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

Q3 2020 Micron Technology Inc Earnings Call
JUNE 29, 2020 / 8:30PM GMT

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Corporate Participants
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* David A. Zinsner
Micron Technology, Inc. - Senior VP & CFO
* Sanjay Mehrotra
Micron Technology, Inc. - CEO, President & Director
* Farhan Ahmad
Micron Technology, Inc. - Senior Director of IR

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Conference Call Participiants
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* Christopher Brett Danely
Citigroup Inc., Research Division - MD & Analyst
* Mark C. Newman
Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst
* Mehdi Hosseini
Susquehanna Financial Group, LLLP, Research Division - Senior Analyst
* Joseph Lawrence Moore
Morgan Stanley, Research Division - Executive Director
* Blayne Peter Curtis
Barclays Bank PLC, Research Division - Director & Senior Research Analyst
* Karl Fredrick Ackerman
Cowen and Company, LLC, Research Division - Director & Senior Research Analyst
* Timothy Michael Arcuri
UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment
* Harlan Sur
JPMorgan Chase & Co, Research Division - Senior Analyst
* Christopher James Muse
Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst
* John William Pitzer
Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head
* Mitchell Toshiro Steves
RBC Capital Markets, Research Division - Analyst

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Presentation
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Operator [1]
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Ladies and gentlemen, thank you for standing by, and welcome to Micron Technologies Third Quarter 2020 Financial Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker, Head of Investor Relations, Farhan Ahmad. Sir, please go ahead.

