First, it will improve in the back end, then we’ll have better utilization on the front end. And most importantly, as customer inventories continue to improve, inventories come down and supply/demand balance is better, we would expect reported margins to improve through FY ’24. But again, a lot of factors at work here. If you were to just strip out the impairment charges or the write-downs in second and third quarters, Q2 would be a 7.3% gross margin, 3Q would be a negative 7.5% margin, so down considerably. And again, this is a function of the pricing environment and the cost of underutilization, including period costs, which, again, I discussed last quarter. Under this view, we would trough in the second half on gross margin, then would improve off these low levels through FY ’24.
So the — in the end, the profile of the outlook is similar to what we discussed last quarter, though, of course, levels are lower with the pricing environment we’ve seen and the recovery is a bit delayed because of a bit lower volumes. But again, trough in the second half and some improvement expected through FY ’24.
Operator: Our next question comes from the line of Toshiya Hari from Goldman Sachs.
Toshiya Hari: One question on the NAND business end market. You talked about your bit production being down year-over-year in calendar ’23, which I believe is a little bit more draconian than most of your competition. Just curious how you’re thinking about the strategy in NAND. Could this cause permanent damage to your relative competitiveness? And kind of related to that, one of your competitors has significant capacity in China. Wondering if you had customers come to you and express concerns around that, and if that could be a potential relative positive for you over the medium to long term.
Sanjay Mehrotra: So with respect to NAND, we are well positioned with our technology and product roadmap. We shared with you today that 176-layer NAND yields are doing exceptionally well. 232-layer NAND, we have begun shipping in the market already. And with 176, as well as 232-layer, we have been well ahead of any competitor in the industry. 90% plus of our supply today in NAND that we are shipping is 176 plus 232-layers. So overall, we are well positioned with our technology. Our underutilization actions, we really believe are — is what is needed to bring supply in line with demand, and we think these are the actions that are needed to restore the health of the business. And we have said in our prepared remarks that the industry recovery could be accelerated if NAND and DRAM supply growth, production growth, is negative on a year-over-year basis.
And we certainly are taking our actions accordingly. And regarding China, I can’t really comment on the part of other customers. But what I can tell you is that our customers really do see a strong technology execution, a strong product execution from Micron, and it’s our product portfolio. We have done well with leveraging our NAND and DRAM in mobile markets with multichip packages. In automotive, I talked about some of the NAND product portfolio expanding and creating opportunities to strengthen our leadership position in automotive markets. And certainly, in the data center market, SSDs is also an opportunity. And our Gen4 NVMe SSDs have been continuing to do well in the client market as well. So our customers see our execution and innovation capabilities in technology and products, and that’s what is bringing us stronger relationships with our customers for the NAND business.
