So this is an exciting opportunity for us. And as you know, HBM is higher revenue per gigabyte. It is also higher profitability per gigabyte. So this is — and it’s one of the biggest growth markets in memory today. So we are excited about this opportunity. And of course, you know, there’s a very tight relationship, tight integration with customers for quals on HBM. And it takes longer than standard products. And, you know, these are all factors that will play a role in terms of, you know, the number of suppliers that customers would tend to have for any given platform for HBM.
Aaron Rakers: Yes. And then as a quick follow-up, I’m curious, in the comment you had said that basically your leading-edge inventory was very tight. And I think the follow-up comment was that you’re really, you know, focusing on minimizing any pull-in in the midst of, you know, pricing increases materializing. Can you just help us appreciate what exactly you’re able to do to minimize any pull-in or the visibility you have in whether any customers are taking strategic inventory? Just curious how you manage that.
Sanjay Mehrotra: So with respect to strategic inventory, I think we had discussed in the past that we had made certain strategic — certain customers had built certain strategic purchases in our FQ4 time frame and those are completing in CQ4 here. And of course, as we look ahead, we are very much focused on, you know, managing our supply, managing our demand. Pricing environment is increasing and we want to in this environment, of course, make sure that we meet the requirements of our customers in a fashion that overall maintains, you know, healthy dynamics of our business. Beyond that, I don’t think we are in a position to discuss further specifics here.
Aaron Rakers: Fair enough. Thank you.
Operator: Thank you. [Operator Instructions] And our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question, please.
Toshiya Hari: Hi. Good afternoon. I had two questions as well. One on gross margins, maybe for Mark, and then my follow-up is for Sanjay. Mark, so the gross margin profile is improving from, you know, breakeven or 1% in the prior quarter to 13%. I was hoping you could sort of break that down, the sequential change for us in terms of pricing, I guess lower underutilization charges, and whatever else is happening from an inventory perspective. And beyond Feb, as we sort of look out into May, you talked about pricing improving throughout ’24, so that continues to be a tailwind. How should we think about some of the other dynamics that go into your gross margin math?
Mark Murphy: Sure. Excuse me. So on the fourth quarter to the first quarter gross margin, you know, we were up 10 points over half, or about half of that was price. Most of the remainder was mix on the higher DRAM volumes. And then we did see some favorable cost. We had the lower-cost inventories clear at $600 million and then we had some reduced idle charges that we’ve talked about. Now, if we move out to second quarter, as we mentioned, we’re not seeing volume growth in the second quarter, but we are seeing gross margins still up 12 points. So it’s all driven by price, or principally price. There is some mix shift within, you know, by customers and some seasonal effects, but again, it’s largely a price-driven increase. You know, while we have lower benefits from the low-cost inventory clearing, we’ll have $400 million clear or $400 million of benefit in the second quarter when we had $600 million in the first quarter.
We are seeing some cost declines occurring with the increase of leading node production, and then again with the lower wafer starts and the higher utilization. What we’ve talked about before, we start to see idle charges dropping, as we’ve discussed. So again, principally price in the second quarter, but then beginning to see some cost benefits, even though we’re losing the benefit of that lower cost inventory. We will see price appreciation through the year. We’re going to — we don’t expect there to be volume growth in the third quarter either, but good price appreciation, which will drive gross margins up. And then in the fourth quarter, we would expect to see volume and price, and again some lower utilization charges. So again, we would expect to see margin expansion second quarter to third quarter, and then again third quarter to fourth quarter.
Toshiya Hari: Okay. Great. That’s super helpful. And then, as my follow-up for Sanjay, you know, you guys had presented a, you know, cross-cycle financial model at your Investor Day, I think it was last May. Clearly, the environment has changed quite a bit. But when you sort of, you know, talk about necessary ROI for your business, as you guys debate when to increase production, when to increase CapEx, should we look at the model from last May still as a reference point, you know, through cycle operating margins of 30%, free cash flow margins of 10% or higher? Is that still the model that’s relevant in your view, or have things changed since? Thank you.
Sanjay Mehrotra: Yes, that model is very much relevant once we get past this downturn and the recovery from this downturn as well. And I think we just have to recognize that this downturn has been steep. This has been driven by once in 100 year pandemic as well as all the other related factors which we have talked about, customer inventories and demand pull-in and demand normalization and all other things that have impacted — severely impacted the industry environment over the course of last year. 2024, we’ll be recovering and we have called it the year of recovery. And we have talked about how we see pricing continuing to increase through the year and of course, profitability continuing to improve through the year as well. As we look past this recovery, we would definitely say that cross-cycle model that we have discussed in the past definitely would hold and that’s what we target for.
