August 5, 2022
WD doesn’t have a DRAM business, and they sell hard drives in addition to NAND and SSDs, so I read their releases for insight into the NAND market.
Earnings Presentation
• NAND bit shipments decreased 6% sequentially (was up 14% and 13% in the last two quarters)
• Like-for-like ASPs were up slightly QoQ (was down 2% and 3% in the previous two quarters)
• Here are the last seven quarterly changes in NAND ASPs (like-for-like, from most recent to oldest): up slightly, down 2%, down 3%, flat, up 4%, flat, down 6%. Putting this all together, like-for-like NAND prices for WD are down about 6.5% in the last 21 months. From six quarters ago, pricing is almost flat. This is a positive margin environment for NAND makers because their costs decline around 15% per year.
• Blended NAND ASPs increased 2% QoQ (down 1% in the previous quarter)
• The company’s NAND gross margin increased slightly this quarter, to 35.9%. The previous five quarters were 35.6%, 36.1%, 27.1%, 30.0%, 35.5%.
Conference Call
Quotes are in italics
David Goeckeler – Chief Executive Officer
in cloud to carry into the second half of calendar year 2022. We believe the accelerated digital transformation will continue to drive cloud growth and believe we are on track to generate about half of our revenue from this market by fiscal year 2025. Outside of cloud, our expectations for calendar year 2022 demand growth have moderated since our last earnings call. As the fiscal fourth quarter progressed, we saw consumer spending soften, impacting both retail flash and HDD demand.
This weakness has migrated to the consumer PC end market as we enter the second half of the calendar year. In client, the market generally expects PC shipments to decline approximately 10% in calendar year 2022. We are seeing our PC OEM customers aggressively right size their inventory to reflect current demand conditions, which will impact our business in this market in the second half of the calendar year. After going through that correction, we expect a more normal flow of business going forward as we believe PCs will continue to fulfill broader use cases as the foundation of the increasingly common hybrid enterprise, driving unit demand above pre-pandemic levels in richer SSD content.
Industry analysts expect the smartphone industry unit volume to decrease by a mid-single-digit percentage year over year in calendar 2022. While we are well-positioned in supplying flash memory for 5G smartphones, we are also seeing our largest customers aggressively resetting their inventories for these products. We expect the inventory correction to be primarily impact our fiscal first quarter and return to market demand for the remainder of the fiscal year. In consumer, we have a premium brand and a great franchise in the marketplace.
Our Flash gross margin was 35.9%, up 30 basis points sequentially and 40 basis points year-over-year. On both a sequential and year-over-year basis, growth in enterprise SSD for data center applications led the improvement in gross margin.
Question and Answer
C.J. Muse – Evercore ISI – Analyst
Yeah, good morning. Thank you for taking the question. I guess, first off, just want to clarify here. In terms of what’s driving the weakness, is it safe to say that it’s entirely consumer client and that on the hyperscale and enterprise side you’re not seeing any changes? And as part of that, as you think about this inventory correction on the consumer client side, how long do you think the duration will last? Is this a one-quarter phenomenon? Too early to tell? Would love to hear your thoughts there.
David Goeckeler – Chief Executive Officer
Hi C.J., good morning. Yeah, I would say, you’ve pretty much got it right. The one thing I would add to that on the cloud side is, we are seeing some inventory digestion in China cloud. The U.S. hyperscalers continue to chug along. But especially in the PC OEMs is where we saw it first, a very sharp inventory correction really in the current quarter, taking down their demand significantly to reset their inventory for what is the reality for the number of unit sales. So, you know, right now, we think that is a relatively short period of time. Is it one-quarter, two-quarter? We’ll see that as we go through the quarter, but it’s definitely very, very sharp in the quarter we’re in.
And then in the smartphone market, we’re seeing it as well. As a matter of fact, it’s even developing within the quarter. Just a couple of weeks ago, we had one of our biggest customers take down their forecast in the quarter by over $150 million. So – and it’s all like the message, very strong message we’re getting directly from our customers, this is just resetting inventory.
So, you know, that one, we expect to be a one-quarter phenomena. I think in a larger market, we’ll see over the next couple of quarters. I will say that in the consumer and channel space, given our broad reach and where we operate around the world in the consumer business, we are starting to see some stabilization of those markets. Our channel business, if you look at sell-through for the first four weeks of the quarter, has been on plan.
Different Analyst Question and Answer
We’re seeing – I would say, if we went back several quarters, we started talking about it very early this year. The consumer started softening really in Europe when the war broke out, in China with the lockdowns and that progressed throughout the first half of the year. You know, the consumer business is something that usually is soft. It’s seasonally the weakest part of the year. April and May, calendar Q2 is an interesting quarter for that business because it always starts off in April and May and comes on strong in June. That really didn’t happen. It stayed soft. And then we started to see the spread into consumer – consumers purchasing PCs and now smartphones. And so, now, we’re seeing the OEMs and the PC and the smartphone business, as we talked about, very aggressively reset their inventory levels. At the same time, we’re starting to see the consumer in our channel business stabilize. So, we’re starting to see the early signs of the consumer business stabilizing, the channel business, stabilizing. If I look at sell-through for the first part of the quarter, it was to plan. Sell-in, it’s still a little bit behind because nobody wants to build inventory right now.
Summary
For memory company shareholders, the key takeaway from this report is the further weakening of demand. The PC segment was soft previously and is forecasted to decline 10% in 2022 in unit volume. WD said this quarter that mobile customers are pulling down their demand, following quickly that customers tell them this is a one-quarter inventory correction. I don’t know how customers would know that. Mobile has been weak most of the year so I think it is more likely there is continued softness in demand, not just inventory absorption. Even with the softness, like-for-like NAND ASPs went up for the company. NAND pricing has been flat from six quarter ago to today. While gross margins have increased some in NAND, they have not expanded as much as they should have given that NAND front end cost is targeted to decline 15% per year. I think one reason for this is they are starting up a new fab complex, which is inefficient at this phase of life. Also, they had an excursion earlier this year that lowered output and will hurt their costs during the time that material is coming out. Third, they are seeing higher labor and materials costs caused by the inflationary environment. Since Micron is not impacted by the first two factors, all else equal investors should expect Micron’s NAND business to be seeing increased profitability. The NAND market continues to be healthy, which is the opposite of what I have been predicting, based on statements from both Samsung and Hynix that they intend to grow their market share even if it risks oversupplying the market.
-Smooth Hughes (long MU)