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Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N

Q1 2018 Micron Technology Inc Earnings Call
DECEMBER 19, 2017 / 9:30PM GMT

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Corporate Participants
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* Shanye Hudson
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* Sanjay Mehrotra
Micron Technology, Inc. - CEO, President & Director
* Ernest E. Maddock
Micron Technology, Inc. - Senior VP & CFO

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Conference Call Participiants
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* Mark C. Newman
Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst
* Srinivas Reddy Pajjuri
Macquarie Research - Senior Analyst
* Kevin Edward Cassidy
Stifel, Nicolaus & Company, Incorporated, Research Division - Director
* Romit Jitendra Shah
Nomura Securities Co. Ltd., Research Division - Executive Director
* Joseph Lawrence Moore
Morgan Stanley, Research Division - Executive Director
* Steven Bryant Fox
Cross Research LLC - MD
* Blayne Peter Curtis
Barclays PLC, Research Division - Director and Senior Research Analyst
* Harlan Sur
JP Morgan Chase & Co, Research Division - Senior Analyst
* Christopher James Muse
Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst
* John William Pitzer
Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head
* Jagadish Kalyanam Iyer
Summit Redstone Partners, L.L.C - MD & Senior Analyst
* David Michael Wong
Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Technology and Services Analyst

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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to Micron's First Quarter 2018 Financial Call. (Operator Instructions) As a reminder, today's conference is being recorded.
I would now like to turn the call over to Ms. Shanye Hudson. Ma'am, you may begin.

