Micron Technology, Inc. (MU) Q2 2018 Earnings Conference Call Transcript

Micron Technology, Inc. (MU -4.47%)
Q2 2018 Earnings Conference Call
March 22, 2018, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Jonathan and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technology's Second Quarter 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, please press * then the number 1 on your telephone key pad. If you'd like to withdraw your question, press the # key. Thank you. It is now my pleasure to turn the floor over to your host, Shanye Hudson. You may begin your conference.

Shanye Hudson -- Investor Relations

Thank you, Jonathan, and welcome to Micron Technology's Second Fiscal Quarter 2018 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 audio and slides, is being webcast from our Investor Relations website at investors.micron.com.

In addition, our website contains the earnings press release, which was 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 along with a convertible debt and capped call dilution table. As a reminder, the prepared remarks from this call and webcast replay will also 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 also follow us on Twitter, @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 Form 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.

Lastly, Micron is planning to host its 2018 Analyst and Investor Event on May 21st in New York City. We'll share further details about this event in the coming months.

With that, I will now turn the call over to you, Sanjay.

Sanjay Mehrotra -- President and Chief Executive Officer

Thank you, Shanye. Good afternoon. During the second quarter, Micron once again set company performance records across multiple metrics, including revenue, gross profit, EPS, and cash generation. We are consistently delivering results that underscore our relentless focus on execution and solid progress on our strategic priorities.

Specifically, we are evolving our product portfolio to richer mix of high-value solutions, enhancing our financial performance and cultivating deeper relationships with more key customers across multiple megamarkets. Our growing portfolio of management solutions and low-power DDR4 products boosted our mobile business to record revenue and profitability during the quarter. We also grew our SSD shares in our second quarter, with total SSD sales up 18% year-over-year and same-site cloud and enterprise lines more than tripling over that same period.

Continued strong penetration of our highly competitive DDR4 products include cloud application and our industry-leading high-performance graphics menu portfolio into gaming, graphics, and crypto-mining applications contributed to a robust 15% sequential growth for our compute and networking business.

Strong demand for our DRAM and NAND products delivered record second quarter revenues for us in the automotive market. We continue to execute well on our goal of contributing new products on our advanced technologies, delivering performance, quality, supplies, and cost advantages to our customers. In NAND, we are transitioning from being a component supplier to becoming a solutions provider. We launched and began qualifications of the industry's first cloud and enterprise center SSD drive, incorporating 64-layer CD TLC NAND. We also introduced discrete UFS solutions targeted at flagship smart phones. These solutions are also based on our 64-layer CD TLC NAND, which has 50% high performance and double the density of the prior technology.

We have qualified a family of these products with a major chip set vendor and we expect to complete customer qualifications in the coming months.

In DRAM, our focus remains on enhancing our cost competitiveness and accelerating our product execution. We have qualified our 1x nanometer DRAM at three of the world's largest hyperscale customers with other qualifications on the way. We also garnered positive feedback on our 1x nanometer LPDRAM solutions and set industry benchmarks for power efficiency, which is particularly critical to our mobile customers.

Our comprehensive and expanding portfolio of DRAM, NAND, and all solutions has enabled us to achieve record design wins for our automotive business in the first half of Fiscal 2018. We believe we are well-positioned to continue to support our share leadership in this rapidly growing market. These achievements illustrate our focus and ability to deliver value to both our customers and shareholders.

I'll now discuss some of the trends we are seeing across our end markets, which will continue to expand the significant opportunities for our business in the years ahead. At Mobile World Congress recently, phone manufacturers featured high-end smart phones with larger 4K displays, multiple high-resolution cameras, and 4K HDR video recordings. Capabilities like these have driven increased memory and storage requirements in recent years but, perhaps most impressive were the multiple implementations of artificial intelligence and virtual reality. Clients are building new artificial intelligence, reality, and life-like virtual reality capabilities into high-end smart phones, including facial and voice recognition, real-time translation, fast image search, and theme detection.

To support these data-intensive capabilities, flagship and high-end smart phones are migrating toward 6 gigabytes of LPDRAM, a trend that bodes well for Micron, given our leadership in LPDRAM, all at efficient speed, which is essential for optimizing battery life. Average storage densities are also increasing across all smart phone classes, with new flagship models using 64 gigabytes of flash memory as the minimum. Micron's portfolio of management solutions is well-suited to address this growing demand and we are leading the industry in TLC utilization with a portfolio that leverages the strong attributes of our 3D NAND technology.

Of course, the growing adoption of AI is not limited to mobile. At the Consumer Electronics Show, several companies showed AI smart components in new automotive models. These systems integrate the instrument dashboard, infotainment, and systematic systems with essentialized compute and storage architecture to create a data center on wheels. Voice and gesture recognition combined with driver-inert monitoring capabilities are making automobiles more intelligent and much more compute-intensive, requiring higher capacity and more powerful memory and storage solutions.

