Micron: Capital expenditures for FY2025 focus on HBM (FY24Q4 earnings call minutes)

Micron Technology (MU.O) released its fourth-quarter financial report for the 2024 fiscal year after the U.S. stock market on September 29, 2024 (as of August 2024), with the following key points:

Below is the summary of Micron's fourth-quarter conference call, interpreting Dolphin Jun's financial report " Micron: Ups and Downs, the Ballast Stone Depends on the Cycle ".

I. $Micron Tech(MU.US) Key Points from the Conference Call:

1) Business Progress

1.1 Overall Performance

a. Revenue for the fourth quarter was at the upper end of the company's guidance range, with gross margin and earnings per share (EPS) also exceeding expectations.

b. Both NAND and storage businesses achieved record revenue levels. Overall company revenue grew by over 60%, with gross margin exceeding 30%.

1.2 DRAM Business

a. 1 beta DRAM production continues to increase, with plans to become the main shipping product in the 2025 fiscal year.

b. Progress is smooth for 1 gamma DRAM, expected to be in mass production by 2025.

c. It is expected that the front-end cost reduction for DRAM (excluding HBM) in the 2025 fiscal year will be in the mid to high single-digit percentage range.

1.3 NAND Business

a. G8 (232 layers) and G9 are accelerating production and are planned to become the main shipping products in the 2025 fiscal year.

b. Cost reduction is expected to continue in the 2025 fiscal year to around 15%, mainly benefiting from the scale effect of G8 and future G9 technologies.

1.4 Data Center

a. It is expected that server shipments in 2024 will grow by a mid to high single-digit percentage compared to the previous year.

b. It is expected that in FY25, HBM, high-capacity D5 and LP5 solutions, and data center SSD product portfolio will each contribute billions of dollars in revenue.

c. Micron expects HBM to reach a 6% market share in the entire industry DRAM market by 2025.

d. Micron has launched the HBM3E product, offering lower power consumption and higher DRAM capacity than competitors. It is expected to achieve larger-scale production in 2025 to meet market demande. The strong demand for high-capacity D5 and LP5 solutions, especially the widely adopted 128GB D5 DIMM product. Micron is driving the application of low-power DRAM in data centers and AI through innovative LP5 solutions.

f. In the fourth quarter of the 2024 fiscal year, quarterly revenue from data center SSDs reached a historical high of over $1 billion, doubling year-on-year.

1.5 PC Segment

Due to rising memory prices and increased demand for AI PCs, PC customers have increased their inventory. It is expected that the inventory situation of PC OEMs will improve by the spring of 2025.

PC shipments are expected to grow at a low single-digit rate in 2024 and accelerate further in 2025, especially during the Windows system replacement cycle.

Micron's low-power memory module (LPCAMM2) can save up to 60% of space, and the 3500 client SSDs have significant advantages in AI workloads.

1.6 Mobile Segment

Shipments are expected to grow in the low to mid-single-digit range in 2024, with this growth continuing into 2025.

In this quarter, the company completed customer validation of the second generation 1beta LP5X DRAM and the second generation G8 NAND UFS 4.0 products.

1.7 Automotive Segment

Micron completed customer certification of 1beta 16Gb LP5 in this quarter, supporting higher performance requirements for automotive digital cockpits and ADAS.

Information entertainment systems and advanced driver assistance systems (ADAS) are driving the growth of memory and storage content in the automotive market.

1.8 Market Supply and Demand

DRAM demand is expected to achieve high double-digit year-on-year growth in 2024; NAND demand growth in 2024 is expected to be in the mid-double-digit percentage range.

Demand growth for the DRAM and NAND industries in 2025 is expected to be in the mid-double-digit percentage range.

In 2024, wafer capacity for DRAM and NAND will drop below the peak level of 2022, while traditional DRAM supply will decrease further with a higher proportion of HBM (High Bandwidth Memory) wafers being introduced, further driving supply-demand balance.

2) Financial Performance

2.1 Revenue

Total revenue for the fourth quarter of the 2024 fiscal year reached approximately $7.8 billion, up 14% quarter-on-quarter and 93% year-on-year. Total revenue for the full year was $25.1 billion, up 62% year-on-year.

DRAM revenue in the fourth quarter was $5.3 billion, up 93% year-on-year, accounting for 69% of total revenue, up 14% quarter-on-quarter. DRAM revenue for the 2024 fiscal year was $17.6 billion, up 60% year-on-year.