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Shanye Hudson, - [2]
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Thank you, Chelsea, and welcome to Micron Technology's First Fiscal Quarter 2018 Financial Conference Call. On the call with me today are Sanjay Mehrotra, President and CEO; and Ernie Maddock, Chief Financial Officer. Today's call will be approximately 60 minutes in length. This call, including audio and slides, is being webcast from our Investor Relations website at investors.micron.com. In addition, our website contains the earnings press release filed a short while ago.
Today's discussion of financial results will be presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures may be found on our website, along with a convertible debt and capped call dilution table.
As a reminder, the prepared remarks from this call and webcast replay will also be available on our website later today. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we'll be attending. You can follow us on Twitter @MicronTech.
As a reminder, the matters we will be discussing today include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer you to the documents we file with the SEC, specifically our most recent Form 10-K and Form 10-Q, for a discussion of 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're under no duty to update any of the forward-looking statements after today's date to conform these statements to actual results.
Lastly, Micron is planning to host its 2018 Analyst and Investor Event on May 21 in New York City. We'll share further details about this event in the coming months.
With that, I'll now turn the call over to you, Sanjay.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [3]
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Thank you, Shanye. Good afternoon. Micron's record first quarter results demonstrate the company's continued strong execution, a market environment that reflects the strategic importance of memory and flash storage and healthy supply and demand fundamentals.
During the quarter, we continued to enhance our cost competitiveness, achieving these maturity on both 1X DRAM and 64-layer 3D NAND. We improved our mix of high-value solutions, delivering record SSD revenues and further increasing our SSD share.
More recently, we began shipping our first 64-layer NAND consumer SSD. We also introduced the industry's fastest high-density 32-gigabyte NVDIMM-N, which combines Micron's DRAM and NAND to deliver a persistent memory solution that addresses intense data analytics workloads.
We have garnered solid interest from enterprise and cloud customers, and customer qualifications are underway. And we strengthened our talent bench with the recent addition of Manish Bhatia, who leads our global operations. Manish brings extensive experience in managing end-to-end operations, and is focused on driving manufacturing and supply chain efficiencies to reduce costs and improve our agility.
Finally, we improved our financial foundation with the retirement of $2.4 billion of debt. I'm pleased with our accomplishments and believe our focus on speed and execution better position Micron to deliver value to our customers and capture the increasing number of end market opportunities.
I will now discuss trends and results in each of our major markets. Cloud and traditional enterprise data center trends are continuing to drive robust demand for memory and flash storage solutions. Our Q1 SSD revenue to cloud and enterprise customers increased 50% sequentially. We recovered from the flash component issue discussed in our September earnings call that impacted last quarter's SSD sales.
On the compute side, we have solid sequential DRAM revenue growth into data center markets, driven primarily by enterprise sales. DRAM bench shipments to both cloud and enterprise customers were up by more than 50% year-over-year, underscoring the data center's growing need for memory and our strong execution in this market.
Our 1X nanometer designs have been well received by cloud customers, with more than a quarter of our cloud revenue in Q1 coming from our 1X technology. Fast qualification and production ramp by our cloud customers of new technology node products is a significant benefit, as it diversifies and accelerates our customer traction and market reach during early stages of production deployment of these advanced nodes.
The need to access, analyze and store data extends well beyond the cloud. This is perhaps most evident in the mobile market. Smartphone capabilities has surpassed simple communication and web browsing. They help us navigate, monitor and interact with the world around us. New cameras capture precious moments with amazing fidelity, and emerging applications like AR have tremendous promise. This increase in functionality is driving the use of higher capacity memory solutions and increased storage in mobile devices.
These trends, along with our solid execution, drove record mobile revenue in F Q1. We are strengthening our offerings and continue to diversify our portfolio of LPDRAM, MCP and discrete managed storage solutions to meet the growing needs of our customers.
We are accelerating our progress to expand our portfolio of low-power solutions, with the release of new products, such as our 1X LPDRAM designs. We also shipped initial samples of our 64-layer NAND discrete UFS solution to chipset partners and customers with very promising results.
Home automation and edge computing devices continue to drive strong revenues in consumer and industrial market segments, which require a wide variety of memory and managed [storage] products. As more edge devices begin to integrate machine learning and intelligence, we see opportunities to provide higher performance memory and flash storage solutions in these markets.
We have also seen rapidly growing demand for our graphics products. The graphics market continues to be fueled by the ever-growing popularity of gaming and eSports. Although smaller in size, recent interest in cryptocurrency mining has put further pressure on graphics memory supply. Our close customer relationships and leading product portfolio helped drive record graphics revenue, up more than 75% year-over-year.
We sampled industry-leading 16 gigabit per second GDDR6 products to key customers, and are seeing significant interest in automotive and networking applications that meet the high bandwidth this memory provides. We plan to ramp GDDR6 to production in early calendar 2018 for the graphics market, followed by other high-performance applications, such as automotive and networking.
The rapid innovation in automotive technology towards autonomous driving continues to create significant demand for higher memory capacities and greater performance. We secured a key design win in an important autonomous driving platform this quarter and are focused on replicating our success to retain our leading-edge share in that market.
Automotive customers are moving more rapidly to new memory technologies than they have in the past, and our announcement of the fastest 1X LPDDR4 and GDDR6 products for autonomous driving applications will ensure we continue to support this shift to leading-edge technologies.
We also set record revenues supplying the networking applications that serve data centers and edge devices as our reputation for consistency and innovation drives strong ties with networking customers.
These diversified growth drivers and structural market trends are generating tremendous opportunity for Micron. We are uniquely positioned in these markets with a broad portfolio of both DRAM and NAND solutions, excellent quality and comprehensive customer ecosystem engagement. We are focused on developing the right products, deepening our customer relationships and enriching our revenue mix to capitalize on these opportunities.
Turning now to manufacturing and technology. Our ability to execute our technology road map and drive cost competitiveness are foundational to our ongoing success.
In terms of wafer manufacturing plans, we still expect to achieve bit output crossover on 64 layer NAND during the second half of fiscal 2018 and expect to achieve bit output crossover on 1X DRAM by the end of calendar 2018.
We are outfitting our new back-end factory in Taichung, Taiwan to ramp assembly and test capacity and expect meaningful output from the facility before the end of the fiscal year.
Our capital investments are tracking with our deployment plans, and we are seeing good traction in improving the efficiency and cost effectiveness of our operations through these investments. Both 1Y DRAM and third-generation 3D NAND development are progressing well, and we remain on track for initial output of both in the second half of calendar 2018.
We continue to make good progress with our 3D XPoint technology. Historically, Micron's efforts on 3D XPoint have been largely focused on technology development and early manufacturing ramp. But given our increased focus on high-value product solutions, we have recently resourced a product development team to address the opportunity ahead of us.
Simultaneously, we are working with various players in the ecosystem to assess market and enablement opportunities, and we will provide further details of our views regarding these opportunities during our upcoming analyst event. We will also continue to have the opportunity to sell our 3D XPoint output to our partner, as this market develops.
Switching to our industry outlook, our supply and demand projections remain consistent with what we shared last quarter. DRAM industry supply bit growth is expected to be about 20% in calendar 2018, and we expect a healthy market environment driven by the ongoing enterprise data center, cloud and mobile strength, as we just discussed.
We expect the industry bit growth for NAND to approach 50% in calendar 2018 as the industry continues to ramp 64 layer designs into volume production. SSD adoption in client computing and data center applications continues to increase and will expand further as more supply becomes available over time.
Against that backdrop, projections for our own bit growth remain unchanged. We expect our DRAM bit growth to be slightly below the industry, and we expect our NAND bit growth to be somewhat above the industry for fiscal 2018.
During fiscal 2018, we are focusing on technology transitions for both DRAM and NAND without any additions to our total wafer capacity and on improving our mix of high-value solutions to enhance our revenue share.
For fiscal 2019 and beyond, we continue to assess scenarios for the Fab clean room space required to implement technology transitions to future, more advanced DRAM and 3D NAND nodes.
I'll now turn it over to Ernie to provide details on our first quarter results by business unit.