Micron is already working with automotive customers who will benefit from our higher-speed automotive-grade LPDDR4 solutions in the near-term and new memory technologies in the future like our high-bandwidth GDDR6 graphics memory. The new features in mobile, automotive, and other connected devices require rapid data analysis and storage in enterprise and cloud servers, including machine learning training and inferencing to complement the compute taking place at the edge. This is driving significant investments in the data center and growing demand for both memory and high-performance storage. Micron's broad technology portfolio and strong innovation engine position us well for these growth trends. We continue to partner with our customers to ensure our technology and in generating roadmaps judging what are the critical features for tomorrow's solutions.

Now I will provide an update to near-term industry supply and demand dynamic. The DRAM market today is very different from the PC-dominated market of the past. This market now supports a healthy demand environment with several secular demand-drivers that I have discussed earlier. More specifically, memory is making possible the applications such as AI and VR and enabling new cloud-based business models which generate a fundamental value far in excess of price per bit.

Against this healthy demand backdrop, we project DRAM industry bit output to grow in the 20% range for Calendar 2018, maintaining favorable industry fundamentals. For the NAND market, we believe the ongoing transition to 64-layer CD NAND creates the opportunity for the more balanced industry dynamic in Calendar 2018 versus the constrained conditions we saw in 2017. We expect industry bit output growth to be somewhat higher than 45% in Calendar 2018, providing incremental supply to address the increasing demand created with the further displacement of HDDS in client, enterprise, and cloud applications.

From a micro perspective, we continue to make significant strides to strengthen our competitive position through technology and cost improvements. In DRAM, we are focused on accelerating our technology transition cadence and ramped our 1x nanometer technology to make sure it is faster than any of our previous technology nodes. We remain on track to receive 1x nanometer bit output crossover relative to our 20-nanometer node by the end of Calendar 2018. We now expect Micron's Calendar 2018 DRAM bit output growth to be in line with industry's 20% range.

In NAND, our 64-layer technology continues to ramp very well but is somewhat ahead of plan. We continue to execute plans to achieve better output crossover on our 64-layer 3D NAND technology, relative to 32-layer in the second half of Fiscal 2018. We believe we will be somewhat above industry bit output growth in Calendar 2018 for NAND. We expect to deliver qualification samples to OEM customers of both of our 1y DRAM technologies and our third-generation 3D NAND technology by the end of Fiscal 2018 and we continue to expect to ramp initial volume for each of these new nodes in the second half of Calendar 2018.

For some time now, industry participants have pointed out that the cost and complexity of DRAM and NAND scaling is increasing with each subsequent technology node. Additional space and equipment is required to manufacture the increasingly complex architectures of these leading technologies to maintain wafer capacity and meet market demand. Accordingly, we are executing plans to add clean room space in our NAND and DRAM SAB network. With the support of the Singapore Economic Development Board, we have finalized plans to build additional shelf space in Singapore adjacent to our existing NAND Center of Excellence. The primary purpose for this new clean room space will be to transition our existing wafer capacity to future CD NAND nodes. That location will enable us to drive efficiency to-scale.

We expect to build out this facility in theaters aligned with our manufacturing requirements and market demands. The first phase of this clean room is expected to be completed by the summer of 2019 with initial wafer output from the facility expected in the fourth quarter of Calendar 2019. We are also building out incremental clean room space in our fab in Hiroshima, Japan, which will be available for production at the beginning of Calendar Year 2019. This clean room space will be used to continue our 1y nanometer DRAM transition. For Fiscal Year 2018, we expect our capital expenditures to be in the upper end of our previously guided range of $7.5 billion plus or minus 5%. Long-term, we target capital expenditures in the percentage of revenue to be in the low 30% range.

Before we move to the next section of our call, I would like to address a supply maintenance issue affecting nitrogen supply to one of our Taiwan DRAM fabs which occurred on Tuesday of this week. We expect this event will impact our DRAM production output by 2% to 3% for the quarter. Our teams are working around the clock to recover from this situation and we expect to return to full production within the next week.

Lastly, I would like to welcome Dave Zinsner as our CFO. Dave brings years of experience within the semiconductor industry and we are happy to have him on-board. Dave will now provide details on our second quarter results and third quarter outlook.

David Zinsner -- Senior Vice President and Chief Financial Officer

Thank you, Sanjay. I'm excited to be joining Micron at a time when the company is accelerating its focus on execution, including the delivery of more high-value solutions and the ongoing improvement of cost competitiveness. During my first few weeks at the company, I've been diving into the details of the business and operations and I'm more convinced than ever that there's a fantastic opportunity to build an even stronger company while continuing to enhance shareholder value.

For the second fiscal quarter, revenues were $7.35 billion, up 8% from the prior quarter and 58% from the prior year. The overall strength reflects a positive business environment and broad-based demand for our memory and storage solutions, particularly for cloud, enterprise, and mobile markets. Non-GAAP gross margins for the quarter were 58.4%, up 300 basis points from the prior quarter and up from 38.5% in the prior year. Our ability to drive a richer mix of high-value products, strong execution on our cost goals, and favorable market conditions contributed to the gross margin expansion.