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Farhan Ahmad, Micron Technology, Inc. - Senior Director of IR [2]
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Thank you, and welcome to Micron Technology's Fiscal Third Quarter 2020 Financial Conference Call. On the call with me today are Sanjay Mehrotra, President and CEO; and Dave Zinsner, Chief Financial Officer.
Today’s call will be approximately 60 minutes in length. This call, including the audio and slides, is also being webcast from our Investor Relations website at investors.micron.com. In addition, our website contains the earnings press release, and prepared remarks 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. As a reminder, a webcast replay will 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 will be attending. You can follow us on Twitter at 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 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 are under no duty to update any of the forward-looking statements after today’s date to conform these statements to actual results.
I'll now turn the call over to Sanjay.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [3]
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Thank you, Farhan. Good afternoon, everyone. I hope that you, your family and your colleagues are safe and healthy. Along with Dave and Farhan, I'm doing this call from Micron’s offices.
Micron’s strong execution in the fiscal third quarter drove solid sequential revenue and EPS growth. We are ramping the industry’s most advanced DRAM node and increasing our mix of high-value NAND. Our strong competitive position and diversified product portfolio put Micron in an outstanding position for the
Many exciting growth opportunities in the memory and storage markets.
I'll start with an update on our operations. Due to the excellent work of Micron's operations team, most of our fab and assembly sites operated at full production throughout the quarter, with our Singapore and Taiwan assembly and test facilities achieving record production. COVID-19's impact to our production early in our third quarter was limited to our back-end assembly and test sites in Muar and Penang, Malaysia, and we quickly offset this impact with production adjustments at our other facilities. All our production facilities are operating normally at this time. We continue to prioritize the health and safety of all team members and contractors and have strong COVID-19 safety measures in place at all our sites worldwide. We are taking a conservative, phased and site-specific approach to returning our team members on-site, prioritizing our manufacturing workforce and engineering teams.
Now turning to the market environment. The pandemic has impacted the cyclical recovery in DRAM and NAND, causing stronger demand in some segments and weaker demand in others. Market segments driven primarily by consumer demand have seen a negative impact. Calendar 2020 analyst estimates for end-unit sales of autos, smartphones and PCs are meaningfully lower than pre-COVID-19 levels, even though estimates for enterprise laptops and Chromebooks have increased. The reduced level of global economic activity has also curtailed near-term demand. The pandemic is driving rapid change in consumer and corporate practices around the world. Consumers are significantly increasing online activity, including e-commerce, gaming and video streaming, all of which drive additional data center capacity requirements. Trends like working-from-home and online learning are likely to drive long-term changes in how we think about workforce flexibility and education. Several governments around the world are considering ways to ensure a level playing field by considering significant programs that provide Chromebooks or tablets to students who cannot afford them, as online learning becomes a necessity in these times.
Additional government fiscal stimulus programs are also supportive of economic activity and will accelerate trends like electric vehicle production. Emerging technologies such as drone-based deliveries and the increased use of robotics across many applications are now being pursued with urgency. Technology solutions are rapidly helping society adapt and manage the temporary and permanent changes stemming from this pandemic.
Clearly, certain trends that would have taken 2 to 4 years to develop have been accelerated into months. It is easy to see how these changes will drive higher consumption of memory and storage in the long term. The faster pace of digital transformation in the economy is here to stay.
Looking ahead to the second half of calendar 2020, let me discuss certain key market trends. First, we expect the data center outlook to remain healthy. Second, we expect smartphone and consumer end-unit sales to continue to improve, accelerating inventory consumption across the supply chain. And third, new gaming consoles will drive stronger DRAM and NAND demand. Despite these trends, our short-term visibility across end markets remains limited due to COVID-19, macro and trade uncertainties, as well as customer inventory changes.
The recent restrictions on Huawei are also impacting our opportunity in the near term. As these risks recede, we expect a resumption of industry growth, with a long-term bit growth CAGR of mid to high-teens for DRAM and approximately 30% for NAND. This growth will be supported by powerful secular technology trends ranging from AI and machine learning, to cloud computing, 5G and the growth in edge computing and the industrial IoT economy.
Turning to industry supply, second-half 2020 supply growth may be somewhat muted compared to pre-COVID-19 expectations. Some suppliers have commented about delays in equipment deliveries, which can result in slower node transitions and lower bit growth. Specific to Micron, we are proactively aligning our bit supply to market demand. Our fiscal year '20 front-end equipment CapEx is down more than 40% from fiscal year '19 and is at its lowest level in the last 5 years. While we expect to increase fiscal year '21 CapEx to support high-ROIC node transition, this CapEx will be meaningfully lower than our pre-COVID-19 plan. We have also made changes to our DRAM utilization to align with the current lower demand in the automotive market. As end market conditions evolve, we will remain flexible to make any needed adjustments to our supply.
Since 2016, Micron has made tremendous progress narrowing the competitive gap on leading-edge technology nodes. In DRAM, we are ramping 1Z technology, which is the industry's most advanced node, and achieving yield improvements that reduce our costs. We have several customer qualifications underway for this technology. Our 1Y and 1Z nodes together now make up more than 50% of our bit production. We continue to make progress on our 1-alpha node, which we expect to introduce in fiscal 2021. We have begun sampling our first high-bandwidth DRAM memory product, which is competitive with the industry's most advanced products and will expand our AI data center opportunity. We are excited about entering this new high-value segment of the DRAM market and look forward to ramping this product after it is qualified with our customers.
In NAND, our 128-layer first generation RG NAND technology entered volume production in FQ3, and we are pleased to announce that we have recently initiated customer shipment. We are also making good progress on our second-generation RG node, which will be deployed broadly across our product portfolio. We remain on track for RG production to make a meaningful portion of our NAND output by the end of calendar 2020.
Micron also continues to make progress with QLC. QLC bits now represents more than 10% of Micron's overall NAND production, contributing to our NAND cost improvement. Fiscal 2020 has been a year of extraordinary gains in the mix of our high-value solutions in NAND, which now make up over 75% of our quarterly NAND bit. We remain on target to increase this to 80% for fiscal 2021.
The new Micron is undergoing a dramatic transformation to combine product leadership with technology, manufacturing and supply chain excellence. Across our entire portfolio of DRAM and NAND products, we will continue to focus on product differentiation and portfolio expansion to grow our share of industry profits while maintaining stable bit share.
Turning to end markets. We had record quarterly revenue in solid-state drives as cloud SSD revenue more than doubled quarter-over-quarter. We continue to introduce new NVMe products in our SSD portfolio while maintaining our leadership in the enterprise SATA market. Customer qualifications are progressing well for our next-generation products for both NVMe and SATA markets. Our client NVMe SSDs have also contributed to our SSD growth. In May, we announced a TLC client SSD and our first QLC client SSD, both using next-generation 96-layer NAND technology.
As the only company with a portfolio of DRAM, NAND and 3D XPoint technologies, Micron is uniquely positioned to benefit from the secular data growth that is driving the cloud, enterprise and networking market. Our cloud DRAM sales grew significantly quarter-over-quarter, with strong demand due to the work from home and e-learning economy and significant increases in e-commerce activity around the world. This quarter, we started early sampling of 1Z DDR5 for enterprise application. Additionally, we also started sampling our higher-frequency DDR4 modules for Intel's Ice Lake server platform, which we expect to drive server DRAM content growth. In networking, our DRAM bit shipments expanded significantly on a sequential basis, driven by rapid work-from-home infrastructure deployment as well as increased 5G deployments, particularly in Asia.
Despite demand headwinds in the smartphone market due to COVID, our mobile business delivered healthy sequential and year-over-year growth due to continuing momentum of our DRAM and NAND solution. The outlook for calendar 2021 is promising, with 5G expected to drive a resumption in smartphone unit sales growth with the multiplier effect of higher memory and storage content. 5G phones will have greater content than 4G phone, and we can see this already in the phones being introduced in calendar 2020. We see the strongest memory and storage content growth in the low- to mid-range part of the smart home market, which is also the largest segment in terms of units. In this part of the market, 5G phones have 6 gigabyte of DRAM and 64 and 128 gigabyte of NAND versus 4G phones with 2 to 4 gigabyte of DRAM and 32 to 64 gigabytes of NAND. We are encouraged to see sub-$250 5G phones, which made 5G accessible to a broader market. This lower price point has been enabled by BOM cost reductions in semiconductor content outside of memory and storage. Micron is well positioned to help our customers win in the 5G era with an industry-leading product portfolio, including low-power DRAM and multichip packages. We continue to achieve design wins for LP4 and LP5 5G platforms, and our most advanced managed NAND products based on UFS 3.1 are now sampling at several major android OEMs.
In PC, our bit shipments declined modestly as we strategically moved supply of compute data to address demand in the data center market. Demand was strong for certain PC subsegments that are supporting increased work from home and remote learning activities, and our PC DRAM revenue was up sequentially as ASPs increased. While certain parts of the PC market has strengthened, overall PC unit shipments are expected to decline this year due to weakness in desktop PCs. In graphics, we have started shipping GDDR6 DRAM for next-generation gaming consoles, and we expect strong demand in the second half of calendar 2020.
In auto, revenue declined significantly from the previous quarter due to broad auto supply chain disruption. Despite auto unit weakness, secular content growth from ADAS and autonomous driving platforms resulted in record LP4 DRAM revenue for our auto business in the fiscal third quarter. As automotive production rates improve around the world, our auto business should return to a growth trajectory.
I'll now turn it over to Dave to provide our financial results and guidance.

