outperform comment - research-doc.credit-suisse.com

11
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 24 July 2018 Americas/United States Equity Research Semiconductor Devices Micron Technology Inc. (MU) Rating OUTPERFORM Price (23-Jul-18, US$) 54.29 Target price (US$) 90.00 52-week price range (US$) 62.62 - 27.49 Market cap(US$ m) 62,966 Enterprise value (US$ m) 59,361 Target price is for 12 months. Research Analysts John W. Pitzer 212 538 4610 [email protected] Charles Kazarian 212 538 4160 [email protected] COMMENT Embedded Expectations Woefully Low Bottom Line. Several memory bears have highlighted weakening China Cloud spend in general and BABA specifically (11%/6% of Cloud CapEx) w/o commenting on what has been a much better than expected Cloud and Enterprise spend earnings-to-date in the US. Specifically: (1) Along with better Cloud/On-Prem results, MSFT (~15% of Cloud CapEx) F4Q CapEx accelerated to 78% y/y vs 73% y/y in F3Q and F1Q CapEx should accelerate again to >100%, (2) AMZN (~15% of Cloud CapEx) Prime Day suffered from a lack of server/memory capacity, and (3) GOOG (20% of Cloud CapEx) C2Q CapEx grew 94% y/y well above Street and in-line with strong 95% y/y growth in C1Q. In addition, C3Q server DRAM contact pricing is up 5% q/q, an acceleration from 2% in C2Q, and while C4Q pricing is still unclear, recent capacity adjustments from Samsung hold our pricing bias flattish q/q implying upside to F4Q/1Q EPS of $3.45/$3.55 vs Street of $3.30/$3.15. While investors continue to pay lofty valuations for Hyperscalers rightfully recognizing the significant TAM Data provides, MU’s relative valuation to Peers and to Hyperscalers continues to be at near all-time lows despite memory’s growing structural importance. Furthermore, we would argue the valuation discount is even more significant when properly valuing MU’s Embedded Business Unit (EBU). EBU is a Hidden Gem: EBU is ~12% of Rev with a 4 yr CAGR of ~20% and includes lower density, longer asset-life, memory sold into Auto, Industrial, and Consumer. We expect EBU FY19 Rev/EPS/FCFPS of $4.3bn/$1.30/$1.30. EBU Rev and OpM is less cyclical and more sticky (usually sole sourced like MCUs) and given its primary exposure to Auto and Industrial end-markets we would argue it’s a higher multiple business. With an OpM of ~43%, a highly diversified customer base, and positive cash flow in any part of the semi cycle, we believe it should trade at a higher multiple than ON (18% OpM) and CY (16% OpM) and perhaps more in-line with MCHP (38% OpM). Applying a 15x multiple on CY19 EV/FCF (w/SBC) would suggest that ~40% of MU’s TOTAL EV of $63 bn is embedded in EBU and imply that the core-Memory business trades at 3.8x EV/FCF a greater than 50% discount to where MU has historically traded on top quartile earnings. Seems like memory is both essential and really cheap. Share price performance On 23-Jul-2018 the S&P 500 INDEX closed at 2806.98 Daily Jul24, 2017 - Jul23, 2018, 07/24/17 = US$31.67 Quarterly EPS Q1 Q2 Q3 Q4 2017A 0.32 0.90 1.62 2.02 2018E 2.45 2.82 3.15 3.30 2019E 3.23 3.10 2.98 2.94 Financial and valuation metrics Year 8/16A 8/17A 8/18E 8/19E EPS (Excl. ESO) (US$) 0.25 4.86 11.72 12.25 Prev. EPS (Excl. ESO., US$) - - - - EPS (CS adj., ) 0.06 4.77 11.56 12.09 P/E (Excl. ESO.) (x) 218.6 11.2 4.6 4.4 P/E rel. (Excl. ESO., %) - 52.2 26.4 27.8 Revenue (US$ m) 12,399.0 20,322.0 30,151.9 34,683.2 EBITDA (US$ m) 3,223.0 10,218.0 19,910.5 23,321.5 Net Debt (US$ m) 5,770 5,707 -3,605 -11,359 OCFPS (US$) 3.06 7.15 14.05 16.43 P/OCF (x) 17.8 7.6 3.9 3.3 Number of shares (m) 1,159.81 Price/Sales (x) 2.28 BV/share (Next Qtr., US$) 22.4 P/BVPS (x) 2.2 Net debt (Next Qtr., US$ m) 273.0 Dividend (current, US$) 1.0 Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates

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Page 1: OUTPERFORM COMMENT - research-doc.credit-suisse.com

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

24 July 2018 Americas/United States

Equity Research Semiconductor Devices

Micron Technology Inc. (MU) Rating OUTPERFORM Price (23-Jul-18, US$) 54.29 Target price (US$) 90.00 52-week price range (US$) 62.62 - 27.49 Market cap(US$ m) 62,966 Enterprise value (US$ m) 59,361 Target price is for 12 months.