Non-GAAP operating margin was 49%, up from 46% in the prior quarter and 25% in the prior year period. Non-GAAP operating expenses were $660 million, up approximately 9% from both the prior quarter and prior year period. The sequential increase is primarily attributed to expenses associated with shifting our portfolio to high-value solutions and accelerating our technology and product development. These expenses tend to fluctuate quarter-to-quarter. We're also beginning to incur the impact of solely funding the development of our fourth generation 3D NAND technology. We continue to manage operating expenses tightly and are generally only increasing operating expenses for developing and qualifying new products and technologies.

Turning to performance by business unit, the compute and networking business unit grew revenue to $3.7 billion in the second quarter, up 15% from the prior quarter and 93% year-over year. Cloud server revenues were up nearly 30% quarter-over-quarter and hyperscale customers continue to invest in data center infrastructure and broaden their service offerings. We also benefited from strong demand for graphics/memory, with crypto-currency mining augmenting sales for gaming applications. Operating income increased to $2.3 billion or 64% of revenue and reflects higher sales of our 1x nanometer DRAM solutions, along with tight supply conditions.

The mobile business unit achieved its highest ever revenue and operating income in the second quarter of $1.6 billion and $680 million, respectively. These results compared to $1.1 billion of revenue and $170 million of operating income for the same period last year. Our performance underscores our laser focus to meet customers' needs. The embedded business unit reported revenue of $829 million in the second quarter, in line with last quarter and up 31% year-over-year. The automotive business had a record quarter, driven by strong sales of ADAS and in-vehicle experience applications.

We also saw an increase in our industrial business, driven by the growing industrial IoT markets spanning factory automation, transportation, and surveillance applications. Operating margins were 44% in the fiscal second quarter, expanding by 260 basis points compared with the first quarter. And, finally, turning to the storage business unit, revenue was $1.3 billion, up 20% year-over-year, supported by record revenue in SSD.

On a sequential basis, SBU revenue declined by 9%, with the strong growth in SSDs offset by a reduction in components revenue. The sequential revenue comparison was impacted by a mix shift within our NAND components sales, which I'll elaborate on momentarily. We're continuing to penetrate the SSD market and expand sales across each end market: consumer, compliant, client, enterprise, and cloud. The growth is most pronounced in the enterprise and cloud SSD component of the market. Our sales of these end markets were up nearly 30% quarter-over-quarter and more than 230% year-over-year.

As we previously noted, product developments for 3D XPoint solutions is now under way. During the second quarter and over the next few quarters, we have incurred and are likely to continue to incur costs associated with production capacity and utilization in advance of volume ramp of these new 3D XPoint products. These charges negatively impacted our SBU operating margins by approximately 500 basis points this quarter. Including these charges, second quarter operating margins were 20% compared with 29% in the fiscal first quarter and 7% in the prior year period.

Moving to performance by product line, DRAM represented 71% of total company revenue in the fiscal second quarter. DRAM revenue in the quarter was up 14% from the prior quarter and 76% year-over-year. Sequentially, shipment quantities increased in the mid-single-digits' percentage range while ASPs increased in the low-double-digit percentage range. DRAM non-GAAP gross margin was 66% in the second quarter, up 4 percentage points from the prior quarter and up 22 percentage points from the year-ago quarter.

Revenue from trade NAND represented 25% of overall company revenue in fiscal second quarter. Trade NAND revenue in the quarter was down 3% sequentially and up 28% year-over-year. On a sequential basis, shipment quantities increased in the low-double-digit percentage range, while ASPs declined in the mid-teens percentage range. The sequential ASP decline in NAND increased in part due to a meaningful last-time purchase of higher price MLC NAND in the fiscal first quarter. This is the mix shift in our SBU NAND component that I had referenced earlier. Trade NAND non-GAAP gross margins were at 47% in the second quarter, down 2 percentage points from the prior quarter but up 16 percentage points from the year-ago quarter. Gross margins for both SSDs and managed-NAND solutions increased quarter-over-quarter, offsetting the declines in component margins. This change in mix illustrates the importance of shifting our sales toward high-value solutions.

I'd like to take a moment to update you on the impact of U.S. tax reform on Micron. The one-time impact related to the taxation of accumulated offshore earnings and cash was largely neutral for the company. The impacts of this repatriation transition tax were largely offset by our accumulated tax losses and other tax credits. For the remainder of the year, we expect our non-GAAP tax rate to remain the low to mid-single-digit percentage. Since we are not yet subject to certain provisions of the new tax code.

For Fiscal 2019 and beyond, we expect our non-GAAP tax rate to settle in the low-teens percentage range. Going forward, we'll benefit from having greater flexibility to access our worldwide cash deposits.

Our non-GAAP earnings per share were $2.82, up 15% from the prior quarter and up over 200% from the prior year. As a result of our record performance, we generated $4.3 billion in cash from operations, which represented 59% of revenue. This compares to $1.8 billion in the year-ago period. Capital spending, net of third party contributions, was $2.1 billion, resulting in a very strong free cash flow, adjusted for these third-party capital contributions, of $2.2 billion or 30% of revenue. This compares to free cash flow of approximately $600 million in the year-ago period.