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [4]
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Thank you, Sanjay, and thanks to all of you for joining the call today.
We had a very strong start to our fiscal year, exceeding guidance across all financial metrics, driven by strong execution, a continued robust market environment and further progress on our technology migrations.
For fiscal Q1, total company revenue was $6.8 billion, up 11% from the prior quarter and up 71% on a year-over-year basis. Non-GAAP gross margin expanded to 55%, up 4 percentage points from Q4 and 29 percentage points from the first quarter of fiscal 2017. Non-GAAP operating margin was 46%, up from 41% in the prior quarter and up 35 percentage points from the year ago period.
We continue to prudently manage spending with non-GAAP operating expenses totaling $612 million for the quarter, up 2% from Q4, with both SG&A and R&D remaining relatively flat quarter-on-quarter. Non-GAAP net income increased to 44% of revenue and totaled approximately $3 billion or $2.45 per share. This performance compares with $2.4 billion or $2.02 per share in Q4 and $335 million or $0.32 per share from the year ago period.
Turning to performance by business unit. The Compute and Networking Business Unit reported FQ1 revenue of $3.2 billion, up 13% sequentially, and more than double year ago levels. Our record performance was driven by increasing server memory content, which drove higher sales to enterprise customers together with strong demand for graphics processing. Operating income was 60% compared to 56% in F Q4 and 14% in FQ1 2017.
Q1 Storage Business Unit revenues increased 7% sequentially to $1.4 billion, driven by strong growth in SSD sales. On a year-over-year basis, revenues were up 61%, driven by increasing market share in SSDs. In fact, sales of SSDs reached record levels in the quarter with double-digit sequential growth across consumer, client and enterprise and cloud markets.
SBU operating margins increased to 29% from 19% in the prior quarter and negative 5% in fiscal Q1 '17. These results reflect a higher-value product mix and continued market acceptance of our TLC 3D NAND-based products.
The Mobile Business Unit reported $1.4 billion in revenue, up 16% sequentially and up 32% year-over-year. We are seeing strong acceptance of our LPDRAM products and continue to enhance our portfolio of managed NAND offerings. The solid demand environment, combined with the traction we've made with our latest generation products, led to operating income of 37%, up from 31% in FQ4 and 9% in FQ1 2017.
The Embedded Business Unit reported revenue of $830 million in FQ1, in line with the prior quarter and up 44% year-over-year. Operating margin was 41%, essentially flat from the prior quarter, and up 10 percentage points year-over-year.
As Sanjay noted earlier, we continue to see exciting demand trends across each of the underlying embedded markets with evolving end market requirements ranging from high-performance memory for autonomous driving to ultra-high-density storage solutions for edge devices, such as video surveillance cameras. We are focused on building upon our existing leadership position to capture these growth opportunities.
Turning to results by product line. DRAM represented 67% of overall company revenue in fiscal Q1. Demand for client PCs, solid exposure to new flagship smartphones and ongoing strength from servers, particularly in cloud and hyperscale data centers, drove DRAM revenue higher during the quarter, up 13% sequentially and up 88% year-over-year.
Sequentially, shipment quantities increased in the upper single-digit range, while ASPs increased in the mid-single-digit range.
DRAM non-GAAP gross margin was 61.5% in FQ1, up 2 percentage points from the prior quarter and up 33 percentage points from the year ago quarter.
Revenue from trade NAND increased 2% sequentially and represented 27% of overall company revenue in fiscal Q1. Trade NAND revenue was up 47% year-over-year, driven by our strong growth and market share gains in the SSD market and robust demand from the mobile and embedded markets.
On a sequential basis, shipment quantities increased in the mid-single-digit range, while ASPs declined in the low single-digit range. Trade NAND non-GAAP gross margin was 49% in FQ1, up 9 percentage points from the prior quarter and up 26 percentage points from the year ago quarter, reflecting a richer mix of sales into high-value end markets.
As Sanjay noted in his prepared remarks, we are making strong progress on the rollout of our 1X nanometer DRAM and 64 layer 3D NAND deployment. The rollout of these technologies will enable meaningful levels of ongoing cost per bit reduction as we make progress throughout fiscal '18.
For DRAM, our bit output growth will be more heavily weighted to the first half of the fiscal year, while NAND bit output growth will be relatively greater in the second half of the fiscal year.
The company generated operating cash flow of $3.6 billion in fiscal Q1 compared to $1.1 billion in the year ago period. During the quarter, we deployed $1.9 billion for capital expenditures, net of partner contributions. We continue to expect FY '18 CapEx in the range of $7.5 billion, plus or minus 5%, fairly balanced between the first and second halves of the fiscal year. Free cash flow for the quarter was $1.7 billion compared to negative free cash flow in the year ago period.
We continue to pursue our plans to strengthen our balance sheet and lower debt. During fiscal Q1, we raised $1.4 billion from an equity offering and repurchased or converted $2.4 billion in principal amount of our debt. Total face value of debt was $9.3 billion as of the end of FQ1, and we currently expect to exit FY '18 with approximately $8 billion in face value debt.
We expect the interest savings from these deleveraging actions, combined with higher interest income from larger cash balances and the anti-dilutive effects of selling converts for cash, to materially offset the dilutive impacts associated with the equity offering.
Exiting FY '18, we foresee non-GAAP net interest expense of $25 million to $30 million per quarter versus $100 million per quarter in FQ4 of '17. We ended the first quarter with cash, marketable investments and restricted cash of approximately $6.6 billion and continue to see the opportunity to exit FY '18 in a positive net cash position.
Moving on to guidance for fiscal Q2 2018. On a non-GAAP basis, we expect the following: revenue in the range of $6.8 billion to $7.2 billion; gross margin in the range of 54% to 58%; operating expenses between $625 million and $675 million; operating income ranging between $3.25 billion and $3.45 billion; and EPS ranging between $2.51 and $2.65 per share, based on 1,241,000,000 diluted shares.
Finally, a word about tax reform. As drafted, the legislation would have no significant impact to our FY '18 tax rate, which we continue to expect to be in the mid-single-digit range. In FY '19 and beyond, we would expect some impact to our non-GAAP tax rate with an offsetting benefit of more flexibility in deploying our global cash balances. As further clarity around this legislation develops, we will provide appropriate updates.
With that, I will turn it back to Sanjay.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [5]
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Thank you, Ernie. As we close out calendar 2017 and look to 2018, we see increasing opportunities for Micron to play a larger role in the technology trends shaping modern life. We will be hosting an Analyst Conference in May, where we plan to elaborate on our view of these trends and how Micron envisions our technologies shaping the world in the years to come.
We believe that our technologies, capabilities and team talent place us in a unique position in the market. Memory and flash storage are strategic assets that put Micron at the intersection of the biggest growth trends in technology, and we cannot be more excited about our future.
Our customers increasingly view us as an essential partner in early design discussions due to the differentiation our solutions can provide. We are focused on increasing this value, and I look forward to sharing the results of that focus throughout 2018.
We will now open for questions.