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David A. Zinsner, Micron Technology, Inc. - Senior VP & CFO [4]
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Thanks, Sanjay. Despite COVID-19, we achieved strong results, thanks to resilient execution from our team members across the globe. Total FQ3 revenue was approximately $5.4 billion, up 13% sequentially and 14% year-over-year. Sequential revenue growth was led by the data center and mobile markets.
FQ3 DRAM revenue was $3.6 billion, representing 66% of total revenue. DRAM revenue increased 16% sequentially and 6% year-over-year. Bit shipments were up by approximately 10% sequentially. ASPs were up sequentially in the mid-single-digit percentage range. FQ3 NAND revenue was approximately $1.7 billion, representing 31% of total revenue. NAND revenue increased 10% sequentially and was up over 50% year-over-year. Bit shipments increased in the lower single-digit percentage range sequentially. ASPs increased sequentially in the upper single-digit percentage range.
Now turning to our revenue trends by business unit. Revenue for the Compute and Networking Business Unit was $2.2 billion, up 13% sequentially and up 7% year-over-year. CNBU's sequential growth was driven by double-digit quarter-over-quarter pricing improvements and stronger demand for data center products. We were supply constrained for certain compute DRAM products, which limited our ability to meet some demand upside from customers. Revenue for the mobile business unit was $1.5 billion, up 21% sequentially and up 30% year-over-year. The sequential growth was primarily driven by strong growth in our LPDRAM bit shipments. MCP revenue remained strong and was up significantly year-over-year.
Revenue for the Storage Business Unit in FQ3 was $1 billion, up 17% from FQ2 and up 25% year-over-year. SBU operating margins increased dramatically to 17%, up from a breakeven level last quarter. This significant sequential improvement in operating margins was driven by improved pricing, stronger data center SSD mix and overall record SSD revenue. And finally, revenue for the Embedded Business Unit was $675 million, down 3% sequentially and down 4% year-over-year, primarily from a reduction in automotive demand.
The consolidated gross margins for FQ3 was 33.2%. Sequential gross margin improvement was driven by pricing improvements in both DRAM and NAND as well as our ongoing improvements in product mix that continue to underpin our financial performance. The impact of underutilization at our Lehi fab was approximately $155 million or 285 basis points in FQ3. We expect underutilization to be approximately $135 million in FQ4 and expect gradual declines in underutilization through fiscal 2021. Operating expenses were $823 million in FQ3. As we said on last quarter's call, we've taken several actions to control our operating expenses, given the increased uncertainty surrounding COVID-19. As a result, we continue to expect favorable underlying OpEx trends to continue into fiscal Q4.
FQ3 operating income was $981 million, resulting in an operating margin of 18% compared to 11% in the prior quarter and 23% in the prior year.
Net interest expense increased to $24 million compared to $6 million of net interest expense in the prior quarter. This increased expense was primarily driven by the drawdown of our revolver and subsequent $1.25 billion investment-grade note issuance in the quarter. We expect net interest expense will be approximately $30 million in FQ4 due to the decline in interest income because of lower interest rates.
Our FQ3 effective tax rate was 3%, which benefited from approximately $19 million of onetime items. We expect our tax rate in the fourth quarter to be approximately 6%. Going forward into fiscal 2021, we expect our tax rate to be in the high single-digit to low double-digit range.
Non-GAAP earnings per share in FQ3 were $0.82, up from $0.45 in FQ2 and down from $1.05 in the year ago quarter. FQ3 non-GAAP EPS was approximately $0.02 higher due to the tax benefits reported in the quarter.
Turning to cash flows and capital spending. We generated $2 billion in cash from operations in FQ3, representing 37% of revenue. During the quarter, net capital spending was approximately $1.9 billion, approximately flat quarter-over-quarter. As we enter the final quarter of FY '20, we are projecting fiscal year 2020 CapEx to be approximately $8 billion. Our FY '20 front end equipment CapEx will still be down more than 40% from last year. However, back-end CapEx and building CapEx, either of which add to bit supply growth, are up from last year.
Free cash flow in the quarter was $101 million compared to $63 million in the prior quarter. This represents the 14th consecutive quarter of positive free cash flow, reflecting the structurally improved profitability and working capital improvements of the new Micron. We repurchased approximately 929,000 shares for $40 million in FQ3 at an average price of $43.54. In the 9 months of FY '20, we've returned $134 million of capital through repurchases and paid $266 million to settle conversion of convertible notes. Combining the convert premiums and share repurchases, we have used $338 million or 135% of FY '20 free cash flow towards reducing the share count.
Ending FQ3 inventory was $5.4 billion or 131 days versus 134 days last quarter. Our overall days of inventory are above our approximately 110-day target level, partly due to elevated NAND inventory as we transition to replacement gate. We are also carrying higher raw material levels as a precaution, given the increased supply chain uncertainty due to the pandemic.
We ended the quarter with total cash of $9.3 billion and total debt of $6.7 billion. Total liquidity was approximately $11.8 billion, up from $10.6 billion at the end of the second quarter. In the quarter, we issued $1.25 billion of investment-grade notes. And those proceeds, together with $1.25 billion of cash on hand, was used to repay the $2.5 billion revolving credit facility we drew at the beginning of the fiscal third quarter.
Prior to providing our outlook and guidance, we'd like to remind everyone that our fiscal Q4 is a 14-week quarter.
Now turning to our outlook. As Sanjay mentioned, while visibility remains limited overall, data center trends are strong, and new gaming consoles will be a tailwind to demand in the second half of the calendar year. While end unit sales of consumer devices such as smartphones have started to recover, we are seeing an impact from the recent restrictions imposed on Huawei. It is also important to remember that we are a lagging indicator relative to the end demand. In addition, the risk of a second wave of COVID-19 infections is continuing to drive greater uncertainty for the economic recovery and our business. Lastly, inventory strategies of our customers are difficult to predict. We continue to closely monitor market conditions and respond to changes in the market environment in a timely and disciplined manner.
With all of these factors in mind, our non-GAAP guidance for FQ4 is as follows: We expect revenue to be $6 billion, plus or minus $250 million; gross margin to be in the range of 35.5%, plus or minus 150 basis points; and operating expenses to be approximately $850 million, plus or minus $25 million. Finally, based on a share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $1.05, plus or minus $0.10.
In closing, we're extremely proud of Micron's performance in this unprecedented period of market uncertainty and operational challenges. The tenacity, creativity and dedication of our team members around the world drove strong results that surpassed our initial expectations. Micron remains on very solid footing with an investment-grade balance sheet, ever strengthening product portfolio and secular industry trends that will continue to drive long-term demand.
I'll now turn the call over to Sanjay for closing remarks.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [5]
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Thank you, Dave. The pandemic has impacted our financial performance trajectory, which was shaping up for a robust outcome this calendar year. Nevertheless, we have moved with agility to leverage the new opportunities in the marketplace and have further strengthened our product portfolio. Micron's portfolio is now dramatically better positioned from a competitive perspective, and we have driven a tremendous transformation here over the last 3 years. In the coming quarters and years, we will continue to strengthen our business foundation. And as the industry environment improves, Micron is exceptionally well positioned to take advantage of long-term trends and drive superior returns for our shareholders.
Of course, preparing Micron for a bright future has to be about more than just quarterly business performance. We also have to be leaders in creating positive outcome for all of our stakeholders. In that context, there are 2 topics that I would like to touch upon before we move to Q&A.
First, earlier this month, we issued our fifth annual sustainability report. This year, we set challenging new goals for energy use, emissions, water use and waste generation that aim to dramatically improve the environmental sustainability of our operations worldwide over the years ahead. We also established an aspirational future vision that will drive us to achieve even more. Reaching our goals will require investment, and we plan to devote approximately 2% of annual capital expenditures to environmental sustainability initiatives amounting to about $1 billion over the next 5 to 7 years. These initiatives underpin our commitment to achieve significantly higher standards and help create a better planet.
Second, I would like to address the social unrest and racial division that have gripped our country. The senseless and tragic deaths of people in our black community in the U.S. must be addressed with real and lasting reforms. Hate, racial discrimination, violence and social injustice have no place in our society. Micron is committed to creating a welcoming and safe work environment for everyone, and we are taking concrete actions to increase technical training, career preparedness and opportunities for underserved population. We are also actively engaging and investing in community programs that aim to create a more just and fair society for everyone.
There is much work to do and we look forward to being part of the solution.
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) Our first question comes from the line of John Pitzer of Crédit Suisse.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [2]
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Sanjay, David, congratulations on the solid results. Sanjay, if you think back 90 days ago when you gave guidance for the May quarter, there was a lot of uncertainty around the pandemic, and you guys guided accordingly, in hindsight, extremely conservatively. I think your comment on the call last time was that you're building inventory, so you're assuming that your customers are building inventory. I guess as you look to the August quarter guide, was there a similar methodology used to inform this guide? And I guess, specifically, there's a lot of consternation in the investment community about data center demand, and you seem to be arguing that in your fiscal fourth quarter, it remains strong and you expect it to remain strong in the calendar second half. I'm wondering if you could just share with us why you think that and why you're not as concerned as some perhaps in the investment community about inventory builds?