As Sanjay mentioned earlier, we expect capital spending, net of third-party contributions, to be at the upper end of our Fiscal 2018 guided range of $7.5 billion, plus or minus 5%. As a result of the strong free cash flow, we ended the quarter with approximately $8.7 billion in cash, marketable investments, and restricted cash. The face value of our debt increased approximately $200 million to $9.5 billion. A $300 million reduction in debt due to scheduled debt repayments was offset by a $500 million increase in debt at our IMFT joint venture.

Since the first of our 3D XPoint products are expected to launch in Calendar 2019, we chose to defer funding for IMFT. Our partner is contractually able to make the funding on our behalf and designated a debt on IMFT's balance sheet and that debt is then counted as part of our debt for the purpose of GAAP reporting. We still expect to be in a net cash flow positive position in the fourth quarter and possibly sooner, depending on the extent and timing of any future convertible note redemptions.

This net cash-positive position remains a significant milestone in the ongoing strengthening of our financial foundation. We continue to evaluate additional opportunities to accelerate our deleveraging actions that will provide a high rate of return. This strong financial profile is the result of consistent execution and focus across the entire company.

Now, turning to the Fiscal Third Quarter guidance, as Sanjay mentioned, we had a maintenance issue at one of our Taiwan DRAM fabs this week which is impacting production. We expect this event to decrease our total revenue by approximately 2% in the third quarter, which we've accounted for in our guidance. Having said that, we continue to experience a strong demand environment and we, therefore, expect Fiscal Third Quarter revenue to be in the range of $7.2 billion to $7.6 billion and non-GAAP gross margins to be in the range of 57% to 60%. We expect to see an increase in operating expenses, again, associated with product and technology qualifications and the funding of our fourth generation 3D NAND technology, both of which primarily impact R&D.

Considering these costs, non-GAAP operating expenses are expected to be $725 million plus or minus $25 million. We expect non-GAAP operating income to be in the range of $3.6 to $3.8 billion. Based on a share account of approximately 1.25 billion shares, these results should drive non-GAAP EPS up $2.83 plus or minus $0.07.

I'll now turn the call over to Sanjay for some concluding remarks.

Sanjay Mehrotra -- President and Chief Executive Officer

Thank you, Dave. Micron will be celebrating our 40th anniversary this fall. Innovation has always been a key cornerstone to our success, ensuring that our technologies and products quickly adapt to serve the world's growing appetite for faster data. As we look ahead, we remain focused on nurturing and fostering an accelerated pace of innovation and I know our team is fired up and ready for the challenge. The opportunity to create a dramatic impact on the world around us is undeniable and I'm excited to be part of this team shaping that future. I'm looking forward to speaking with all of you at our analysts and investor event in May. You can expect us to provide more detail on how we see secular market trends creating new opportunities for memory and high-performance storage and why we believe Micron is well-positioned to win.

We will now open for questions.

Questions and Answers:

Operator

Certainly. Ladies and gentlemen, if you have a question at this time, please press * then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the # key. Our first question comes from the line of Rajvindra Gill from Needham and Company. Your question, please?

Rajvindra Gill -- Needham and Company -- Managing Director

Yes, thank you for taking my questions. I appreciate it. I was wondering, Sanjay, if you could talk a little bit about the changes in the DRAM industry that you've seen over the past year or so? I think, in the past, you had mentioned that memory has become a strategic differentiator for high-performance computing. I was wondering if you could maybe elaborate on what specific end markets or behavior patterns that have been changing with some of your main customers in terms of how they consume memory?

Sanjay Mehrotra -- President and Chief Executive Officer

Certainly. I think we are seeing the fastest growth for our DRAM memory at large-scale in cloud computing and hyperscale data centers. And this is where high-performance is absolutely becoming essential, along with fast storage is becoming essential for the trends such as AI, which are really driving new business models. Whether you go from education and training tailored toward individuals, levels of coaching or training to the individuals, all the millions of transactions, process real-time and financial sector to detect fraud or going to diagnosing and treating life-affecting diseases -- bottom line is, we are barely starting with AI in cloud computing and data centers.

And to realize the full impact of these solutions and to truly provide this new business model and services and applications to consumers and businesses alike, more and more and more data needs to be processed. It needs to be real time analytics and that requires more fast memory and more fast storage -- that means flash as well as DRAM. So, we are seeing tremendous growth and, if you look at trends, we project that, 2017, about 145 gigabytes per server going to about 350 gigabytes per server by 2021. Similarly, if you look at flash storage, 1.5 terabyte average in 2017 going to something like 6 terabyte average with each server by 2021 timeframe. So, these are massive secular demand trends in the cloud computing and hyperscale for memory as well as for flash storage.

Similarly, going to mobile, I talked about in my script that, at Mobile World Congress, several new phone models were introduced that leveraged 4K HDR capabilities, that leverage AR and BR, and even that are processors that are being introduced for mobile applications that actually have the AI unit built into it. So, just imagine how much data-intensive applications are now being run in order to provide users smooth experience. That then requires high performance and a lot of memory. And you're starting to see now 6-gigabyte of DRAM in the phones so mobile is another large driver of DRAM memory and, of course, it is also a large driver with average capacities continuing to increase for flash as well.