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Questions and Answers
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Operator [1]
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(Operator Instructions) And our first question comes from the line of Srini Pajjuri with Macquarie Securities.

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Srinivas Reddy Pajjuri, Macquarie Research - Senior Analyst [2]
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A couple of questions on the NAND side. Sanjay, at least among the investor community, there seems to be some concerns that there's going to be a flood of supply coming online into the industry in the first half. I'm just wondering if you have any thoughts about what your view is about the supply/demand balance as we head into the first half. And then, for Ernie, the NAND gross margin improvement is 900 basis points, sequentially. I know you mentioned mix healthy there, but I'm just curious if you could provide some more color as to exactly what's driving that, and how sustainable that is going forward?

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Srinivas Reddy Pajjuri, Macquarie Research - Senior Analyst [5]
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And then, maybe just one follow-up, Ernie, on the balance sheet. I think you previously said your gross debt target is about $8 billion, which you said you're going to reach, I guess, next quarter. Given -- assuming that the tax bill will pass, is there any change to that target? And then, if you can talk about, again, assuming that the tax bill will pass, what's your priorities for cash going forward?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [6]
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Yes. I don't think we've said that we'd reach that gross debt target in FQ2. We said, by the end of our fiscal year. And so I wouldn't expect that we would achieve that level end fiscal Q2. The tax bill, as we understand it, would not necessarily change the priorities, which are always to continue to make sure we have the best technology we can in production and to be able to transition that at a time that makes sense for us. And then, for fiscal year '18, certainly, getting the balance sheet in shape relative to these aggregate levels of debt.