So specifically with respect to data center, pre-COVID, we expected 2020 to be a year of strong growth in cloud, again, with all the trends building around AI and that needing more memory and storage. We expected healthy demand for pre-COVID in cloud applications. And of course, with COVID, as we discussed in the last earnings call, certainly, some of the trends got pulled in. Work-from-home economy as well as e-commerce, gaming, video streaming, all of these drove strong surge in demand on the cloud front.
As we look ahead at the second half, of course, given the total COVID environment and uncertainties around COVID around the globe, we basically have limited visibility. Yet, we do believe that cloud demand in the second half of the calendar year will continue to be healthy for us. We work closely with our customers in terms of understanding their inventories. We understand what their demand trends are. And from what we can see, customer inventories with respect to cloud are in a healthy place. And of course, there are other parts of the market such as mobile phone, where there are other considerations such as geopolitical considerations as well as related to COVID as well, where customers may have built up some additional inventory.
And in mobile, in particular, you saw in China that how in April, post-COVID within China, the demand went up, surged up for smartphones. So some of the customers may be preparing for -- as the consumer comes back, given the low point that the world experienced in March, April time frame, customers want to be prepared to supply the smartphone demand to them as well. So overall, it's a mixed picture with respect to the inventory on the customer front, cloud inventories are in decent shape. Mobile, I would say, is somewhat in anticipation of demand as well as managing to the supply chain consolidations due to COVID and some geopolitical considerations as well.
So overall, I would say, when we look at fiscal first quarter, the environment is similar to what we had experienced in FQ3, FQ4. And of course, our best assessment is baked into the guidance that we have provided to you.