And then autonomous driving is barely starting. Industry contacts are talking about robo-taxis intercepting the whole autonomous driving trend and being introduced even in 2019, 2020 kind of timeframe. And autonomous driving means, as I said in my remarks, data-center on wheels. It's acquiring more fast memory to, again, make all real-time decisions providing for a safe, and comfortable, and efficient driving experience. So, these are really massive trends and these are secular in nature and I believe will continue to drive strong demand for DRAM in the years ahead.

And, of course, there are other ones -- continuing average capacity in 2 billion PCs for DRAM, a bit more gaming features and VR features, and of course Industrial 4.0 initiatives. These are all multiple megamarkets for DRAM and we are very well positioned with our product portfolio, focusing on cross-competitiveness with our technology advancements as well what I indicated, low-power DRAM solutions, which are becoming increasingly important across multitude of these applications.

Rajvindra Gill -- Needham and Company -- Managing Director

That was very helpful, Sanjay. A follow-up, your SSD revenue was up 80% year-over-year. Can you talk a little bit about the attach rate for client SSD, specifically? Last year, they were put on a temporary pause because of tightness in supply. I was wondering if you could talk a little bit about that now that we're about a quarter into this year? Thank you.

Sanjay Mehrotra -- President and Chief Executive Officer

So, you are right -- last year's flash was severely constrained and that did somewhat slow down our cash rate of SSD and applied computing as well as slow down the march toward highest capacity of SSDs in normal computers. And attached rates for SSD applied computing around 35 to 40%, maybe 40% in 2018 may be going toward 50%. Over the next few years, this is expected to continue to go toward, by 2020/2021 timeframe. to 80% plus attach rate for SSD. So, again, this is a large growth driver for SSD in applied computing applications.

We are focused on, of course, expanding our portfolios. SSD, we talked about significant progress of our SSDs across the board, in client, enterprise, as well as in the consumer markets. And we look at opportunities to gain further share in all of these SSD markets in the future as we continue to execute on our product roadmap.

Rajvindra Gill -- Needham and Company -- Managing Director

Great. Thank you. Congratulations.

Operator

Thank you. Our next question comes from the line of Chris Danely from Citi. Your question, please?

Chris Danely -- Citigroup, Inc. -- Semiconductor Analyst

Hi, this is Wayne Loeb on the line for Chris Danely. My question is you talk about your plans for acquisitions. What would be the criteria that would make you buy something and how does M&A fit into your plan in the context of Micron wanting to be a NAND solution provider?

Sanjay Mehrotra -- President and Chief Executive Officer

We are not going to speculate on M&A matters here. We are very pleased with the portfolio of technologies and initiatives we have with respect to continuing to advance our product solutions. But, of course, we do not lose out in the future leveraging M&A toward any growth initiative and, of course, we always look for core capabilities to expand the market opportunities for Micron and, of course, we'll be focused on value in terms of any acquisition that we may entertain in the future. Again, not speculating on anything at this point. And, of course, always looking for our "Why?" kind of opportunities.

Chris Danely -- Citigroup, Inc. -- Semiconductor Analyst

As a follow-up question, can you talk about what Micron's projected cost reductions are for NAND and DRAM this year?

Sanjay Mehrotra -- President and Chief Executive Officer

We don't provide specifics on cost reductions, but what I can tell you is that we are making very good progress on our technology. As we indicated, in our 1x DRAM technology, we have achieved the fastest RAM to mature yield in the history of the company. And, similarly, our 64-layer technology, it has ramped to mature yields as well and we are continuing, of course, to do very well on our 20-nanometer DRAM technology with ease, as well.

So, we are pleased with our continuing progress on costs and the technology that's built and continuing to focus on advancing our next generation technology nodes and products. And, of course, also very much focused on non-memory costs in our products such as SSD, non-memory costs. So, making good progress and all of that is baked into our gross margin guidance that we have provided.

Chris Danely -- Citigroup, Inc. -- Semiconductor Analyst

Thank you very much.

Operator

Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs Your question, please?

Mark Delaney -- Goldman Sachs -- Vice President

Yes, good afternoon. Congratulations on the good results and thanks for taking the question. First question, I hope you can detail a little bit more about that nitrogen issue you mentioned. Did you have to scrape wafers or just idle production? And can you help us reconcile the comment about a little bit last year about output for next quarter with the now full-year guidance about growing in-line with the industry compared to, last quarter, I think, Micron was going to grow slightly below?

Sanjay Mehrotra -- President and Chief Executive Officer

So, this nitrogen maintenance issue, it has not caused scrapping of wafers. It has idled or slowed down production. As we said, it's affecting 2% to 3% of this our quarter's DRAM production output. And, with respect to our expectation our output role for Calendar Year 2018, that remains in-line with the industry estimate of 20% and this effect is already included in that as well.

Mark Delaney -- Goldman Sachs -- Vice President

Is it fair to assume better 1x nanometer yields? Is that how Micron's now growing in-line with the industry for the full-year despite this nitrogen issue?