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Operator [7]
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And our next question comes from the line of Harlan Sur with JPMorgan.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [8]
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On the DRAM side, you've got Intel ramping Skylake. You've got AMD ramping EPYC on the server CPU side. Cloud and hyperscale CapEx spending looks to grow about 30% next year. Given all of this, do you guys anticipate continued momentum and mix in your server and cloud business in DRAM to continue to move higher next year? And then, from an industry perspective, does the server and cloud segment become a bigger part of the DRAM consumption mix over the next 2 to 3 years overtaking mobile?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [9]
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Yes. Absolutely. Cloud and server, data center enterprise as well as cloud data centers absolutely will continue to be the biggest growth drivers at large volumes for the DRAM industry. And we have very strong penetration in these markets. And actually, we do expect to continue to build momentum in these markets going forward.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [10]
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Great. And Sanjay, you talked about semi and fully autonomous wins in the quarter. All of the major auto OEMs and self-systems guys are focused on this. We talked to one of the leading guys that's focused on sensors and processor technology required for these types of vehicles. They're talking about 25, 30 gigabytes of DRAM and 1 terabyte SSDs per car for level 4 and level 5 fully autonomous. That's a pretty significant step up in DRAM and NAND content. Is that consistent with how you see the content trends in automotive over the next kind of 3 to 5 years?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [11]
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It absolutely is. I mean, when you look at autonomous vehicles, they really are level 5 autonomous vehicles in the future are projected to have about 40 gigabyte of DRAM content in them. And when you think about it, that is very similar to the average capacity that's associated with servers -- in the server workstations, right? So these cars will be really very powerful computers in the future, and they are not only going to be driving tremendous amount of DRAM content usage, but they will also drive NAND Flash usage. They will be generating, using data to make millions of real-time split-second decisions to make sure that the passengers in the autonomous vehicles can be transported effortlessly and safely to their destination. There will be sensors from sonar to camera that will be generating billions of signals, and all of that data will have to be processed, accessed in order to make fast decisions. So you're absolutely right to note that this is really a secular trend here in front of us in terms of driving continued usage of memory and storage. Earlier, we talked about cloud and data center applications. And again, those are growing faster than the rest of the industry. Autonomous vehicles will be another big driver in the future. And Micron is uniquely positioned with a strong portfolio of solutions, both with flash solutions as well as DRAM memory solutions to address these fast-growing market trends.

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Operator [12]
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And our next question comes from the line of Blayne Curtis with Barclays.

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Blayne Peter Curtis, Barclays PLC, Research Division - Director and Senior Research Analyst [13]
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A couple of questions. Maybe on DRAM, can you just go back to -- the servers been a huge driver, and that's really been without Intel's Purley's still the minority. Can you just maybe talk about content per server? How much that increased this year? And then, as you look into next year, how much of a driver is Purley as you look in the second half, and that being more meaningful?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [14]
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So in terms of content for server, I think 2017, if you look at flash, attach rate, it's about average capacity around 2.5 -- 2,500 gigabytes. And when you look at projection over 2018 timeframe going to anywhere above 3,000 gigabyte average capacity continues to march ahead by 2021 timeframe, almost tripling from the 2017 levels, well above 8,000 gigabytes as well. So that is on the SSD side. And similarly, on the DRAM side, average capacities continue to increase nicely there as well. In 2017, timeframe about 145 gigabytes per server average capacity estimated, and industry reports are showing that by 2021 timeframe going to about 350. So very strong solid and year-over-year increases, not just in near term, but again, as I say, these are secular trends here.

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Blayne Peter Curtis, Barclays PLC, Research Division - Director and Senior Research Analyst [15]
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And then, just on the NAND side, I just want to go back to that prior question. Obviously, you're seeing a crossover at 64. How do you think about the cost trajectory here as you then start to ramp third gen as you look to the fiscal year, is there any sort of -- what's the slope of that cost curve as one is going up, and the other one's going down?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [16]
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As we introduce third-generation 3D NAND, we would continue to expect that, that technology of mature yield have -- or has favorable cost dynamics relative to 64-layer. We don't believe that it will have a significant positive or negative impact in our FY '18 results as we will just be implementing that as we get into the last quarter of the fiscal year. So it won't be material enough either way to change the fundamental dynamic that we're going to see this year, which is largely driven by our 64-layer TLC NAND.

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Operator [17]
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And our next question comes from the line of Kevin Cassidy with Stifel.

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Kevin Edward Cassidy, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [18]
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You had mentioned when you gave your guidance for CapEx for the year about adding more value-added into your DRAMs and flash. Can you say what percentage right now would you call in a value-added group? And what's the goal for that?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [19]
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Well, in the value-added solution category, we count our SSDs index, and in fiscal Q1, we had really solid increase in our SSD revenues. We gained share in the market as well. In the mobile space, managed NAND solutions are also -- and discrete NAND solutions we consider as value-add as well. Our share in those markets today is relatively low, low single digits, but we see tremendous opportunity as we are continuing to diversify our product portfolio. And as we execute on that product road map in the quarters to come, we expect to be gaining -- making substantial progress. And of course, in the DRAM side, applications such as automotive, such as graphics, high-performance applications as they all contribute towards the value-add solution. We are not providing you any specifics at this point. We'll discuss more details at our Analyst Day in May.