Research Analysts

John W. Pitzer

212 538 4610

[email protected]

Charles Kazarian

212 538 4160

[email protected]

COMMENT

Embedded Expectations Woefully Low

Bottom Line. Several memory bears have highlighted weakening China Cloud

spend in general and BABA specifically (11%/6% of Cloud CapEx) w/o commenting on what has been a much better than expected Cloud and Enterprise spend earnings-to-date in the US. Specifically: (1) Along with better Cloud/On-Prem results, MSFT (~15% of Cloud CapEx) F4Q CapEx accelerated to 78% y/y vs 73% y/y in F3Q and F1Q CapEx should accelerate again to >100%, (2) AMZN (~15% of Cloud CapEx) Prime Day suffered from a lack of server/memory capacity, and (3) GOOG (20% of Cloud CapEx) C2Q CapEx grew 94% y/y well above Street and in-line with strong 95% y/y growth in C1Q. In addition, C3Q server DRAM contact pricing is up 5% q/q, an acceleration from 2% in C2Q, and while C4Q pricing is still unclear, recent capacity adjustments from Samsung hold our pricing bias flattish q/q – implying upside to F4Q/1Q EPS of $3.45/$3.55 vs Street of $3.30/$3.15. While investors continue to pay lofty valuations for Hyperscalers – rightfully recognizing the significant TAM Data provides, MU’s relative valuation to Peers and to Hyperscalers continues to be at near all-time lows – despite memory’s growing structural importance. Furthermore, we would argue the valuation discount is even more significant when properly valuing MU’s Embedded Business Unit (EBU).

EBU is a Hidden Gem: EBU is ~12% of Rev with a 4 yr CAGR of ~20% and

includes lower density, longer asset-life, memory sold into Auto, Industrial, and Consumer. We expect EBU FY19 Rev/EPS/FCFPS of $4.3bn/$1.30/$1.30. EBU Rev and OpM is less cyclical and more sticky (usually sole sourced like MCUs) and given its primary exposure to Auto and Industrial end-markets – we would argue it’s a higher multiple business. With an OpM of ~43%, a highly diversified customer base, and positive cash flow in any part of the semi cycle, we believe it should trade at a higher multiple than ON (18% OpM) and CY (16% OpM) and perhaps more in-line with MCHP (38% OpM). Applying a 15x multiple on CY19 EV/FCF (w/SBC) would suggest that ~40% of MU’s TOTAL EV of $63 bn is embedded in EBU and imply that the core-Memory business trades at 3.8x EV/FCF a greater than 50% discount to where MU has historically traded on top quartile earnings. Seems like memory is both essential and really cheap.

Share price performance

On 23-Jul-2018 the S&P 500 INDEX closed at 2806.98

Daily Jul24, 2017 - Jul23, 2018, 07/24/17 = US$31.67

Quarterly EPS Q1 Q2 Q3 Q4 2017A 0.32 0.90 1.62 2.02 2018E 2.45 2.82 3.15 3.30 2019E 3.23 3.10 2.98 2.94

Financial and valuation metrics

Year 8/16A 8/17A 8/18E 8/19E EPS (Excl. ESO) (US$) 0.25 4.86 11.72 12.25 Prev. EPS (Excl. ESO., US$) - - - - EPS (CS adj., ) 0.06 4.77 11.56 12.09 P/E (Excl. ESO.) (x) 218.6 11.2 4.6 4.4 P/E rel. (Excl. ESO., %) - 52.2 26.4 27.8 Revenue (US$ m) 12,399.0 20,322.0 30,151.9 34,683.2 EBITDA (US$ m) 3,223.0 10,218.0 19,910.5 23,321.5 Net Debt (US$ m) 5,770 5,707 -3,605 -11,359 OCFPS (US$) 3.06 7.15 14.05 16.43 P/OCF (x) 17.8 7.6 3.9 3.3

Number of shares (m) 1,159.81 Price/Sales (x) 2.28 BV/share (Next Qtr., US$) 22.4 P/BVPS (x) 2.2 Net debt (Next Qtr., US$ m) 273.0 Dividend (current, US$) 1.0 Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates

Page 2: OUTPERFORM COMMENT - research-doc.credit-suisse.com

24 July 2018

Micron Technology Inc. (MU) 2

Micron Technology Inc. (MU)

Price (23 Jul 2018): US$54.29; Rating: OUTPERFORM; Target Price: 90.00; Analyst: John Pitzer