NAND revenue in the fourth quarter was $2.4 billion, up 96% year-on-year, accounting for 31% of total revenue, reaching a quarterly revenue record, up 15% quarter-on-quarter. NAND revenue for the 2024 fiscal year was $7.2 billion, up 72% year-on-yearCalculation and Networking Business Unit

Revenue for the Calculation and Networking Business Unit was $3 billion, with a sequential growth of 17%, primarily driven by strong demand for data center server DRAM and continuous growth of HBM.

2.2 Mobile Business Unit

Revenue was $1.9 billion, with a sequential growth of 18%, mainly driven by seasonal product increases.

2.3 Storage Business Unit

Revenue was $1.7 billion, with a sequential growth of 24%, led by data center SSDs and achieving a quarterly revenue record.

2.4 Embedded Business Unit

Revenue was $1.2 billion, with a sequential decrease of 9%, but the automotive industry business set a new revenue high for the fourth consecutive year.

2.5 Gross Margin and Operating Performance

The fourth-quarter gross margin was 36.5%, with an 8% sequential increase, and the annual gross margin was 23.7%, with a 31% year-on-year increase.

Operating revenue for the fourth quarter was $1.7 billion, with an operating profit margin of 23%, a 9% sequential increase and a 53% year-on-year increase.

Adjusted EBITDA for the fourth quarter was $3.7 billion, with an EBITDA profit margin of 48%, a 5% sequential increase and a 30% year-on-year increase.

2.6 Capital Expenditure

Capital expenditure for the fourth quarter was $3.1 billion, with annual capital expenditure of $8.1 billion, an 11% increase over the previous fiscal year.

2.7 Future Outlook and Guidance

1. The gross margin for the first quarter of the 2025 fiscal year is expected to continue to increase sequentially.
2. Operating expenses for the first quarter of the 2025 fiscal year are expected to remain flat or slightly increase. Annual operating expenses are expected to increase by a double-digit percentage year-on-year, with the increase mainly concentrated in the second half of 2025 to support investments in research and development (including the HBM project).
3. It is expected that capital expenditure for the first quarter of the 2025 fiscal year will increase sequentially to approximately $3.5 billion, with annual capital expenditure at around 35% of revenue.
4. Non-GAAP revenue for the first quarter of the 2025 fiscal year is expected to be $8.7 billion, with a fluctuation of $200 million. The gross margin is expected to be 39.5%, with a fluctuation of 100 basis points. Operating expenses are expected to be $1.085 billion, with a fluctuation of $15 million.
5. The tax rate is expected to remain in the double-digit range, with an estimated earnings per share (EPS) of approximately $1.74, with a fluctuation of $0.08.

II. Micron Q&A Analyst

Q: Does the financial guidance assume that the growth of DRAM and NAND will remain stable in Q1 of the 2025 fiscal year? Can it be understood that the majority of revenue growth is mainly driven by pricing?

A: In Q1 of the 2025 fiscal year, DRAM growth is expected to be higher than previously anticipated, adjusted from the initial expectation of stable growth to a more significant increase. NAND growth is expected to remain stable in Q1 of the 2025 fiscal year, consistent with previous forecasts. The company considers a healthy supply-demand balance and product mix optimization in its financial guidance, especially strong demand in areas such as HBM, high-capacity DIMM, LP, and data center SSDs, all of which have driven Micron's overall improvement in product roadmap, execution, and manufacturing performanceQ: HBM's quarterly revenue in May slightly exceeded $100 million. Can you tell us about the data for August?

A: The company will not disclose specific quarterly revenue data. The team has achieved good results in capacity management and improving yield in 2024, and continues to provide strong products to customers. Although specific data will not be provided, the company did achieve hundreds of millions of dollars in HBM revenue in the 2024 fiscal year, and is expected to deliver billions of dollars in HBM revenue in the 2025 fiscal year.

Q: Regarding gross margin. You mentioned that the gross margin increased by about 300 basis points. Can you elaborate on the driving factors behind this? How much of it is due to the increase in the average selling price (ASP) of DRAM's similar products, changes in product mix, improvement in HBM yield, and cost reduction? Additionally, can you further explain the impact of these factors after the November quarter?

A: In the fourth quarter and the first quarter, our gross margin expansion is similar to the themes we have discussed before. The supply-demand relationship remains healthy, which is also reflected in pricing performance. At the same time, we have seen the execution of the product roadmap, especially the gradual improvement of high-value products, all of which contribute to the growth of gross margin.