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Operator [4]
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Our next question comes from C.J. Muse of Evercore.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [5]
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I guess a question on gross margins. How should we think about mix, particularly DRAM, as we move into the August quarter? And I guess, would love to hear, as part of that, what implied cost downs will look like? And really just trying to understand the nice step up you're seeing, how much of that is mix versus cost down versus perhaps other?

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David A. Zinsner, Micron Technology, Inc. - Senior VP & CFO [6]
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So well, let me step back to Q3 just for a second. So gross margins obviously expanded in the third quarter as well. As I said in the prepared remarks, I'd say that, that was the pricing environment in both DRAM and NAND combined with just a richer mix of higher-value products, which obviously carry with it better gross margins. From a high-value solution perspective, I think we see that again in the fourth quarter that is helping drive an improved outlook for gross margins for the fourth fiscal quarter. You know, C.J., that we don't telegraph pricing and cost out for future quarters. But suffice it to say, we take both pricing and cost reductions into account. And obviously, the combination of those are pretty favorable.
The other thing I would say is in the third fiscal quarter, we did have some expenses associated with COVID-19, both in terms of just increased spending on our part to manage through some disruptions that we had early on. And then on top of that, we did have to move around the back end production. That did increase our tariff expense in the third quarter. So those things, we wouldn't expect to happen again in the fourth quarter, which is helping also on the gross margin front in the fourth quarter.

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Operator [7]
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Our next question comes from Blayne Curtis of Barclays.

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Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [8]
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I'd like to add my congrats. Just on CapEx, seems like this year, there were some concern it that may be lower at $8 billion. I guess when you look at next year, I don't know where your starting point was. But I was wondering if you could walk us through some of your moving pieces. You talked about 5G as being the big tailwind. That makes sense. I'm curious what you would highlight that you're taking in account for next year on the other way.

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David A. Zinsner, Micron Technology, Inc. - Senior VP & CFO [9]
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Yes. I mean the one thing to keep in mind is, so CapEx spending this year had a fair amount of construction expense. And actually, we drove the front end equipment expense down quite considerably on a year-over-year basis. Sanjay said in the prepared remarks that it was down more than 40% in both DRAM and NAND. So we cut back pretty heavily on the front end equipment side this year.
Next year, we would expect some of that to come back, in particular, we're going through a full rotation into our second-generation replacement gate that certainly will drive some CapEx increases. And offsetting that, we'll have to look at construction and see what directionally we want to do there. I'd say we haven't firmed up the CapEx plans quite honestly for the year. As you know, we've maintained a lot of flexibility around CapEx. We take a hard look at the demand profile of bits over the next few years, and we kind of manage the front end CapEx accordingly to make sure that we're staying aligned with that. So over the next couple of months, we'll continue to refine our outlook over the next year or 2. And I think we'll be able to give you a better picture when we have our fourth quarter earnings announcement.
I would say, when we looked at, coming in pre-COVID levels, on the CapEx front, for front-end equipment, and now that we look at it now, it certainly has been cut back. And our expectation is that will impact kind of our bit supply in the calendar fourth quarter.

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Operator [10]
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Our next question comes from Harlan Sur of JPMorgan.

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Harlan Sur, JPMorgan Chase & Co, Research Division - Senior Analyst [11]
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And congratulations on the solid execution. Last earnings call, the team highlighted the supply production shift in mix from mobile to server DRAM to service the higher demand from your data center customers. Given the outlook for stronger data center demand, are you guys keeping the production mix more heavily weighted towards server DRAM? Or are you already starting to shift part of your DRAM production mix back to mobile?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [12]
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So we, of course, manage our mix on an ongoing basis. We assess customer demand expectations and make judgments regarding managing that mix. So yes, like you noted, we had shifted some of the supply from mobile toward the server applications. And at this point, we continue to make -- study how trends are evolving. And we think we are in a good position with respect to managing our mix. But if some changes are needed, we'll, of course, revert to making those changes in the future.