Income Statement 8/16A 8/17A 8/18E 8/19E

Revenue (US$ m) 12,399.0 20,322.0 30,151.9 34,683.2 Sales 12,399.0 20,322.0 30,151.9 34,683.2 EBITDA 3,223.0 10,218.0 19,910.5 23,321.5 Operating profit 243.0 6,232.0 15,021.5 17,291.6 Recurring profit (57.0) 5,797.0 14,881.0 17,262.6

Cash Flow 8/16A 8/17A 8/18E 8/19E

Cash flow from operations 3,168 8,153 17,309 20,254 CAPEX (5,817) (4,734) (7,900) (8,500) Free cashflow to the firm (2,649) 3,419 9,409 11,754 Cash flow from investments (3,068) (7,537) (7,009) (8,500) Net share issue(/repurchase) (99) 107 1,636 (4,000) Dividends paid 0 0 0 0 Issuance (retirement) of debt 1,329 753 (7,798) 0 Other 515 (511) (281) 0 Cashflow from financing activities 1,745 349 (6,443) (4,000) Effect of exchange rates - - - - Changes in Net Cash/Debt (716) 63 9,312 7,754 Net debt at end 5,770 5,707 (3,605) (11,359)

Balance Sheet ($US) 8/16A 8/17A 8/18E 8/19E

Assets Other current assets 398 147 155 159 Total current assets 9,495 12,457 17,846 26,704 Total assets 27,540 35,336 43,772 55,100 Liabilities Short-term debt 0 1 1 1 Total current liabilities 4,835 5,334 6,090 6,959 Long-term debt 9,154 9,872 3,890 3,890 Total liabilities 14,612 16,716 11,404 12,273 Shareholder equity 12,080 17,772 31,500 41,958 Total liabilities and equity 27,540 35,337 43,773 55,101 Net debt 5,770 5,707 (3,605) (11,359)

Per share 8/16A 8/17A 8/18E 8/19E

No. of shares (wtd avg) 1,036 1,140 1,232 1,233 CS adj. EPS 0.06 4.77 11.56 12.09 Prev. EPS (US$) - - - - Dividend (US$) 0.00 1.00 1.00 1.00 Free cash flow per share (2.56) 3.00 7.64 9.53

Earnings 8/16A 8/17A 8/18E 8/19E

Sales growth (%) (23.4) 63.9 48.4 15.0 EBIT growth (%) (91.9) 2464.6 141.0 15.1 Net profit growth (%) (97.9) 8131.8 162.2 4.7 EPS growth (%) (97.6) 7241.6 147.2 4.8 EBIT margin (%) 2.0 30.7 49.8 49.9

Valuation 8/16A 8/17A 8/18E 8/19E

EV/Sales (x) 5.54 3.38 1.97 1.49 EV/EBIT (x) 282.9 11.0 4.0 3.0 P/E (x) 852.2 11.4 4.7 4.5

Quarterly EPS Q1 Q2 Q3 Q4 2017A 0.32 0.90 1.62 2.02 2018E 2.45 2.82 3.15 3.30 2019E 3.23 3.10 2.98 2.94

Company Background

Micron Technology, Inc. is a manufacturer & marketer of semiconductor devices, principally dynamic random access memory, Nandi Flash memory, as well as other innovative memory technologies, packaging solutions & semiconductor systems

Blue/Grey Sky Scenario

Our Blue Sky Scenario (US$) 100.00

Our Blue Sky scenario of $100 assumes ~8x FY19 EPS of $12.25, sustainable indsutry growth, and reduced pricing volatility.

Our Grey Sky Scenario (US$) 50.00

Our Grey Sky scneario of $50 assumes trough EPS of ~$6.50 and a 8x P/E multiple.

Share price performance

On 23-Jul-2018 the S&P 500 INDEX closed at 2806.98

Daily Jul24, 2017 - Jul23, 2018, 07/24/17 = US$31.67

Source: Company data, Thomson Reuters, Credit Suisse estimates

Page 3: OUTPERFORM COMMENT - research-doc.credit-suisse.com

24 July 2018

Micron Technology Inc. (MU) 3

Highlights History and Background of EBU: MU started reporting Embedded Revenue for the first

time in C2Q11 which then consisted of NOR, DRAM, and NAND in rank order. We

estimate that ~60% of EBU Rev is Auto/Industrial which is in-line with average exposure

for Analog/MCU companies. Note we estimate MU has ~30% market share in the

Auto/Industrial Memory market.

Figure 1: EBU End-Market Exposure

Source: Company data, Credit Suisse estimates

Sum of the Parts Valuation: MU's EBU segment sells in to similar end-markets as

MCU/Analog companies – Auto, Industrial, and Connected Home – and has a higher OpM

than most MCU/Analog companies. With an OpM of ~43%, a highly diversified customer

base, and positive cash flow in any part of the semi cycle, we believe it should trade at a

higher multiple than ON (18% OpM) and CY (16% OpM) and perhaps more in-line with

MCHP (38% OpM). Applying a 15x multiple on CY19 EV/FCF (w/SBC) would suggest that

~40% of MU’s TOTAL EV of $63 bn is embedded in EBU and imply that the core-Memory

business trades at 3.8x EV/FCF a greater than 50% discount to where MU has historically

traded on top quartile earnings.

