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Technology Stocks : Silicon Motion Inc. (SIMO)
SIMO 67.38-0.8%3:59 PM EDT

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From: Elroy7/1/2022 1:09:14 PM
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From the MU call

There are consumer demand and inventory-related headwinds impacting the industry and consequently our fiscal Q4 outlook.

Across the industry, there are cost challenges stemming from supply chain and inflationary pressures; however, we continue to expect our cost reductions to outpace those of the industry this year,

Despite COVID-19 control measures in China that created challenges for the global electronics supply chain, Micron’s strong execution enabled record assembly output in fiscal Q3, supporting record quarterly revenue. However, these COVID-19 control measures in China impacted our outsourced assembly and test subcontractors and led to some impact to fiscal Q3 results.

We are also driving a portfolio mix shift toward higher growth and more stable markets. Fiscal 2021’s 55 to 45 revenue split in favor of the more mature mobile, PC and consumer markets is expected to shift, by fiscal 2025, to a 38 to 62 split in favor of the higher growth data center, auto, industrial, networking and graphics markets. Several of these end markets also exhibit more stable profitability. Our fiscal Q3 new product launches and customer qualifications reflect solid execution toward this portfolio transformation.

Data center fiscal Q3 revenue grew by a double-digit percentage sequentially and well over 50% year-over-year. Data center end demand is expected to remain strong in the second half of calendar 2022, driven by robust cloud CapEx growth. Despite the strong end demand, we are seeing some enterprise OEM customers wanting to pare back their memory and storage inventory due to non-memory component shortages and macroeconomic concerns.

In fiscal Q3, we achieved client revenue growth in the mid-teens percentage range sequentially, driven by DRAM shipments and share gains in client SSD.

A number of factors have impacted consumer PC demand in various geographies. As a consequence, our forecast for calendar 2022 PC unit sales is now expected to decline by nearly 10% year-over-year from the very strong unit sales in calendar 2021. This compares to an industry and customer forecast of roughly flat calendar 2022 PC unit sales at the start of this calendar year.

Smartphone unit sales expectations have declined meaningfully for calendar 2022. We are now projecting smartphone unit volume to decline by mid-single-digits percent range year-over-year in calendar 2022, well below the industry and customer expectation earlier in the year of mid-single-digit percentage growth.

Near the end of fiscal Q3, we saw a significant reduction in near-term industry bit demand, primarily attributable to end demand weakness in consumer markets, including PC and smartphone. These consumer markets have been impacted by the weakness in consumer spending in China, the Russia-Ukraine war, and rising inflation around the world.

COVID-19 control measures in China have exacerbated supply chain challenges for some customers, and the macroeconomic environment is also creating some caution amongst certain customers. Several customers, primarily in PC and smartphone, are adjusting their inventories, and we expect these adjustments to take place mostly in the second half of calendar 2022.

Fiscal Q3 NAND revenue was $2.3 billion, representing 26% of Micron’s total revenue. NAND revenue increased 17% sequentially and was up 26% year-over-year. Sequential bit shipments increased in the high-teens percent, and ASPs declined slightly.

We achieved record SSD revenue, with both data center and client SSD revenues reaching all-time highs.

Now turning to our outlook for the fiscal fourth quarter. Long-term demand trends remain constructive; however, select market weakness and macroeconomic uncertainty are impacting our near-term outlook and visibility. Currently, we do project sequential bit shipments to be down for both DRAM and NAND in fiscal Q4.

Q: Sanjay, I’m curious, do you think this Q4 outlook is the bottom of the cycle, or do you think the risks can extend into Q1? Because you mentioned that the consumer headwinds could continue to play out during the second half of the calendar year and also because cloud inventory is at elevated levels. So, I guess, my specific question as much as I realize you don’t guide out more than a quarter is, do you think Q1 sales and margins are more likely to be flat, up or down sequentially?

A: we expect these inventory adjustments to be working themselves out over the course of second half of the year. We have pointed out that the inventory adjustments primarily are taking place in PC and the smartphone market.

And I’ll just point out that from the past history as well, that once inventory adjustments begin in a certain part of the segment, then it takes a couple of quarters for them to work out. And here, we, of course, have macroeconomic uncertainties as well. It has been a rapidly changing and uncertain environment. And this is what we have to keep in mind when we look at when does normally see return in terms of demand. And that’s why, just like Mark pointed out here in response to the last question, we will be using inventory to address the demand next year. And we will continue to closely with our customers to understand their overall demand environment.

We think that sometime in fiscal ‘23 is when -- in our fiscal ‘23 is when demand will rebound, but more importantly, it’s really about the supply-demand balance. And with respect to supply-demand balance, you can see, that we are taking actions immediately in terms of curtailing our supply growth for fiscal year ‘23 by sharing the plans with you that we are bringing down our CapEx versus our estimations earlier. So, that’s an important step. And of course, industry has shown that in DRAM that it has CapEx discipline as well. We believe our actions will also contribute toward returning the industry health sooner.

So, I would expect that sometime in our fiscal year ‘23 demand will rebound as well as industry demand supply environment, there’s a store to a healthy level. But again, I will point out that, look, this is a highly uncertain rapidly changing environment. We are, of course, responding fast and -- in terms of any changes we see. So we are not been pointing to any specific quarter at this time.
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