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Operator [13]
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Our next question comes from the line of Timothy Arcuri of UBS.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [14]
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Sanjay, you talked about Huawei, I think, twice or maybe 3 times. And I know you've been reshipping under the licenses, and the new restrictions are really on ASICs, not on standard products. So is that comment really more around the fact that this is sort of the last extension of the commerce licenses, and so you won't be able to ship to them in another few months? And can you sort of quantify how much is your Huawei exposure right now?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [15]
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So thanks for asking that question. Just to be clear, the foundry replacement on entity list, we had applied for licenses, and we secured those licenses for mobile and server shipments. And we do not supply into the networking side of the business. We never sought that license. So the entity list placement that had happened several months ago did impact some of our outlook, but we have been operating under the licenses that we have already received. The comment that I was making today is really related to last month's action by commerce department, which will go into effect sometime next month. And as a result of that action, we are already starting to see an impact in our fiscal Q4 as our customer reacts to the actions by the U.S. And quite frankly, impacts related to Huawei are still unfolding. We expect some of the impact to Huawei, yes, related to the foundries, but it affects their potentially overall considerations on managing their business, managing their supply chain. And we expect some of these impact to continue in FQ1 and beyond as well.
And then this is compounded further by changing inventory strategies at customers as well as market share shifts that happened between the smartphone players. So as far as we are concerned, you know that we have improved our revenue diversity. We have significantly expanded and strengthened our product portfolio. And we have good design and activity with all key players, particularly with new products that we have introduced, such as UFS3.1, LP5, DRAM and multichip packages. So we continue to work with our customer ecosystem to mitigate the effects of this. But the particular comments that you heard us talk about on the Huawei front really relate to the actions from U.S. government that have -- last month that have impacted the customer reaction, the Huawei reaction to those actions and impacting our outlook in FQ4.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [16]
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And then I guess, just how much of revenue was it maybe in May, Dave?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [17]
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In the May quarter, the FQ3 quarter, that did not -- the action announced last month did not -- action announced by the commerce department last month did not have an effect in FQ3.

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David A. Zinsner, Micron Technology, Inc. - Senior VP & CFO [18]
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Now suffice it to say that we didn't list them as an over 10% customer, so you can make the assumption that it was below 10%.

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Operator [19]
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Our next question comes from the line of Joe Moore of Morgan Stanley.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [20]
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I wanted to ask about customer inventory. I want to revisit that. To the extent that customers are wrestling with pretty unprecedented potential supply challenges, do you think they're building up buffer inventory to deal with that? I mean, we've seen single earthquakes in one region caused that behavior in the past. Now we're dealing with rolling outages across multiple continents. Do you think customers may be building inventory? And if so, do you think memory is sort of less or more impacted than other things from that? And I have a follow-up.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [21]
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So what I can tell you is that Micron itself in our supply chain operations has focused on making sure, given all the considerations around the globe with all the uncertainties around COVID and COVID containment and COVID spread, Micron itself and its supply chain operations is increasing the inventory for raw materials to make sure that we are well prepared to meet our customer demand. So this trend of higher level of inventory, elevated level of inventory is -- it's been talked about, and it's common in the tech supply chain. And with respect to our specific customers for memory and storage, so as I mentioned earlier, so yes, some customers may have built some inventory given their considerations, their concerns around supply -- potential supply chain disruptions that may occur due to all the COVID-related uncertainties. As well as I pointed out, some of the customers in the mobile may have built some inventory, given U.S.-China trade tensions and the regulations.
So the thing is, these are unprecedented times, uncertain times, not just for us or for the memory industry, but for our customer ecosystem as well. And customers' inventory strategies are changing. They are adapting as they themselves see how their market trends are evolving and how they want to best address their own inventory position as well. So this is the changing environment. We continue to work closely with our customers, and we make adjustments as appropriate. And key is to be adaptable and to be agile. And I think we have shown over the course of the first half of this calendar year that we have been really running our operations with tremendous amount of adaptability and agility and continuing to produce healthy results.

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Joseph Lawrence Moore, Morgan Stanley, Research Division - Executive Director [22]
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Great. And then in terms of the strength that you guys are seeing in cloud in the second half, would you differentiate it all by geography? I think you mentioned China being stronger, but is it any different in China versus the rest of the world in cloud?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [23]
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We're not going to break it down here between China and rest of the world. But overall, when we look at in totality, we continue to see healthy demand trend in cloud in the second half of the year. And of course, cloud, when you look at long-term trends, I mean, long term, cloud is still actually in early innings, and long-term trends for cloud are strong because AI as well as 5G, 5G driving more intelligent devices at the edge, growing more data opportunities, it's really the virtuous cycle between cloud and intelligent devices at the edge. And then industrial IoT and everything around autonomous and robotics, all of these trends point to growth at the edge as well as in the cloud. So long-term trends continue to be healthy. Will it ever be a little bit lumpy here or there? Certainly, it can be. But the point is that long-term growth drivers are solid and secular in nature for cloud.

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Operator [24]
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Our next question comes from Mitch Steves of RBC Capital Markets.

