Micron CFO: 5G cycle is living up to the hype

Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman speak with Micron Technology CFO David Zinsner about trends he’s seeing in the chip industry, outlook, and much more.

Video Transcript

MYLES UDLAND: Well, certainly, the chip shortage has been one of the top stories this year in the world of business and a story that we expect will continue. A company sitting right at the center of that fascinating business dynamic is Micron. And joining us now to discuss where things stand for the company and the sector at large is David Zinsner. He's the Chief Financial Officer over at Micron.

So David, thanks so much for jumping on this morning. I'd love to just start with kind of from your vantage point, first week of June 2021, where you see the cycle at as we are trying to get supply to where it needs to go. Certainly, demand remains strong in a multi-year time frame. But how does Micron see the landscape today?

DAVID ZINSNER: Well, first of all, thanks for having me. And as you point out, things have been very strong. We're just wrapping up our third fiscal quarter. We'll finish that off tomorrow, actually. And demand's strong across virtually every market-- mobile, automotive, computing, cloud. And we've really seen improved pricing both in our DRAM, our memory business, and in NAND, our storage business. We've also seen good demand on the DRAM front. I think we're in a good place.

Last week Sanjay, our CEO, mentioned that we thought we would hit at least the high end of our range, if not higher. We said that we would be somewhere between $6.9 and $7.3 billion-- so at least at the high end, 7.3, if not a little higher. And also because pricing is better, we expect to see very strong gross margins, very strong earnings per share.

JULIE HYMAN: David, really interesting here. I know there were a few questions after your earnings about the pricing power. So can you talk to me a little bit more about that, about what you're hearing from customers and about the sustainability of those pricing increases and visibility as you head throughout the year?

DAVID ZINSNER: Yeah, it's a good question. So you know, given demand strength-- and we expect that demand strength to continue through this year and into next year-- I think that the industry in general, particularly on the DRAM front-- maybe not so much on the NAND front, but perhaps getting a bit better. On the supply side, those have been more aligned with the demand. That generally is a positive for pricing, and so we've seen pricing improve in DRAM pretty meaningfully.

We had seen NAND pricing stabilize when we talked last quarter at the earnings. I think more recently, we've actually seen that pricing improve. I think the year looks to be like a really solid year for us given the demand and supply dynamics. And I think that continues, particularly in DRAM, into next year.

As I said, NAND is a little bit more opaque for us, given that there are more suppliers in the industry. It's harder to delineate exactly what all the suppliers are going to do in terms of their supply. But we're cautiously optimistic on the NAND front, and definitely optimistic on the DRAM front.

BRIAN SOZZI: So David, demand is strong. That's good. But is it-- is it nearing a peak?

DAVID ZINSNER: I don't think so. I mean, I think you guys mentioned before that this is a multi-year cycle, or a secular cycle we're under. Really, there's computerization going on across pretty much every end application. And memory really is at the heart of that.

Memory tends to be the bottleneck in a lot of those applications. So it requires more content going into all these applications to drive, you know, the compute that's needed in the mobile space for 5G, and cloud in particular for artificial intelligence, in automotive for more advanced automotive infotainment on autonomous driving. So I think those things are long-term secular drivers that will last for a long time.

There might be perturbations over time. This is a cyclical industry. But I think when you look at this over a 5, 10-year horizon, things look very good for the semiconductor space-- look very, very good for the memory space.

BRIAN SOZZI: There's a bit of a shift going on amongst your customers in terms of how they order from just in time to the way the Street puts it, just in case. How is that changing your business?

DAVID ZINSNER: So you know, first of all, I think we are doing the same. We want to make sure that we aren't left with an inability to supply to our customers for nonmemory components, components outside of what we manufacture. And so we are carrying what we call buffer levels of inventory across our supply chain to make sure that that doesn't cause an issue.

And I really think, you know, as you look across the supply chain, the electronics supply chain, almost every person in my seat-- the CFO-- is thinking the same way. You know, we need to make sure that we have enough inventory to make sure we meet what customers are asking for. And you know, a lot of these parts are generally not very expensive relative to the overall bill of materials for the customer. And so you know, it would be, you know, disappointing for every one of these customers if they can't meet customer demand based on one single, relatively inexpensive part. So I do agree that most of the industry will move to this model, where they'll carry higher levels of buffer inventory across a number of different components and carry higher levels of inventory in general to make sure that the demand is met.

BRIAN SOZZI: And David, about 30% to 35% of your sales are tied to the mobile phone market. Is the 5G cycle living up to the hype?

DAVID ZINSNER: It is, actually. I mean, quite honestly, I've been surprised about it. There were over 200-- I think 250 million 5G handsets sold last year, counter '20. We'd expect that to double this year. That's still not a majority of the handsets that get sold. There's over 1 billion handsets sold every year.

So it's increasing at a fairly rapid pace. Still a lot more room to go for that to really be the workhorse main device getting sold today. And the good thing for us is, in the mobile space it's basically double the content in 5G versus 4G for us. So not only do we get this pickup in 5G handsets-- just the end demand improving-- we also get the content increases from this transition from 4G to 5G.

MYLES UDLAND: And you know, David, finally, before we let you go, I did want to ask about this recent credit facility. You guys stood up for sustainable investments. I'm just curious, as a CFO of a company-- we hear a lot about ESG and sustainability targets. But as a CFO thinking about the capital structure of the business, this seems to me like something I haven't seen before. Maybe your peers are standing these kinds of things up. But I'm curious if you could just quickly talk us through sort of how this came about and how you will draw on this credit line.

DAVID ZINSNER: Yeah, actually, it's somewhat common in-- or at least more common-- in Europe. But we're one of the first to do it in the US. I'm pretty excited about it. We have a focus on ESG. We're going to spend $1 billion over the next five to seven years in terms of improving our impact on the environment.

The credit facility-- you see a lot of these green bonds that are utilized for improvement of-- on the ESG front, but not so much on the credit facility side. So we went to our banks and investigated whether we could put a facility in place that really not only benefited us, but incentivized us to hit our objectives from an ESG orientation.

So if we hit-- and we have to hit them every year. There's improving milestones every year over the life of the five-year facility. But every year, if we hit those, we get about $1 million of interest expense savings. Credit Agricole is the agent of the overall facility in terms of on the sustainability front, so they monitor how we're doing and make sure we comply with it.

The $1 million savings is good. But what I really like about it is it just kind of reinforces the commitment that we have towards significantly improving our impact on the environment. We have very aggressive goals for 2030. And over this five year period where the facility is in place, this will be opportunities to move the ball forward in terms of improving ESG.

MYLES UDLAND: All right. David Zinsner is the CFO at Micron. David, really appreciate you taking some time to talk with us this morning, and I hope we'll stay in touch.

DAVID ZINSNER: Thanks for having me. Appreciate it.