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Kevin Edward Cassidy, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [20]
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Okay. Great. Maybe just as one follow-up because especially a DRAM market had been such a commodity market, are you getting any pushback from your customers that they want you to move more towards a commodity?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [21]
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And let me just point out, in response to your previous question, that while we will provide more detail in May, but on a year-over-year basis, certainly, we are increasing our value-add solution mix substantially and very pleased with the progress that we are making. Regarding your second question on DRAM. DRAM really is a strategic enabler today in diversity of markets and the megatrends we talk about, whether it is data centers, cloud applications, being the fuel for AI engine, helping make decisions for various search algorithms as well as various activities in all verticals that are being pursued, leveraging AI in mobile space as more and more applications go toward augmented reality type of features in mobile requires more DRAM. DRAM is highly strategic. Even in the future, when you look at notebook computers, they will require the form factor and the low-power aspects, even in PCs of LPDRAM in future years to come. So you see -- and of course, we just talked about automotive as well. So now DRAM is addressing diversity of markets. I mean, several large diverse markets. Product portfolio, meeting the needs of these markets is becoming differentiated. And when that happens, that always gives you stronger opportunities to drive profitable growth in that market. And our customers, when we have an engagement with them, when we have dialogues with them, they are talking to us how memory, DRAM memory, is really now helping them solve the bottlenecks in their applications. So DRAM today is very different, as I've said many times before, from the DRAM in the PC-era only or when it was about just PC and mobile. Today, it is about many more applications of DRAM and really providing a very strategic enabling role in creating all these applications that are truly transforming the world right before our eyes.

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Operator [22]
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And our next question comes from the line of David Wong with Wells Fargo.

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David Michael Wong, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Technology and Services Analyst [23]
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I'm not sure if you said it, but on the November quarter, how much of your total NAND production was 3D NAND? And as you transition to 64-layer in the February and May quarter next year, does your NAND production drop or grow sequentially?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [24]
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So about 80% of our output for the quarter just completed was on 3D. And over the course of the balance of fiscal '18, we'd expect that number to grow to about 95%. We expect that we will have some measure of bit growth, as we said. Each and every quarter, we said it would be, in the prepared remarks, a little more heavily weighted to the back half of the year.

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [26]
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Yes. Yes. That output for the quarter was up in the low single-digit range.

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Operator [27]
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And our next question comes from the line of C.J. Muse with Evercore.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [29]
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We work very closely with our customers, and we certainly work hard in terms of gaining visibility to their future requirements of DRAM and how their applications are shaping up so that we can make sure that our technology and product road map is addressing their needs. And this varies from customer to customer. Some customers tend to be more on a month by month basis, some more quarter, and some, certainly, longer-term engagements as well. And you're right to note that, yes, I mean, that the industry supply growing about 20% and demand likely to be somewhat higher. We do expect a healthy DRAM industry supply and demand environment and continue to work very closely to drive strategic growth of our revenue mix going forward.

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Christopher James Muse, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [30]
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Very helpful. And I guess as my follow-up, on the NAND side, you're talking around 50% bit growth or approaching that for the industry. One or 2 of the other players in the market are expecting lower type of bit growth. So it would appear that you're making assumptions around the 64-layer ramp that might be a little bit more robust than your competitors. So curious, how are you thinking about that ramp? And clearly, I think you'd agree the risk is probably lower than 50%, how would you kind of, I guess, put a probability around where you think it truly ends up?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [31]
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So of course, in terms of projecting, our industry bit growth estimates here, we, of course, are taking into consideration our estimate of the ramp of 64-layer technology in the industry and our assumptions around ramp of wafer production as well as yield ramp of that technology. And along with other mix of technologies in the industry as well. But you're right to note that the dominant factor of the supply bit growth in the industry will be with 64 layers here. And we continually look at our estimates and we review it, based on all the intelligence that we may have as well as we may collect from third-party reports, we define our models on an ongoing basis. And if we have any changes on this, we will share them with you.

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Operator [32]
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And our next question comes from the line of Joe Moore with Morgan Stanley.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [33]
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I wonder, I know you don't want to get too far ahead of yourself on this, but when you get to sort of net cash neutral and you get to investment grade, what's next from a prioritization of free cash flow? And how do you just qualitatively think about cash return versus maintaining cash for more strategic uses?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [34]
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I think that we will continue to prioritize the -- supporting our latest generation technology in production. As we've talked about for fiscal '18, clearly focused on getting aggregate debt down in that $8 billion range. Those things will lead to, we believe, over time, improved ratings. I think how we think about deploying cash is not wholly dependent upon the achievement of any particular ratings grade. We just think these are things that will be worked in parallel. And at the appropriate time, I think we're very open to thinking about broader uses of cash, including shareholder return programs, so those do have a place in the hierarchy of thinking about uses of our cash. But until we get to the point where we have completed or substantively completed our work on this technology deployment and regaining cost competitiveness and also getting our aggregate debt levels to the -- to a level that we are more comfortable with, certainly, those will continue to remain our priority.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [35]
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Great. And then, I wondered, the disparity between the 60% operating margins in your compute business and mobile, which are still quite high, I guess, to me, sort of you can see that PC DRAM still quite a bit more profitable than mobile. How do you think about that going forward in terms of your allocation of mix? Obviously, mobile gives you more stability down the road versus the upside that you can get from PCs. How are you thinking about that balance?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [36]
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Yes. Don't forget that the Compute and Networking Business Unit includes a wide array of products, which includes both client, but also includes data center, mobile -- I'm sorry, not mobile, but networking and other products as well. So it isn't just a statement about the client compute environment. And many of those subsegments within the Compute and Networking Business Unit we would also consider as strategically important. These are relationships where we have the opportunity to deploy both DRAM and NAND. And certainly, mobile continues to be important. So I wouldn't necessarily presume that the margin performance out of our Compute and Networking Business Unit is largely driven by the performance of client.