Sanjay Mehrotra -- President and Chief Executive Officer

Yes, it is correct that our production output is expected to grow in-line with the industry and that is, of course, as I observed, of our excellent yield of 1x nanometer nodes as well as the 20-nanometer node.

Mark Delaney -- Goldman Sachs -- Vice President

Okay. And then one other question from me, if I could. Sanjay, you commented about having a CapEx to sales target in the low 30% range. I don't want to parse words too closely -- I think it was about 30% as of the last Analyst Day -- but the strategy from Micron, as I understood it, had been that the company was trying to keep its net DRAM wafer starts flat and there's a lot of costs associated with getting to these new nodes because of all the extra factory space that you need and that you need for new clean rooms. Given your comments about CapEx coming in toward the higher end of the range this year and the comments about that ratio, is there any change about the strategy of Micron, how thinking about CapEx and religious enabling -- getting to those next nodes, which are getting more -- or is there a change that we need to be thinking about in terms of how Micron's thinking about managing its net wafer starts and DRM? Thank you.

Sanjay Mehrotra -- President and Chief Executive Officer

I think, if you look at last few years, and you look at Micron's revenue, and you look at Micron's CapEx, you'll see that Micron's CapEx over the course of last few years is in the low 30% range of the revenue over those last few years as well. So, what we have said here today is fairly consistent with what actually has been the case at Micron over the course of last few years. And, in fact, if you look at the industry, itself, and you look at the revenue of those key players, and you look at CapEx, over the course of last few years, you see, actually, that that's average for the industry, as well, is in that same range, also.

So, in terms of our own strategy for CapEx spend, it's absolutely focused on accelerating our technology transitions so our CapEx is geared toward utilizing DRAM and NAND technology transitions toward more cost-effective and advanced technology nodes for our products and it is not about capacity -- wafer capacity production -- in these quarters.

Mark Delaney -- Goldman Sachs -- Vice President

Thank you.

Operator

Thank you. Our next question comes from the line of Karl Ackerman from Cowen and Company. Your question, please?

Karl Ackerman -- Cowen and Company -- Director, Semiconductor Research

Hi, good afternoon. Dave, welcome to the team. I have two questions, please. My first question is on DRAM demand. We all know that DRAM is more inelastic than NAND, but I was curious what are some signs that you look for to assess if you are beginning to see demand destruction in DRAND demand from higher ASPs, particularly in mobile or PC environments that are more sensitive to price than hyperscale environments? I have a follow-up, please.

Sanjay Mehrotra -- President and Chief Executive Officer

So, can you clarify the question to me? I didn't totally get the question, I'm sorry.

Karl Ackerman -- Cowen and Company -- Director, Semiconductor Research

Yes, I'm just curious how should we assess the potential demand destruction in DRAM demand from higher ASPs in mobile and PC environments over the next few quarters if there were to be an issue?

Sanjay Mehrotra -- President and Chief Executive Officer

So, I think what we have to realize is that DRAM absolutely is essential to the experience and the business model that it enables. Whether it is the experience in mobile phones -- I talked about those experiences, AI, VR, 3-D gaming -- once you view those applications and user's absolutely expecting seamless experience, that requires such data-intensive applications required more DRAM so it is essential.

It's not like you can offer a model with less DRAM in it -- a high-end model with less DRAM in it -- and expect that users will still have the same good experience. So, DRAM capacity has really become a key enabler and essential element of mobile. And, same as I talked about earlier, for hyperscale data centers, when they look at what model that they can enable for their end customers, those are all being built on very data-intensive applications. Imagine retailers and a consumer goes into a retail store and the retailer already knows about what are the needs of that consumer. All of that requires, for retail, real-time applications which means a lot of data that has to be processed fast which means, again, it needs more DRAM memory.

So, it is actually, when you look at hyperscale data centers, it's not about the cost of DRAM anymore. I think the value that it enables to these cloud applications and hyperscalers is far in excess of any aspect of DRAM price per bit. So, DRAM really has become an essential part -- this is very different from any time in the past.

David Zinsner -- Senior Vice President and Chief Financial Officer

And the best indicator of this is that DRAM pricing is strong and DRAM demand is strong right now so...

Karl Ackerman -- Cowen and Company -- Director, Semiconductor Research

No, that's helpful. As my follow-up, I was hoping you could elaborate on your comments for OpEx as we think about the trajectory of spending for the next few quarters? Specifically, do you plan on reinvesting the savings you expect to achieve from Micron and Elpida coming together for the first time on 1x development? And how should we think about the timing of any planned pre-qualification expenses for maybe 1x DRAM or QLC3 NAND deployment when we make assumptions for OpEx for the balance of 2018? Thank you.

David Zinsner -- Senior Vice President and Chief Financial Officer

I'll get this one. So, let me go back to the commentary and make sure it's clear. So, in the second quarter, most of the increase we experienced was around qualifications of various technologies that all came together all in the second quarter and it continues on into the third quarter. Those expenses vary over time and so this just happens to be a couple of quarters in which that activity is pretty heavy and so we're experiencing the lift in expenses and I would expect that portion of it to settle down and, when the next set of qualifications are required, it'll come back up again.

