Harlan Sur: On the underutilization charge, I know last call the team had articulated roughly $460 million of charges recognized primarily in fiscal Q3 and Q4. So how much of this is embedded in your Q3 numbers and Q3 guidance? And given the lower utilization, tick it down to 25% or cut it by 25%. If you continue to drive lower utilization through the second half of this calendar year, like how do we think about some of the utilization charges in fiscal Q4 and second half of this calendar year?
Mark Murphy: Yes. Harlan, so I’ll answer it briefly here at the beginning and then maybe take the opportunity to just talk through gross margins and effective utilization gross margin. So based on what we told you last quarter and I went into some length last quarter about the charges and period costs and so forth. But last quarter, we thought we’d have around $900 million in fiscal ’23 and about $460 million would hit FY ’23 COGS. With the underutilization that we’ve stepped up here, we see now about $1.1 billion in ’23, and this is a combination of cost and inventory and period costs, and we actually see about $900 million of that flowing into FY ’23. And that’s driven by not only the increase in utilization costs — underutilization cost is driven by the effects of the write-down and the accounting — or inventory write-downs and the pull forward of cost.
So if we step back and we look at our reported gross margin and our outlook, their a function of many factors, including pricing, inventory write-downs, which incorporate our forward view of pricing, the effects of utilization, volumes and the associated leverage on period costs, as we discussed last quarter, and of course, mix. These factors are continuously changing due to the market environment and our actions. And then further, I’ll add that at these lower levels of profitability, the margin forecast and the results are more sensitive to slight changes in assumptions, importantly, such as price. So on price, given the recent price trends that we’ve seen and our current view on pricing, as we reported in Q2, we took a material write-down of inventories of $1.4 billion.
And then the Q3 guide contemplates a write-down of $500 million on these additional inventories produced. With these write-downs, we pulled forward inventory costs and thus, we’ve lowered the carrying value of on-hand inventories. And as those lower cost inventory clears in future quarters, we’ll realize more income in those quarters than we would have without the charge. So as an example, we expect around a $300 million benefit in Q3 from the Q2 charge as a portion of these lower cost inventories sell through. So as per your question, we also now have the underutilization effects creating higher cost inventories and then adding additional period costs. And as mentioned, we see about $1.1 billion of underutilization impact in FY ’23, and most of that, as I mentioned, we expect to hit the P&L this year and some of it will carry over to next year.
Now because of the effective write-down accounting, less of it will carry over to next year than would have otherwise. Now considering all this, we expect our reported second quarter gross margin to be the trough, so that 31.4%. And that, again, is driven in large part by the $1.4 billion write-down. With a much lower inventory charge forecasted in the third quarter, you see that we guided about 10 points better relative to Q2. Now again, these estimates are very sensitive to pricing changes, but in our current view, Q4 would be better than Q3 in the sense of a lower charge, if any. And then over time, as bit volumes grow as I talked about in the last call and we talked about today, we get leverage on our period costs and utilization improves.