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Operator [37]
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Our next question comes from the line of Romit Shah with Nomura Instinet.

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Romit Jitendra Shah, Nomura Securities Co. Ltd., Research Division - Executive Director [38]
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Sanjay, some of your equipment -- semicap equipment suppliers have -- this is like over the last 3 months, have been raising their spending forecast for 2018, driven in part by higher DRAM investments. And my question is, what's the risk that your competitors, perhaps, are going more aggressively for share and that the 20% growth assumption you laid out for next year may actually end up proving conservative?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [39]
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I think, again, our estimates based -- for DRAM as well, are based on all the information from various sources and reports that we gather and we have put that here. I do think that even when you look at estimates by other suppliers, we are all pointing to fairly close, tightly-aligned, industry supply growth estimate here. And -- but this is our estimate. We will, as I said before for NAND, same thing. We routinely look at this very, very closely. And just also remember that the technology transitions in the industry today certainly are becoming increasingly complex, and they have greater capital intensity. As well as with advanced technology nodes, you are actually getting less bits on a per wafer basis even at mature yields compared to prior generation nodes. Again, given the scaling challenges, the increased complexity. So all of these trends are actually increased technology complexity and increased capital intensity have a moderating effect on the supply growth.

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Romit Jitendra Shah, Nomura Securities Co. Ltd., Research Division - Executive Director [40]
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And then, just on the February quarter, I don't know if you guys look at your individual periods on a seasonal basis, but it seems like the February quarter typically is a down quarter and you're guiding to sequential growth off of a better-than-expected November period. What's driving the better-than-normal seasonality for you? Is it pricing or other factors as well?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [41]
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Yes. I think, Sanjay mentioned earlier the diversification of the DRAM demand stream. And certainly, that is also true on the NAND side. And in the context of that diversified demand stream, for example, automobiles tend to be far less seasonal than client PCs. And if you look at data center deployments among all of the key players, there's certainly a specific pattern per customer. But when you put them all together, there is no macro seasonality pattern that emerges when you look at that. So as we've transitioned to these diversified demand drivers, the concept of seasonality, I think, has been redefined and is perhaps less impactive on a quarter by quarter basis than it may have been in the past.

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Operator [42]
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And our next question comes from the line of Jagadish Iyer with Summit Redstone.

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Jagadish Kalyanam Iyer, Summit Redstone Partners, L.L.C - MD & Senior Analyst [43]
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Two questions. First, if NAND ASPs continue to decline from rising supply, do you expect cost reduction to keep pace with the ASP decline as we look at fiscal '18? And then, I have a follow-up.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [44]
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I mean, we are certainly not projecting pricing for fiscal year '18 here. But again, what I'll point to you is that if you look at the history of NAND, increase in technology capabilities, technology advances, which leads to cost reductions, ultimately enable opening up of many new market applications and drive the elasticity in many of these markets as well and drive the demand environment. So I consider it as healthy if the cost declines are greater than the price declines in the industry. That's a healthy industry environment. And while we don't get into the projection of pricing, again, when we look at all the demand drivers that are ahead of us, I spoke about it repeatedly in the call today, multitude of demand drivers and in each of these large market segments, again, whether it is about cloud data center, enterprise data center, mobile, smartphones, client notebook, automotive applications, all of these are continuing to drive strong demand trends for NAND Flash application.

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [45]
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Yes. I think the one thing I would add to that as well is if you think about our statements around industry bit growth, which are approaching 50%, those would be associated, typically, with fairly healthy levels of cost reduction. We're not going to get into the specifics of what that might be, but it is important to remember that, that bit growth usually would be accompanied by some good cost reduction as well.

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Jagadish Kalyanam Iyer, Summit Redstone Partners, L.L.C - MD & Senior Analyst [46]
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Okay. Fair enough. Then, on 3D XPoint, I was wondering how much are you earmarking for spending in fiscal '18? And has there been customers who have identified? And how should we think, generally, on a big picture, about pricing there?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [47]
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So this is Ernie. The 3D XPoint CapEx and any associated R&D expenses, the CapEx piece is embedded in our nonvolatile estimates for the year, which we said was between 35% and 45% of our total spending. And as we look at that product, we're going to have to see how the markets develop, as Sanjay mentioned, before we provide any broader perspective on that.