Figure 2: EBU Generating ~$1.20 of EPS Figure 3: MU Implied SOTP Valuation

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

40%

50%

60%

70%

ADI MCHP EBU CY ON TXN MXIM

Au

to/I

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as

% o

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Auto/Industrial Median

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

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F2Q

14

F3Q

14

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EBU Annualized EPS

2x

4x

6x

8x

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12x

14x

16x

$15

$25

$35

$45

$55

$65

Total MU Rest of Biz EBU

NTM

EV

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Enterprise Value EV/FCF (w/SBC)

Page 4: OUTPERFORM COMMENT - research-doc.credit-suisse.com

24 July 2018

Micron Technology Inc. (MU) 4

Thru-Cycle Rev and Margin Stability: A key piece of the MU debate is around

normalized or "thru-cycle" operating margins. From F1Q15 to F3Q16, MU OpM went from

24% to (1%) with CNBU and MBU OpM contracting ~35 ppts while EBU OpM was FLAT.

Further, we would highlight the stability of EBU Rev. Specifically, from F1Q15 to F3Q16

MU Rev declined 37% with CNBU and MBU Rev down 45% while EBU Rev only declined

10%. We believe Auto/Industrial Rev exposure underpins this stability.

Figure 4: EBU Rev/OpM Figure 5: EBU OpM Stability

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Hyper Disconnect: While investors continue to pay lofty valuations for Hyperscalers –

rightfully recognizing the significant TAM Data provides, MU’s relative valuation to Peers

and to Hyperscalers continues to be at near all-time lows (exhibit 6) - despite memory’s

growing structural importance. Furthermore, we would argue the valuation discount is

even more significant when properly valuing MU’s Embedded Business Unit (EBU). Our

$90 TP implies MU's Core business trades at 8x – a multiple that feels more appropriate

when considering: (1) more sustainable fundamentals, (2) MU turns net cash positive in

F3Q, (3) $2-2.5 bb of FCF/Q, (4) an anticipated ~$1bn buyback beginning in Sep, and (5)

at least $9 bn of operational improvements since the FY16 trough.

Figure 6: MU Trading at ~80% Discount to Hyperscalers

Source: Company data, Credit Suisse estimates

-10%

0%

10%

20%

30%

40%

50%

$300

$400

$500

$600

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$900

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F2Q

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18

Op

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%)

Re

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($

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EBU Rev EBU OpM MU Total OpM

-10%

10%

30%

50%

70%

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MBU OpM CNBU OpM EBU OpM SBU OpM

40%

60%

80%

100%

MU

Dis

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MSFT GOOG FB BABA TCEHY

Page 5: OUTPERFORM COMMENT - research-doc.credit-suisse.com

24 July 2018

Micron Technology Inc. (MU) 5

GOOG CapEx Update: GOOG (20% of Cloud CapEx) C2Q CapEx grew 94% y/y well

above expectations and matching the strong 95% y/y growth in C1Q. Further, we would

highlight that AI/Machine Learning was used 35 times on the 2Q18 Earnings call ABOVE

the 1Q18 Earnings Call of 17 times.

Figure 7: GOOG Y/Y CapEx Figure 8: : GOOG Y/Y CapEx 4QMA

Source: Company data, Credit Suisse estimates; Excludes 1Q18 $2.4bn purchase of Chelsea Market.

Source: Company data, Credit Suisse estimates

-100%

0%

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Mar

-11

Au

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Page 6: OUTPERFORM COMMENT - research-doc.credit-suisse.com

24 J

uly

201

8

Mic

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Figure 9: MU Income Statement

Source: Company data, Credit Suisse estimates

Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18E Nov-18E Feb-19E May-19E Aug-19E Nov-19E Aug-17E Aug-18E Aug-19E Nov-17E Nov-18E Nov-19E

Modified 20 May 2018 F1Q F2Q F3Q F4Q F1Q F2Q F3Q F4Q F1Q F2Q F3Q F4Q F1Q FY2017 FY2018 FY2019 CY2017 CY2018 CY2019

TOTAL SALES $3,970 $4,648 $5,566 $6,138 $6,803 $7,351 $7,797 $8,201 $8,962 $8,751 $8,513 $8,457 $8,850 $20,322 $30,152 $34,683 $23,155 $32,311 $34,571