The other piece of the expenses really relates to our fourth-generation 3D NAND where, as we announced earlier, we're taking that on, ourselves. We had about half of that hit us in the second quarter. We'll have the full quarter's effect in the third quarter and that was about $20 million in the full quarter, so about $10 million lift in the second quarter and $20 million lift in the third quarter.

Operator

Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question, please?

Tristan Gerra -- Robert W. Baird -- Managing Director, Senior Analyst

Hi, good afternoon. Given the continued strong demand that you see in data center, how should we look at the issue of supply and demand outlook in NAND, slash for the second half of 2018? Should we expect the pricing to settle out? Any commentary based on the trends that you see currently comparing for the rest of the year?

Sanjay Mehrotra -- President and Chief Executive Officer

So, we are not going to comment on pricing trends in industry, but what I can tell you that is NAND's industry does have certain aspect of its end market, such as USB flash drive, imaging cards or detail, that tends to be somewhat seasonal in the first calendar quarter. And, as we go forward with that, that part changes, but most important thing to look at is that, as more supply becomes available and drive deeper penetration of SSD in client devices as well as in... it gives an even stronger value proposition in enterprise and data center applications.

So, this is what we expect during the course of the year and, of course, average capacities of NAND in mobile phones -- smart phones -- continues to increase as well. And we are expanding our portfolio of multi-chip packages with DRAM and NAND, which is where Micron is uniquely well-positioned to expand our opportunities and increase our share with NAND, flash, and DRAM-based solutions in multi-chip packages as well as discrete NAND solutions such as the UFS that I talked about that are in the stages of qualification with our customers.

So, we look ahead at the year with strong demand drivers for NAND in the industry and growing opportunities for our NAND business for the remainder of the calendar year here and very focused on execution of all of our new product introductions and qualifications with our customers because those will ultimately drive our success toward high-value solutions as part of a mix of management.

Tristan Gerra -- Robert W. Baird -- Managing Director, Senior Analyst

Okay, that's useful. And then, just a quick follow-up, is it fair to assume that high-double-digit growth rate in bit demand for NAND in data center is something that is possible again for this calendar year?

Sanjay Mehrotra -- President and Chief Executive Officer

Yes, for this calendar year, for data centers, absolutely. NAND bit consumption in data centers is expected to be 50% -- in the range of 50% or higher -- definitely data centers is where demand will grow faster than the average of the industry. Keep in mind, same thing for client SSDs as well.

Tristan Gerra -- Robert W. Baird -- Managing Director, Senior Analyst

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Mehdi Hosseini from SIG. Your question, please?

Mehdi Hosseini -- Susquehenna International Group -- Senior Equity Research Analyst

Yes, thanks for taking my question. Sanjay, I have a follow-up. You and others in the memory industry have been discussing opportunities in moving up the stack. At the same time, some of your enterprise customers are also trying to navigate their way and move up the stack. And I'm just wondering, what's wrong with keeping the business as is? Your NAND gross margin is in the 45% to 50%, year-end gross margin is in the 65% to 70%. And, assuming that the industry's rational and we can avoid excess capacity, why not just focus on making the most cost-effective DRAM bit and captivize on a margin profile? And I have a follow-up.

Sanjay Mehrotra -- President and Chief Executive Officer

Let me be clear that we are very excited about the market opportunities for DRAM and NAND, all the things that we have been talking about so far over the course of last 45 minutes here. And, of course, our strategy is to continue to strengthen our cost-competitiveness as well as increase the mix of high-value solutions in our revenue. And, by high-value solutions in our revenue, we mean products such as SSDs as well as managed NAND solutions because we have both DRAM and NAND and that gives us a unique approach opportunity to provide management solutions for today's smartphones that are needing more and more of such solutions. So, we are absolutely focused on leveraging our core capabilities to drive cost reductions -- catch-up on the DRAM costs with the rest of the competition -- and, in the NAND, strengthen our portfolio all these high-value solutions. And have no doubt that there is nobody taking an eye off the ball and we have relentless focus on strengthening the execution engine of the company and tremendous opportunity ahead in that regard for us. It's already been realized through the strong results we have demonstrated so far but there is even better opportunity ahead of us.

Mehdi Hosseini -- Susquehenna International Group -- Senior Equity Research Analyst

In terms of cost, you recently introduced a QLC 64-layer 3D NAND SATA SSD. Is there any way you can either quantify or qualitatively discuss the cost per gigabyte that this particular product offers you and how we should think about its ability, due to a lowest cost, to penetrate and displace existing technologies?

Sanjay Mehrotra -- President and Chief Executive Officer

What we introduced recently is a 64-layer bit TLC SATA SSD and, as we have said before, QLC is certainly an exciting opportunity for Micron in the years ahead. And QLC is in the development stages and it is not a 2018 phenomenon -- that is something that is more like 2019 opportunity starting in 2019 timeframe.

Mehdi Hosseini -- Susquehenna International Group -- Senior Equity Research Analyst

Should we assume that this offers you, perhaps...? I'm just going to give you a number -- could it offer customer less than $0.20 per gigabyte of cost?