In terms of costs, our cost reduction measures are progressing well. However, due to the increased proportion of HBM in the product mix in the first quarter, we expect DRAM costs to increase slightly. Nevertheless, the overall situation is developing as expected, especially in terms of technological leadership, supply-demand balance, favorable pricing environment, and product mix improvement, all of which are driving business growth and better cost execution.

Q: There have been significant changes in the end environment in the past quarter. Has the company made any adjustments to its capital expenditure plans?

A: The company will continue to focus its capital expenditures on HBM investments, with the goal of achieving long-term growth.

Q: AI GPU customers of the company are shortening the product refresh cycle to one year. At the same time, the product roadmap for HBM seems to have been shortened from the previous 18-month cycle to 12 months. Will this put you and your peers at a disadvantage in terms of yield? In other words, transitioning quickly to the iterative new node of HBM4 may face lower initial yield. So I would like to understand how this cycle of HBM product progress affects yield and gross margin?

A: We are making good progress on the 8-layer stack yield target of HBM3E. In 2025, we will further improve and plan to start production of 12-layer stack in early 2025. The 12-layer stack will go through its own yield ramp-up process and span the entire 2025. HBM4 is expected to become a product in 2026. Like all new products, the initial stage always requires a yield improvement process.

The company is very satisfied with its technical capabilities and manufacturing capabilities, and has performed well in continuously improving product yield and quality. Ultimately, as customer refresh cycles accelerate, only companies with the best products and technologies can benefit from it, as they can stay in sync with customer needs. HBM3E has already demonstrated a leading position in the market in terms of performance, power consumption, and overall product characteristicsLooking ahead, we will transition from the 8-layer stacking of HBM3E to 12-layer stacking, and further advance to HBM4 and future HBM4E. Leveraging our manufacturing advantages, this will become our competitive edge within the future timeframe. The company closely collaborates with customers, deeply understanding their pace and needs, and ensuring that our technology, products, and manufacturing capabilities align well with customer demands.

Q: What was the reason for the increase in inventory in the last quarter?

A: While we have seen strong demand from data centers, we have also noticed some customers making early purchases in anticipation of price increases, especially in the launch of AI-related devices and the demand for supply reliability, particularly in the case of tight supply at high-end nodes. Inventory is expected to remain at a high level in the 2025 fiscal year. Therefore, as you can see, our days of inventory have increased.

We will continue to be cautious in terms of supply, abandoning low-profit businesses. We expect the supply-demand environment to be favorable for improving profitability in 2025. Given the tight supply at high-end nodes and our outlook, we need this inventory to address the production overlap during the technology node transition. Therefore, our outlook is that inventory will be close to our target level by the end of the fiscal year.

Currently, our shipments are weighted more heavily in the second half of the fiscal year. Therefore, we expect a relatively small improvement in inventory turnover days in the first half of the fiscal year, but as we enter the second half, the improvement will be more significant. We are confident in the outlook for inventory and clearly need this high-end inventory to meet market demand.

Q: Could you roughly describe the path to achieving a HBM market share goal that better aligns with the overall market share? Does the company expect the entire market to continue to be constrained by supply? Or will the market rely more on the balance of Micron's product quality to drive growth? What are the determining factors for the company to achieve this market share?

A: Our HBM3E product is the best in the industry, offering 30% lower power consumption, suitable for 8-layer products. At the same time, when expanded to 12 layers, power consumption is reduced by 20% and capacity is increased by 50%.

We are in a favorable position with outstanding performance and low power consumption, which also keeps us in a strong position in product sales in 2024 and 2025. Looking ahead, we predict that the total addressable market (TAM) of the HBM market in 2025 will exceed $25 billion, with us expected to capture over 6% market share.

We are very confident in the capacity expansion of our products and agreements with customers, expecting to achieve the industry-standard market share in 2025. While our current growth is constrained by capacity ramp-up, we are on a good growth trajectory. Our HBM3E product has a premium advantage in the market, further enhancing our future development path.

Q: Regarding HBM, if the number of suppliers increases from the current two to three, do you think there is a possibility of oversupply? Assuming there are still only two suppliers for the next generation HBM, is it possible for the third supplier to cause an oversupply by increasing DRAM supply? This is mainly about the supply-demand dynamics of traditional DRAM and HBM4 next year.**

A: We can foresee that the third supplier will successfully launch HBM3E products and gain a certain market share. As mentioned earlier, our products are already sold out until 2025, and our market positioning for this product is very good.