(sequential % change) 23.4% 17.1% 19.8% 10.3% 10.8% 8.1% 6.1% 5.2% 9.3% -2.4% -2.7% -0.6% 4.6%

(year-over year % change) 18.5% 58.4% 92.1% 90.8% 71.4% 58.2% 40.1% 33.6% 31.7% 19.0% 9.2% 3.1% -1.3% 63.9% 48.4% 15.0% 77.9% 39.5% 7.0%

Cost of goods sold $2,938 $2,859 $2,895 $2,991 $3,034 $3,055 $3,047 $3,233 $3,626 $3,578 $3,527 $3,535 $3,716 $11,683 $12,369 $14,266 $11,779 $12,961 $14,356

GROSS PROFIT $1,032 $1,789 $2,671 $3,147 $3,769 $4,296 $4,750 $4,968 $5,336 $5,173 $4,985 $4,922 $5,134 $8,639 $17,783 $20,417 $11,376 $19,350 $20,215

(% of sales) 26.0% 38.5% 48.0% 51.3% 55.4% 58.4% 60.9% 60.6% 59.5% 59.1% 58.6% 58.2% 58.0% 42.5% 59.0% 58.9% 49.1% 59.9% 58.5%

Selling, general and administrative $143 $185 $202 $192 $194 $185 $185 $197 $224 $219 $213 $211 $221 $722 $760 $867 $772 $790 $864

(% of sales) 3.6% 4.0% 3.6% 3.1% 2.8% 2.5% 2.4% 2.4% 2.5% 2.5% 2.5% 2.5% 2.5% 3.6% 2.5% 2.5% 3.3% 2.4% 2.5%

Research and development $457 $471 $432 $446 $451 $512 $577 $582 $583 $604 $596 $592 $584 $1,806 $2,121 $2,374 $1,799 $2,253 $2,376

(% of sales) 11.5% 10.1% 7.8% 7.3% 6.6% 7.0% 7.4% 7.1% 6.5% 6.9% 7.0% 7.0% 6.6% 8.9% 7.0% 6.8% 7.8% 7.0% 6.9%

SG&A plus R&D $600 $656 $634 $637 $644 $696 $762 $779 $807 $823 $809 $803 $805 $2,527 $2,881 $3,241 $2,571 $3,044 $3,240

(% of sales) 15.1% 14.1% 11.4% 10.4% 9.5% 9.5% 9.8% 9.5% 9.0% 9.4% 9.5% 9.5% 9.1% 12.4% 9.6% 9.3% 11.1% 9.4% 9.4%

Other operating (income) expense ($6) ($44) ($34) ($36) ($32) ($30) ($29) ($29) ($29) ($29) ($29) ($29) ($29) ($120) ($120) ($116) ($146) ($117) ($116)

Total Operating Expenses $594 $612 $600 $601 $612 $666 $733 $750 $778 $794 $780 $774 $776 $2,407 $2,761 $3,125 $2,425 $2,927 $3,124

OPERATING INCOME $438 $1,177 $2,071 $2,546 $3,157 $3,630 $4,017 $4,218 $4,559 $4,379 $4,206 $4,148 $4,358 $6,232 $15,022 $17,292 $8,951 $16,423 $17,091

(% of sales) 11.0% 25.3% 37.2% 41.5% 46.4% 49.4% 51.5% 51.4% 50.9% 50.0% 49.4% 49.0% 49.2% 30.7% 49.8% 49.9% 38.7% 50.8% 49.4%

Non-GAAP interest income (expense), net ($100) ($122) ($113) ($100) ($72) ($35) ($21) ($14) ($11) ($9) ($6) ($4) ($1) ($435) ($142) ($29) ($407) ($81) ($19)

PRETAX INCOME $338 $1,055 $1,958 $2,446 $3,085 $3,595 $3,997 $4,204 $4,548 $4,371 $4,200 $4,144 $4,357 $5,797 $14,881 $17,263 $8,544 $16,344 $17,072

(% of sales) 8.5% 22.7% 35.2% 39.9% 45.3% 48.9% 51.3% 51.3% 50.7% 49.9% 49.3% 49.0% 49.2% 28.5% 49.4% 49.8% 36.9% 50.6% 49.4%

Non-GAAP Income tax benefit (provision) ($18) ($31) ($64) ($60) ($91) ($99) ($97) ($147) ($568) ($546) ($525) ($518) ($545) ($173) ($434) ($2,158) ($246) ($912) ($2,134)

(tax rate) 5.3% 2.9% 3.3% 2.5% 2.9% 2.8% 2.4% 3.5% 12.5% 12.5% 12.5% 12.5% 12.5% 3.0% 2.9% 12.5% 2.9% 5.6% 12.5%

Equity method investees net (loss) income $15 $7 $2 $1 - - - - - - - - - $25 - - $10 - -