Sanjay Mehrotra -- President and Chief Executive Officer

You know, we don't get into cost discussions and our focus, of course, is to develop QLC solutions that will be, in the future, going toward applications that are very lead-intensive and some more balanced in terms of more right applications. And, of course, our goal would be to drive this... build value in these solutions -- especially going toward high-capacity aspects of the storage market -- build value in these solutions so that we can be selling them in a profitable fashion and bringing strong value to other customers as well. I'm not going to get into pricing or speculate about the pricing for QLC.

Mehdi Hosseini -- Susquehenna International Group -- Senior Equity Research Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Hans Mosesmann from Rosenblatt will continue working that Securities. Your question, please?

Hans Mosesmann -- Rosenblatt Securities -- Managing Director

Sanjay, if you can just clarify -- and I think somebody asked the question before but I'll just make it more concise -- are you seeing any despecing in DRAM or NAND markets? Thanks. And I have a follow-up.

Sanjay Mehrotra -- President and Chief Executive Officer

We are not seeing any despecing. If anything, again, given the nature of the application, the average capacities requirements continue to go up in all end markets of DRAM.

Hans Mosesmann -- Rosenblatt Securities -- Managing Director

Okay. And then a follow-up, more of a longer-term or mid-term question. After 1y in the DRAM world, how many more node transitions or half-transitions do you expect you and the industry to have before you hit a wall, if you will?

Sanjay Mehrotra -- President and Chief Executive Officer

We have talked about our 1z technology node in DRAM and will continue working that. And then there's, of course, continue to look at opportunities for further scaling. And, incrementally, we are working on other advanced technologies of the future, as well.

Hans Mosesmann -- Rosenblatt Securities -- Managing Director

Okay. But there's no letter after 1z at this point?

Sanjay Mehrotra -- President and Chief Executive Officer

You know, there is no letter in the alphabet after 1z...

Hans Mosesmann -- Rosenblatt Securities -- Managing Director

You can go to 1zz or you can add a ++ or a +++. Anyway, thank you very much -- that answered the question.

Sanjay Mehrotra -- President and Chief Executive Officer

Thank you. We'll take you up on your suggestion.

Operator

Thank you. And our final question comes from the line of

Thank you. Our next question comes from the line of Vijay Rakesh from Mizuho Your question, please?

Vijay Rakesh -- Mizuho Securities -- Equity Research Analyst

Yeah, hi, guys. Just on the NAND side, was wondering what percent of your NAND was SSDs? I know you mentioned it grew 80% year-on-year and seeing good traction enterprise?

David Zinsner -- Senior Vice President and Chief Financial Officer

We don't give that breakdown.

Vijay Rakesh -- Mizuho Securities -- Equity Research Analyst

Got it. And I know you talked about 3D XPoint to find a bit drag on the margins. When do you start to see the drag go away? And just wondering, as you look at that ramp by year-end, what proportionally do you think that could be of your NAND? Thanks.

David Zinsner -- Senior Vice President and Chief Financial Officer

So, 3D XPoint products are expected to come out sometime in Calendar Year 2019. Sometimes, we'll have underutilized charges. It's possible that our partner might take some of those wafers, so that would obviously help on the underutilization. And, of course, as we start to release those products in 2019 and start to build some of those wafers and that will help out on underutilization as well.

Vijay Rakesh -- Mizuho Securities -- Equity Research Analyst

Got it. Great. Thanks.

Sanjay Mehrotra -- President and Chief Executive Officer

And I just wanted to comment on your earlier question regarding SSD. Of course, we don't provide the specifics, but clearly SSD is growing fast and is in keeping the large portion of our revenue. And very pleased with the progress we have made in infusing the mix of SSD in our portfolio.

Operator

Thank you. This does conclude the question-and-answer session. I'd like to hand the program back to management for any further remarks.

Shanye Hudson -- Investor Relations

Thanks, Jonathan, and as always, we appreciate your interest and support for Micron and remind you that a copy of the prepared remarks as well as the webcast replay can be found on the Investor Relations section of our website later this afternoon. Thank you.

Operator

Thank you. This concludes today's Micron Technology Second Quarter 2018 Financial Release Conference Call. You may now disconnect.

Duration: 58 minutes

Call participants:

Shanye Hudson -- Investor Relations

Sanjay Mehrotra -- President and Chief Executive Officer

David Zinsner -- Senior Vice President and Chief Financial Officer

Rajvindra Gill -- Needham and Company -- Managing Director

Chris Danely -- Citigroup, Inc. -- Semiconductor Analyst

Mark Delaney -- Goldman Sachs -- Vice President

Karl Ackerman -- Cowen and Company -- Director, Semiconductor Research

Tristan Gerra -- Robert W. Baird -- Managing Director, Senior Analyst

Mehdi Hosseini -- Susquehenna International Group -- Senior Equity Research Analyst

Hans Mosesmann -- Rosenblatt Securities -- Managing Director

Vijay Rakesh -- Mizuho Securities -- Equity Research Analyst

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