It is important to note that the current leading process supply is very tight. The tight supply is due to the industry reducing capital expenditures in 2022 and 2023, while the entire industry is shifting to new generation technology nodes, resulting in a significant decrease in wafer capacity compared to the peak in 2022. In addition, factors such as the 3:1 trade ratio of HBM are also affecting the overall market, leading to not only HBM but also non-HBM markets being in a tight supply situation.

We have great confidence in our HBM plans, while maintaining a good business mix between non-HBM and HBM businesses. We always focus on the discipline of capital expenditure and our market share targets. Overall, we intend to maintain stable market shares for DRAM and NAND.

Looking ahead to market trends, not only is there a growth in demand for HBM, but it is expected that the HBM market will exceed $25 billion by 2025. Starting from this spring, we have seen a gradual increase in memory demand in smartphones and PCs, especially with the rise of AI smartphones. Over the next few quarters and years, this market will continue to expand. We expect that by the spring of 2025, customer inventories will return to healthy levels, and the demand for memory in smartphones and PCs will drive the development of the entire market.

We see not only the strong momentum of HBM, but also anticipate achieving billions of dollars in revenue in the 2025 fiscal year through high-capacity DRAM modules and low-power memory for data centers. These factors, especially the demand from AI-driven data centers, smartphones, and PCs, indicate a positive market trend with strong demand, and a growing need for memory and content in the current tight supply environment.

Therefore, we believe that the market opportunities for the 2025 fiscal year are very promising, with a good balance of supply and demand, providing a favorable environment for our financial performance. It is because of this that we are confident in creating significant revenue records and improving profitability in the 2025 fiscal year.

Q: Does the company believe there is still room for improvement in the gross profit margin in FY25? What are the current operating assumptions?

A: Looking ahead to the 2025 fiscal year, we expect significant revenue progress and a substantial increase in profit margins. The supply and demand environment is relatively optimistic, with leading technology supplies in the market still tight, especially in the HBM field where supply constraints persist. With increasing market share, the supply and demand situation remains healthy. At the same time, our shipments are gradually shifting towards supporting high value-added products, such as HBM, high-capacity DIMMs, more LP products, and NAND SSDs for data centers. These factors, combined with excellent cost control, support our expectations for margin expansion and enhance our confidence in the performance of the 2025 fiscal year.

Q: You mentioned that the company's supply has been sold out until 2025. Is there room for improvement or a possibility of further exceeding the current 2025 plan, or is the company's expectation close to the limit due to reasons such as equipment delivery cycles, making it impossible to further increase?Looking ahead to 2025, with shipments and pricing already locked in, can we expect HBM's gross margin to remain at the current level? Or is there room for further increase in gross margin as production volume increases?

A: We are very focused on achieving a market share for HBM in 2025 that is equivalent to DRAM. At the same time, we are steadily advancing capacity expansion and yield improvement, all of which are proceeding as planned and we are very satisfied with. If there are opportunities for improvement in the future, we will seize them. In particular, in terms of yield, we expect that the yield for HBM in the 2025 fiscal year will reach a mature level, and the increase in equipment productivity may also bring additional opportunities.

As for the issue of HBM gross margin, we expect the HBM business to continue to make a positive contribution to the overall gross margin of the company in the 2025 fiscal year. In addition, we do not have more details to provide at the moment. Shipments and pricing for HBM in 2024 and 2025 have already been locked in, and are expected to bring us stable revenue.

Q: In your forecast for 2024, you raised the growth rate of the DRAM business to high double digits, and provided a preliminary outlook for mid double digits in 2025. I would like to understand what factors have led to a slowdown in the growth rate in 2025 compared to 2024, and whether the growth rate in 2025 is affected by supply constraints? From a demand perspective, you have maintained a relatively optimistic outlook on demand for PCs, smartphones, and data centers.

A: Regarding the outlook for DRAM growth, in 2024, based on the strong performance of data center demand, we raised our growth expectations to high double digits. For 2025, considering the high base in 2024, the growth rate forecast for 2025 has been lowered to mid double digits. In addition, smartphones and PCs are performing well, but customers have some inventory backlog. It is expected that by the spring of 2025, PC customer inventory levels will return to a healthy state, which will also be one of the influencing factors.

At the same time, unit growth for smartphones and PCs in 2025 will accelerate, especially in the second half of the year, with an increase in the penetration rate of AI smartphones and servers. All these factors are included in the mid double-digit growth outlook for DRAM in 2025.

Regarding HBM (High Bandwidth Memory), we expect the market size to exceed $20 billion by 2025. Due to the low production efficiency of HBM, which requires three times the standard product wafers to produce the same bit capacity, this also has an impact on overall bit growth.

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