Noncontrolling interest in net (inc) loss - - - ($1) - - - - - - - - ($1) - - ($1) - -

NET INCOME (w/ Options) $289 $976 $1,839 $2,329 $2,943 $3,440 $3,852 $4,009 $3,931 $3,777 $3,627 $3,578 $3,764 $5,433 $14,244 $14,913 $8,087 $15,232 $14,746

(% of sales) 7.3% 21.0% 33.0% 37.9% 43.3% 46.8% 49.4% 48.9% 43.9% 43.2% 42.6% 42.3% 42.5% 26.7% 47.2% 43.0% 34.9% 47.1% 42.7%

Non-recurring charges (benefits) $109 $82 $192 ($40) $265 $129 $29 $74 $74 $74 $74 $74 $74 $343 $497 $296 $499 $306 $296

NET INCOME (U.S. GAAP) $180 $894 $1,647 $2,369 $2,678 $3,311 $3,823 $3,935 $3,857 $3,703 $3,553 $3,504 $3,690 $5,090 $13,747 $14,617 $7,588 $14,926 $14,450

Basic average shares out 1,040 1,099 1,106 1,109 1,134 1,156 1,159 1,152 1,153 1,154 1,155 1,156 1,157 1,089 1,150 1,154 1,112 1,155 1,156

Diluted average shares out Non GAAP 1,062 1,146 1,169 1,181 1,220 1,240 1,238 1,230 1,231 1,232 1,234 1,235 1,236 1,140 1,232 1,233 1,188 1,235 1,234

Diluted average share count GAAP 1,091 1,160 1,177 1,187 1,225 1,238 1,235 1,230 1,231 1,232 1,234 1,235 1,236 1,154 1,232 1,233 1,187 1,234 1,234

EPS (Pro Forma, Diluted, ex-Options) $0.32 $0.90 $1.62 $2.02 $2.45 $2.82 $3.15 $3.30 $3.23 $3.10 $2.98 $2.94 $3.08 $4.86 $11.72 $12.25 $6.99 $12.50 $12.10

EPS (Pro Forma, Diluted, w/ Options) $0.27 $0.85 $1.57 $1.97 $2.41 $2.77 $3.11 $3.26 $3.19 $3.06 $2.94 $2.90 $3.05 $4.77 $11.56 $12.09 $6.81 $12.34 $11.95

EPS (Diluted, GAAP) $0.16 $0.77 $1.40 $2.00 $2.19 $2.67 $3.10 $3.20 $3.13 $3.00 $2.88 $2.84 $2.99 $4.33 $11.16 $11.85 $6.39 $12.10 $11.71

Free Cash Flow ($150) $232 $1,518 $1,561 $1,547 $2,172 $2,163 $4,142 $2,763 $3,024 $2,961 $3,006 $2,930 $3,161 $10,024 $11,754 $4,858 $11,240 $11,921

FCF per share ($0.14) $0.20 $1.30 $1.32 $1.27 $1.75 $1.75 $3.37 $2.24 $2.45 $2.40 $2.43 $2.37 $2.77 $8.14 $9.53 $4.09 $9.10 $9.66

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24 J

uly

201

8

Mic

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Tec

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olo

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c. (M

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Figure 10: MU Balance Sheet

Source: Company data, Credit Suisse estimates

Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18E Nov-18E Feb-19E May-19E Aug-19E Nov-19E Aug-17E Aug-18E Aug-19E Nov-17E Nov-18E Nov-19E

Modified 20 May 2018 F1Q F2Q F3Q F4Q F1Q F2Q F3Q F4Q F1Q F2Q F3Q F4Q F1Q FY2017 FY2018 FY2019 CY2017 CY2018 CY2019

ASSETS

Cash and Equivalents + ST Investments $4,169 $3,898 $4,330 $5,428 $6,174 $8,042 $7,071 $9,565 $11,328 $13,352 $15,313 $17,319 $19,249 $5,428 $9,565 $17,319 $6,174 $11,328 $19,249

Receivables $2,453 $2,891 $3,497 $3,759 $3,876 $4,437 $4,912 $5,166 $6,286 $6,138 $5,970 $5,932 $6,207 $3,759 $5,166 $5,932 $3,876 $6,286 $6,207

Inventories $2,750 $3,000 $3,064 $3,123 $3,160 $3,184 $3,369 $3,575 $4,009 $3,956 $3,900 $3,909 $4,108 $3,123 $3,575 $3,909 $3,160 $4,009 $4,108

Other current assets $132 $156 $132 $147 $148 $173 $147 $155 $169 $165 $160 $159 $167 $147 $155 $159 $148 $169 $167

Total current assets $9,504 $9,945 $11,023 $12,457 $13,358 $15,836 $15,499 $18,461 $21,792 $23,611 $25,344 $27,319 $29,731 $12,457 $18,461 $27,319 $13,358 $21,792 $29,731