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Mitchell Toshiro Steves, RBC Capital Markets, Research Division - Analyst [25]
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So you guys mentioned 2 things on the call that I wanted to double-click on. So the first one is you mentioned that some of the shipments that's semi-capped didn't come in on time. So is this enough, in your opinion, to kind of impact the price of memory? I'm not looking for specific numbers, but was the shipment miss impactful enough that you think it's going to hurt supply enough to move the price? And then secondly, just high level, any comments on the U.S. government kind of incentivizing U.S. manufacturing? So we got TSMC coming to United States. And any impact you guys think it will have on you guys in the future?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [26]
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So regarding the equipment piece that you asked, let me be very clear that Micron did receive its equipment in time because our equipment deliveries were rather early in fiscal Q3 toward our 1z technology ramp in DRAM and, of course, other aspects on the NAND front as well. So we did not say that equipment deliveries were delayed for us during FQ3. However, it is well-known and has been talked about in the industry that given the various challenges due to COVID, such as logistics and transportation-related challenges as well as supply chain challenges, some of the equipment deliveries have been impacted in the industry. And yes, for us, in the future, it is possible, given the challenges of COVID, that some of our deliveries in the future may get impacted. But in the past, we have been in good shape overall with respect to our receipt of equipment, again, because timing of most of that equipment delivery was such that we were able to actually escape some of the potential challenges in this regard.
So from an industry point of view, if equipment deliveries get impacted, which have been talked about, there have been reports, equipment suppliers have talked about some of that as well, then obviously, that impacts technology transition capabilities, and therefore, it can impact supply, perhaps some with supply growth somewhat lower than pre COVID expectations due to the difficulty in making sure that the equipment are delivered on time as well as equipment install and equipment ramp is happening smoothly, given all the travel considerations involved as well.
So yes, to the extent that affects the supply growth and lessens the supply growth, it obviously impacts the industry supply and demand environment. We have talked about that the demand also due to COVID in certain pockets certainly has been less, particularly those pockets related to COVID. So -- and we don't really comment on the pricing, but obviously, supply has an important role to play on the pricing front.
Your second piece of the question regarding possible U.S. incentives for semiconductor manufacturing, let me first say that we are pleased that the U.S. administration as well as the Congress is considering incentives for U.S. semiconductor industry. This just goes to highlight that U.S. semiconductor industry is extremely important to our economy today. Semiconductor really forms the foundation of the economy of the future and also highlights the recognition of this importance by the officials in Washington, D.C. And really, it's important that U.S. maintains its global competitiveness and innovation capabilities. So from that point of view, we are pleased that there are these consolidations, the bill that is -- that has been put together. Of course, a lot of details still has to be worked out and the bills have to be approved. So we will continue to monitor this.
And from the point of view of memory, I think important thing is that cost and scale in memory are extremely important considerations. Micron, in this regard, actually has a well-diversified footprint of front-end manufacturing across the globe. You know that we have fabs here in the U.S. in Manassas, Virginia, as well as in Utah, and state-of-the-art, best-in-class R&D facility in Boise, Idaho as well. And of course, we have R&D and manufacturing for memory in Asia as well. So we will continue to monitor these trends, but important considerations, our scale, cost and ROI on any investments is important. It's not just about government incentives. It's about managing the business in a healthy fashion, keeping in mind ROI considerations. And above all, it's extremely important that supply growth is managed in a cost-effective fashion but also managed in a fashion to not disrupt the industry, to certainly not disrupt Micron's supply plans and make sure that supply factor is aligned with demand CAGR. So while we welcome these incentives for growth of U.S. semiconductor industry and innovation agenda, we will continue to monitor this in a very disciplined fashion before we make any decisions in this regard.

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Operator [27]
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Our next question comes from Chris Daneley of Citigroup.

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Christopher Brett Danely, Citigroup Inc., Research Division - MD & Analyst [28]
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Just a question. Can you just talk about the linearity of bookings during the quarter? Did they sort of build all quarter? Was there some volatility in there? And then you also mentioned that mobile and data center were the strongest end markets. Were both of those stronger than expected?

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David A. Zinsner, Micron Technology, Inc. - Senior VP & CFO [29]
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So linearity bookings was pretty -- I would call it pretty linear through the quarter. No surprises. And the mix -- of course, as we said, data centers showed good strength through the quarter, and mobile was a bit weaker than perhaps we were thinking coming into it, but just in terms of linearity. But in general, I would say, actually a fairly linear quarter for us.

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Operator [30]
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Our next question comes from Mehdi Hosseini of SIG.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [31]
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Most of the good questions have been asked. I just have a follow-up. I'm just wondering, Sanjay, what would it take for your customers to feel comfortable in signing multiyear -- by quarter, rather, contracts? I remember when supply was tied back in 2016 and '17, the industry was highlighting the longer-term contracts associated with enterprise customer. I think that has changed. And in that context, how do you see (inaudible) coming back and be a more (inaudible) part of the memory industry?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [32]
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So Mehdi, you were breaking up a little bit. However, your question is a good question. And of course, we -- as you know, our customer base is extremely well diversified from automotive to data center to PC to smartphones and networking and industrial and consumer customers. So customer requirements with respect to discussions around supply and from us, they vary. Some of the customers are managing it on monthly basis, some manage it on quarterly basis. And with some customers, we do have supply agreements that extend for years time frame. Of course, certain pricing discussions, et cetera, I mean, are not part of these contracts. They tend to be around supply, and discussions around pricing tend to be on an ongoing basis. Auto is an example where the contracts can be multiyear contracts, long-term contracts, so it really varies from market to market. And you know that the technology and product mix continues to change as well. So I think we want to be careful in terms of the length of the contracts that we manage with the customers. And we manage, I believe, the diversity of our customers very well.
And our customers value our supply. They are valuing the product portfolio that Micron is delivering. They are recognizing that we are the only company in the world that have NAND, DRAM and 3D XPoint and the ability to bring innovative products and solutions to them with a mix of technologies in them as well. And this really positions us uniquely. So our discussions really regarding longer-term nature of product road maps and supply considerations, we win all of these various aspects and are built around the road maps as well. So things do change in this business. And therefore, multiyear contracts are more in the market that are auto market where more legacy nodes are required to be in production for longer terms. But the parts of the markets where technology and products are moving fast, it's not about multiyear contracts there, but varying length of contracts depending upon the end market customers.

