can achieve significantly higher pricing. The company has executed well, and the production ramp-up is progressing smoothly as planned, so it is pleased to see that in this quarter when production shipments begin, HBM will have a positive impact on gross margin. This positive momentum will continue to strengthen over the next few quarters.

Regarding the question about traditional server demand, the company expects that in 2024, demand for traditional servers will grow moderately, especially after a significant decline in server unit sales in 2023. The company is very pleased with the strengthening momentum of content growth in traditional server demandAt the same time, the growth of AI server units and the overall growth of AI server units in the AI field are expected to reach mid to high single-digit percentages annually, with the growth rate of AI servers exceeding the moderate growth of traditional servers.

The company actually has strong demand for DRAM and NAND products in the server field, and is shifting some product portfolios towards these higher-demand solutions. Strong demand is seen for HBM and high-density DIMMs suitable for server applications, as well as healthy demand for SSDs in data centers. Additionally, the company predicts that customer inventories of memory and storage in the data center market will normalize in the first half of 2024, in line with forecasts from several quarters ago.

Q: (1) What impact does the wafer transfer from Big3 to HBM have on the supply and demand outlook for DDR5, and (2) any developments around interactions with customers and long-term contracts?

A: In response to the question regarding the wafer transfer from Big3 to HBM and its impact on the supply and demand outlook for DDR5, the company points out that HBM3E production requires nearly three times the wafer volume compared to DDR5 at the same technology node to generate the same number of bits. This reflects that HBM is a highly silicon-intensive technology. With rapidly increasing demand for HBM, especially with higher attach rates observed in recent GPU solutions, it indicates that HBM is experiencing a peak in demand growth. This growth in demand, both in terms of bits and revenue, is expected to continue in the foreseeable future. Due to the 3-to-1 conversion ratio and the increasing demand for HBM, as well as the higher profitability of HBM, the supply of non-HBM memory components has become tight. This has led the company to state that supply at the most advanced technology nodes is very tight, and it is expected that D5 and other DDR products will see improved profitability due to supply constraints. Regarding long-term agreements with customers, the company has secured supply for 2024 and 2025, enhancing its confidence in collaborating with customers on D5 and LP5 products.

Q: In terms of gross margin, you mentioned that the previously written-down inventory has now been cleared. Could you provide details on the factors that will affect the gross margin for the remainder of 2024?

A: In response to the question about gross margin, particularly regarding how the previously written-down inventory will impact the gross margin for the remainder of 2024, the company states that over the past year, it has faced challenges due to various factors, including timing differences, difficult-to-assess cost reductions and gross margin progress, impacts of underutilization, node transitions, structural capacity reductions, etc. By the second quarter, the previously written-down inventory has finally been cleared, which has somewhat reduced the negative impact on gross margin. This impact is expected to weaken compared to the first quarter and is anticipated to turn into a favorable impact in the third quarter. Additionally, cyclic costs related to underutilization have decreased from the first quarter to the second quarter. The company now only has costs related to legacy capacity remaining and will continue to do so in the futureWith the reduction of costs and the gradual normalization of marginal effects, a transition in nodes is taking place, which is a positive change. The diminishing impact of underutilization is fading away, and companies are responding to this change by enhancing production leverage effects and related cost absorption, as well as focusing on efficiency. Therefore, the company expects the cost reduction to return to a normal mid-to-high single-digit decrease. Looking ahead, the costs related to HBM will impact the performance of cost reduction, which is a good deal as it improves the product mix, raises prices, thereby increasing marginal profits, but this will have an impact on cost reduction.

3.3 Supply and Demand Tightness and Customer Collaboration Dynamics

Q: I would like to know about the discussions you have with your customers. It seems that this year's industry growth is mainly due to the high baseline of last year, but the supply does not seem to have increased to match this year's higher growth, making the supply-demand balance more tense in the past three months. (1) How has this changed the dynamics of your discussions with customers? (2) Were there prepayments of 600 million USD in the previous quarter, are there prepayments this quarter? (3) Are you discussing new contract structures with customers, such as them sponsoring some of your capital expenditures?

A: For fiscal year 2024 or calendar year 2024 compared to 2023, shipments will increase significantly, and the growth in annual shipments will be substantial. As pointed out, the supply is very tight. The tight supply is due to factors previously discussed, including the industry's downturn last year, reductions in capital expenditures and utilization rates, and a structural shift from traditional old nodes to new nodes supporting the most advanced nodes, leading to a structural decrease in the industry's wafer capacity. The 3-to-1 exchange ratio of HBM also contributed to the extremely tight supply situation. In particular, in discussions with customers regarding HBM, when it comes to HBM being sold out, such contracts include pricing, quantities, and other stricter terms as part of long-term agreements. Production and pricing for 2024 are all locked in. Most of the production for 2025 has been allocated, and some pricing has been determined. It is worth noting that this is unprecedented, with discussions on 2025 supply and pricing already locked in. This has had a positive impact on discussions with other customers in the non-HBM market segment.