Property, plant and equipment, net $15,321 $19,098 $19,014 $19,431 $20,723 $21,864 $22,705 $22,368 $23,198 $23,936 $24,594 $25,170 $25,665 $19,431 $22,368 $25,170 $20,723 $23,198 $25,665

Goodwill - - - - - - - - - - - - - - - - - - -

Other assets $3,011 $3,312 $3,230 $3,448 $3,110 $3,563 $3,641 $3,558 $3,475 $3,392 $3,309 $3,226 $3,142 $3,448 $3,558 $3,226 $3,110 $3,475 $3,142

TOTAL ASSETS $27,836 $32,355 $33,267 $35,336 $37,191 $41,263 $41,845 $44,387 $48,464 $50,938 $53,246 $55,715 $58,539 $35,336 $44,387 $55,715 $37,191 $48,464 $58,539

LIABILITIES AND SH EQUITY

Accts payable and accrued expenses $4,155 $3,801 $3,656 $3,664 $3,766 $4,194 $3,998 $4,205 $5,377 $5,251 $5,108 $5,074 $5,310 $3,664 $4,205 $5,074 $3,766 $5,377 $5,310

Current portion of long-term debt $1,155 $1,117 $1,161 $1,262 $1,401 $1,514 $1,454 $1,454 $1,454 $1,454 $1,454 $1,454 $1,454 $1,262 $1,454 $1,454 $1,401 $1,454 $1,454

Other current liabilities $236 $289 $326 $408 $416 $427 $431 $431 $431 $431 $431 $431 $431 $408 $431 $431 $416 $431 $431

Total current liabilities $5,546 $5,207 $5,143 $5,334 $5,583 $6,135 $5,883 $6,090 $7,262 $7,136 $6,993 $6,959 $7,195 $5,334 $6,090 $6,959 $5,583 $7,262 $7,195

Long-term debt $8,490 $11,308 $10,485 $9,872 $7,644 $7,802 $5,890 $3,890 $3,890 $3,890 $3,890 $3,890 $3,890 $9,872 $3,890 $3,890 $7,644 $3,890 $3,890

Other liabilities $1,480 $1,553 $1,468 $1,509 $1,438 $1,629 $1,423 $1,423 $1,423 $1,423 $1,423 $1,423 $1,423 $1,509 $1,423 $1,423 $1,438 $1,423 $1,423

TOTAL LIABILITIES $15,516 $18,068 $17,096 $16,715 $14,665 $15,566 $13,196 $11,403 $12,575 $12,449 $12,306 $12,272 $12,508 $16,715 $11,403 $12,272 $14,665 $12,575 $12,508

TOTAL MU STOCKHOLDERS' EQUITY $12,320 $14,287 $16,171 $18,621 $22,526 $25,697 $28,649 $32,115 $35,020 $37,621 $40,071 $42,573 $45,162 $18,621 $32,115 $42,573 $22,526 $35,020 $45,162

Noncontrolling interest in subsidiaries $848 $848 $848 $849 $867 $869 $869 $869 $869 $869 $869 $869 $869 $849 $869 $869 $867 $869 $869

TOTAL EQUITY $13,168 $15,135 $17,019 $19,470 $23,393 $26,566 $29,518 $32,984 $35,889 $38,490 $40,940 $43,442 $46,031 $19,470 $32,984 $43,442 $23,393 $35,889 $46,031

TOTAL LIABILITIES AND SH EQUITY $27,836 $32,355 $33,267 $35,336 $37,191 $41,263 $41,845 $44,387 $48,464 $50,938 $53,246 $55,715 $58,539 $35,336 $44,387 $55,715 $37,191 $48,464 $58,539

Efficiency Ratios

Asset Turns (Annualized Sales / Assets) 0.6 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.7 0.6 0.6 0.7 0.6

Receivables turns (annualized) 6.5 6.4 6.4 6.5 7.0 6.6 6.3 6.3 5.7 5.7 5.7 5.7 5.7 5.4 5.8 5.8 6.0 5.1 5.6

Days sales outstanding (DSO) 56.4 56.8 57.3 55.9 52.0 55.1 57.5 57.5 64.0 64.0 64.0 64.0 64.0 67.5 62.5 62.4 61.1 71.0 65.5

Inventory turnover (annualized) 4.3 3.8 3.8 3.8 3.8 3.8 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.7 3.5 3.6 3.7 3.2 3.5

Days of inventory 85.4 95.8 96.6 95.3 95.0 95.1 100.9 100.9 100.9 100.9 100.9 100.9 100.9 97.6 105.5 100.0 97.9 112.9 104.5