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Operator [33]
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Our next question comes from Karl Ackerman of Cowen.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [34]
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It's great to see the improvements in your SSD segment, both client and enterprise. First, what sort of percentage could QLC drives represent as a portion of your overall SSD mix next year? Could it be 25% or more? And I'd appreciate hearing your perspective on the development taking place in enterprise SSDs. On one hand, your U.S.-based competitor has been adamant they're going to gain significant share in enterprise SSDs this year. Yet merchant controller manufacturers do enable cloud providers to design their own in-house enterprise SSDs rather than just relying on off-the-shelf SSDs from OEMs. So I was hoping you could just provide the opportunity that you see in enterprise SSD this year versus peers. And how you see that playing out in the next 12 to 24 months, particularly as some of the new technologies that you're introducing and providing, such as PCIe 4.0 becomes more mainstream.

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [35]
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Thank you for asking the question. We are very pleased with our execution in SSDs. As we noted, that record quarter for us in SSDs and really solid sequential growth in SSDs. And this is happening, as we had said before that during calendar year 2020, we will be expanding our portfolio of SSD solutions, introducing NVMe solutions for clients as well as data center markets. And we have said before that as we bring out those new solutions, as we qualify them with those customers, those NVMe solutions, it will give us an opportunity during the course of the year to gain share, and this is what has been happening during the course of this year. With our strong performance in SSDs, we actually have been gaining share, yet, our share is still relatively low. And as we continue to bring out new products in the future, and several are underway and several qualifications are underway as well with our customers, we will have ongoing opportunities through the course of next year as well in terms of driving for profitable share gains in the SSD market.
And regarding QLC that you asked about, we are really pleased with our execution on the QLC front as well. We are shipping QLC SSDs in the consumer markets as well as we have product offerings that will be having -- drive future opportunity for us on the value side of the PC, on the OEM front as well. And QLC SSDs are also being used in read-intensive applications and replacing 10K HDDs as well. So you see there are multiple end market applications and opportunities for our SSDS. And we are already more than 10% of our total NAND consumption with respect to QLC, and this presents a good opportunity for us. And we fully expect our SSD mix to continue to increase as we bring out more new products over the course of next several quarters. So yes, I mean, QLC as a mix of SSD percentage will go up for us going forward.
And let me just add that QLC is obviously an opportunity that instead of 3 bits per cell, it has 4 bits per cell. So obviously, once done right and you really have all the BOM costs taken care of on the product side, it gives you lower cost and, therefore, improved profitability opportunity as well. So we are certainly focused on increasing the mix of QLC. At the same time, TLC will remain vast majority of the market for a considerable period of time.

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Operator [36]
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Our final question comes from the line of Mark Newman of Bernstein.

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [37]
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Congrats on strong numbers today. Just as a follow-up question on the data center segment. There seems to be -- I mean it sounds like everything you said stays very upbeat, quite bullish on data center demand remaining quite strong. There seems to be some worries in the market, particularly around some investors of hyperscalers inventory have been increase slightly. And I think the worry is stemming from what happened in '18 with the cuts in orders in late 2018, which continued too much of 2019. So my question is how has the communication changed with the data center at the hyperscalers? Are you having more frequent and closer communication with them to determine -- trying to get a better idea of what the inventory levels are? Or otherwise, how can you help kind of soothe those fears that data center demand is going to remain stronger for longer, as we hope it will?

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Sanjay Mehrotra, Micron Technology, Inc. - CEO, President & Director [38]
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So first of all, I would say on the inventory side, pre-COVID, data center customers as well as other customers largely had inventories that had returned to normal levels. And certainly, supplier inventories were at normal level as well pre-COVID. And the COVID environment, work-from-home environment has driven strong surge in demand on the data center front. And as we mentioned, we expect demand trends to continue to be healthy in the second half for data center as well.
In terms of inventories in the data center market, yes, while certain customers may be carrying high levels of inventory, again, for the reasons that I had mentioned earlier, related to their own supply chain considerations as well as changing environment with respect to the demand. But the point is that compared to 2018 or 2019 environment, customer inventories are really at a much better, much healthier levels. This is not like a 2018, 2019 and situation, even if certain customers are carrying some higher levels of inventory, again, given the uncertainties around COVID.
And the other point I would say is that while COVID does give us lower visibility and does bring about uncertainty, not just for us but for our customers as well, cloud is an area where the long-term demand trends, as I mentioned earlier, are secular in nature overall. So memory and storage, given the kind of application that customers -- our data center customers, hyperscalers are working on, those are requiring more memory and more storage. So the longer-term trend continues to be healthy.
In the near term, yes, I mean, COVID does have unprecedented amount of challenges and uncertainty in the entire tech ecosystem, and we are doing our best to continue to work with our customers. Our relationships today, since you were asking about those, are certainly a lot closer than they were in the previous time frame. I would say that even hyperscale customers have become somewhat more sophisticated in terms of understanding the memory dynamics and improving their own supply chain operations. So it's really a 2-way relationship. We do work closely together with them.
Having said all of that, of course, our visibility cannot be perfect in this area. We continue to focus on working closely with the customers, understanding the requirements and planning our supply chain accordingly. And what also helps is that the markets are quite diverse for us. I mean, yes, cloud is a strong driver of growth for the business, but also we are well diversified with strong mobile footprint as well as PC and between DRAM and NAND. And as we talked about, diversified into the gaming side with new gaming consoles coming in, needing more DRAM, twice as much DRAM, the new gaming consoles. So diversity of the business is certainly a helpful factor for us to manage through some of these uncertainties.

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Operator [39]
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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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