In the overall tight supply environment, it is advantageous for the company to manage price increases, maintain a focus on supply-demand balance, and continue to execute the strategy of maintaining stable market share while driving business revenue and profit growth with extreme discipline. The most advanced supply is extremely tight, and the company is working to maximize output, meaning that the most advanced production lines are currently fully utilized.

Regarding the issue of prepayments, the company did not provide any specific information.

3.3 Market Potential of High-Capacity DIMMs

Q: The 128GB product you mentioned seems to be very important in the AI market. The company has adopted a single-chip approach, while I know your competitors use a packaging approach. (1) Can you talk about the acceptance of this? (2) And the opportunity you mentioned of several hundred million USD, how big do you think this opportunity is?A: The company has indicated in the prepared remarks that this product has received strong demand from customers. This is mainly due to the architecture we have chosen, which focuses on issues crucial to customers, including significantly improved latency and energy efficiency. Compared to stacked architectures, the single-chip architecture provides a simplified interconnect approach, bringing benefits in energy efficiency and performance. Therefore, the company has indeed seen strong acceptance of this product. The company stated that this will bring meaningful revenue to the company in this fiscal quarter and generate hundreds of millions of dollars in revenue in the 2024 fiscal year, demonstrating a strong growth trend. The company's goal is to continue prudently managing the mix of products to continue shifting the product portfolio to more profitable business segments, especially in areas like data center solutions, including high-capacity DIMMs—HBM, data center SSDs, and others discussed.

3.4 Contribution of HBM to Gross Margin and Future Outlook

Q: If HBM accounts for 20% of Micron Tech DRAM revenue, and you have mentioned that at some point next year, from a digit perspective, it may be comparable to your market share, meaning HBM will increase from today's low percentage to 20% of Micron Tech DRAM revenue. Can you quantify how much this richer product mix will contribute to the gross margin improvement?

A: The company will not provide specific breakdowns, but can offer some insights into the gross margin trajectory. The growth from 1% to 20% in gross margin from the first quarter to the second quarter is mainly price-driven. While there are many other factors, price is the main driver of this growth. Similarly, from the actual 20% in the second quarter to the guided 26.5% in the third quarter, price remains the biggest contributing factor. Some of it is offset by the reduction in low-cost inventory benefits mentioned earlier. But price remains the biggest factor. Beginning to join are the recovery of cost declines and the favorable product mix effects the company is starting to see, including HBM as mentioned by Sanjay.

Entering the fourth quarter, the expected growth in gross margin will be similar to the level from the second quarter to the third quarter. This will be more balanced between price effects, product mix effects, and cost reductions. Most notably, HBM is becoming increasingly important and will continue into 2025.

Q: You mentioned that there are still some capacity utilization costs related to legacy manufacturing capacity. When will these costs disappear?

A: Regarding capacity utilization costs, they decreased from $165 million in the first quarter to less than $50 million in the second quarter. The company believes these costs will remain at levels far below 50 in the foreseeable future, so no further comments will be made. These costs are related to legacy capacityQ: Follow-up questions on all matters related to HBM gross margin. With more competition and capacity in the market, (1) can you discuss the trend of HBM product gross margin? (2) When Samsung starts to increase capacity, your capacity rises, and all these factors combine, when will the gross margin peak and then start to decline?

A: Regarding the outlook for HBM gross margin, the company will not make predictions here. The company is fully focused on increasing production capacity and aims to align HBM's market share with DRAM by 2025. This will bring greater profit opportunities, but the company does not currently predict the future pricing of HBM. Clearly, HBM brings significant value in applications, with increasing demand for HBM in new platforms while facing shortages. The company has mentioned that supply for 2024 and 2025 has already been booked. All these factors indicate that the HBM business will achieve high revenue growth and high profits. The company will be extremely focused on maintaining discipline, capital expenditure discipline, maintaining HBM market share targets, and ensuring overall supply growth aligns with DRAM business share. This will be key for the company to continue executing and driving opportunity development.

Looking ahead to 2025, the company foresees sustained pricing strength, favorable product mix, and good cost reductions beyond the HBM effect, all contributing to the expansion of gross margin.

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