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Operator [48]
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Our next question comes from the line of Steven Fox with Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [49]
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Two quick questions for me. First of all, you mentioned the market share gains in SSDs and I assumed some of that was related to fixing the component issue. But can you sort of give us some more color on where you think specifically you had most success in gaining share? And then, secondly, I know you're not going to talk specifically about pricing for the upcoming quarter, but if you could, maybe, qualify some more how you get to your sales guidance in terms of pricing and mix, that would be helpful.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [50]
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In terms of SSD share gain during the quarter, we believe we gained share both in client applications as well as enterprise and cloud data center applications. Really, our products did very well there. And at this point, our offerings are with SATA drive. And next year, we'll bring out our NVMe solution sometime during calendar year '18, and that should help us expand our portfolio and give us opportunities to continue to gain share in this market. And regarding our guidance that we have given you, of course, we have certain assumptions related to total demand. And our pricing assumptions are baked in there as well. But obviously, for competitive reasons, we do not get into discussions of pricing on the call.

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Operator [51]
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And our next question comes from the line of John Pitzer with Credit Suisse.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [52]
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Ernie, maybe I can ask the gross margin question around NAND a little bit differently. I'm just kind of curious, given that you guys had significant gross margin upside on pricing down low single digits sequentially, under a scenario where pricing continues to decline, let's say, at a low single-digit rate sequentially, is there enough mix and cost opportunity for you to maintain and/or grow gross margins from here? Or how should we think about the parameters that you're able -- being able to maintain or grow gross margins relative to your cost and mix availability from here?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [53]
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Yes. So if we're framing the scenario in the future as we continue to see sort of marginally declining pricing environment, a couple of points per quarter or so, I think there's ample room for gross margin expansion, both as a result of our cost reduction as well as the ongoing transition to high-value solutions, which would include redirecting -- continuing to redirect component sales into higher value-added solutions as well as some of our partner contracts wind down over the course of our fiscal '18 and into 2019. So I think in that pricing scenario that you've set forth, we believe there's reasonable room for gross margin expansion.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [54]
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That's helpful. And a similar question on the DRAM front. You mentioned in your prepared comments that you expect more DRAM bit growth in the first half of your fiscal year than the second half. As we transition into the second half, how much -- how many levers do you have on the mix side in DRAM to be able to progress sort of gross margins higher from here?

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Ernest E. Maddock, Micron Technology, Inc. - Senior VP & CFO [55]
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Yes. I think, again, the same general story with respect to continuing to move towards higher value-add solutions. You heard Sanjay speak to, for example, increasing the breadth of our managed NAND offerings. If you look at server, that's certainly a very, very strong growth pattern here as well as automotive. So I think there are a number of segments where we would continue to expect to be able to optimize our bit output toward that would give us the best gross margin opportunity. And of course, even though our bit output growth is going to be lower in DRAM than NAND, we'd still expect to deliver some meaningful cost reduction there, as I articulated in the prepared remarks.

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Operator [56]
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And we'll take our final question from the line of Mark Newman with Bernstein.

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [57]
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I had a question on CapEx and capacity. So Micron -- you stepped up the CapEx quite a bit this year from previous years. But still, quite significantly underspending some of the rivals, particularly Samsung. My question, actually, is about how is Micron thinking about the need for fabs longer term. This is more of a kind of longer-term question, because both Samsung and Hynix are building brand-new greenfield fabs as we speak. What is the status right now for Micron in both DRAM and NAND in terms of how much space you have available to you in DRAM and NAND? And I understand your goal is to keep wafer capacity roughly flat and grow gigabytes from technology migration. At what point do you need more fab space to keep that fab capacity roughly flat? Or it is, of course, more layers requires more fab space, and of course, as you shrink DRAM, you also need more fab space as well. So do you have any plans for new fabs? What would be the plan? And how are you thinking about that?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [58]
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So like you noted, in order to realize the technology transitions, you, of course, do need space in your cleanroom to deploy the tools that are required to implement the advanced technology nodes. So our fabs have had space here in terms of deploying the technology transitions, for example, in Singapore going from 32-layer to 64-layer. And in the past, in Singapore fab for NAND, going from planar to 3D nodes as well. And similarly, cleanroom space is something we look at very carefully for DRAMs as well because, as I just said, I mean, more cleanroom space is needed for technology transitions. So as I said in my prepared remarks, I mean, we do continue to assess the scenarios that are needed for future technology transitions, and I continue to assess our cleanroom space requirements. Fiscal year '18, we are not looking at any new wafer capacity additions. We are not looking at any new -- any meaningful new cleanroom space required to implement our technology transition plans in fiscal year '18. And as I said in my remarks, going beyond that, we continue to assess various scenarios to implement the requirements for technology transitions, both in DRAM as well as in NAND. No plans firmed up yet. And as and when we look at it, we will share these things. Remember, any time you build a new cleanroom, it takes several months to build, construct the building. And it takes a few months then to roll in equipment into the new cleanroom and to deploy the equipment, qualify it and build products. So these are things that are to be looked at for the longer-term horizon, and we are evaluating those scenarios.

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Operator [59]
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Thank you. And this concludes today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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