Working Capital (AR + Inventory - AP) $1,048.0 $2,090.0 $2,905.0 $3,218.0 $3,270.0 $3,427.0 $4,283.0 $4,536.4 $4,917.6 $4,843.4 $4,762.7 $4,766.1 $5,005.3 $3,218.0 $4,536.4 $4,766.1 $3,270.0 $4,917.6 $5,005.3

Change in working capital (net of cash) $30.0 $(1,042.0) $(815.0) $(313.0) $(52.0) $(157.0) $(856) $(253.4) $(381.2) $74.2 $80.7 $(3.4) $(239.2) $(2,140) $(1,318) $(230) $(2,222) $(1,648) $(88)

Per Share Values

Book Value per common share $11.60 $12.47 $13.83 $15.77 $18.46 $20.72 $23.14 $26.11 $28.44 $30.52 $32.48 $34.47 $36.53 $16.34 $26.07 $34.53 $18.97 $28.37 $36.59

Tangible Book Value per common share $11.60 $12.47 $13.83 $15.77 $18.46 $20.72 $23.14 $26.11 $28.44 $30.52 $32.48 $34.47 $36.53 $16.34 $26.07 $34.53 $18.97 $28.37 $36.59

Cash per common share $3.93 $3.40 $3.70 $4.60 $5.06 $6.49 $5.71 $7.78 $9.20 $10.83 $12.41 $14.02 $15.57 $4.76 $7.76 $14.05 $5.20 $9.18 $15.59

Net Cash per common share $(5.16) $(7.44) $(6.26) $(4.83) $(2.35) $(1.03) $(0.22) $3.43 $4.86 $6.50 $8.08 $9.70 $11.25 $(5.01) $3.43 $9.71 $(2.42) $4.85 $11.27

Profitability Ratios

Return on Equity (ROE) 9.4% 27.3% 45.5% 50.0% 52.3% 53.5% 53.8% 49.9% 44.9% 40.2% 36.2% 33.6% 33.3% 29.2% 44.4% 35.0% 35.9% 43.5% 32.7%

Return on Assets (ROA) 4.2% 12.1% 22.1% 26.4% 31.7% 33.3% 36.8% 36.1% 32.4% 29.7% 27.2% 25.7% 25.7% 15.4% 32.1% 26.8% 21.7% 31.4% 25.2%

Return on Net Assets (RONA) 4.9% 13.7% 25.4% 31.1% 38.0% 41.4% 44.3% 46.0% 42.3% 40.2% 38.2% 37.3% 38.3% 18.2% 40.9% 38.8% 26.1% 41.0% 37.5%

Return on Invested Capital (ROIC) 5.3% 14.6% 26.4% 31.3% 37.3% 39.3% 42.8% 42.8% 39.0% 35.2% 31.9% 29.9% 29.8% 18.3% 38.0% 31.1% 25.6% 37.7% 29.2%

Return on Sales 29.1% 84.0% 132.2% 151.8% 173.0% 187.2% 197.6% 195.5% 175.5% 172.6% 170.4% 169.2% 170.1% 26.7% 47.2% 43.0% 34.9% 47.1% 42.7%

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Micron Technology Inc. (MU) 8

Companies Mentioned (Price as of 23-Jul-2018) Alibaba (BABA.K, $187.04) Alphabet (GOOGL.OQ, $1211.0) Amazon com Inc. (AMZN.OQ, $1802.0) Analog Devices Inc. (ADI.OQ, $97.79) Cypress Semiconductor Corp. (CY.OQ, $17.21) Maxim Integrated Products (MXIM.OQ, $60.83) Microchip Technology Inc. (MCHP.OQ, $94.2) Micron Technology Inc. (MU.OQ, $54.29, OUTPERFORM, TP $90.0) Microsoft (MSFT.OQ, $107.97) ON Semiconductor Corp. (ON.OQ, $23.78) Tencent Holdings (0700.HK, HK$371.0) Texas Instruments Inc. (TXN.OQ, $114.67)

Disclosure Appendix

Analyst Certification I, John W. Pitzer, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Micron Technology Inc. (MU.OQ)

MU.OQ Closing Price Target Price

Date (US$) (US$) Rating

03-Aug-15 19.00 34.00 O

02-Oct-15 15.91 25.00

23-Dec-15 14.30 20.00

15-Dec-16 20.29 25.00

21-Dec-16 20.58 30.00

21-Mar-17 25.52 35.00

23-Mar-17 26.47 40.00

27-Sep-17 37.09 50.00

19-Dec-17 43.98 60.00

19-Mar-18 60.14 70.00

21-May-18 55.48 80.00

20-Jun-18 58.95 90.00

* Asterisk signifies initiation or assumption of coverage.

O UT PERFO RM

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stoc ks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform wh ere an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

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Micron Technology Inc. (MU) 9

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 49% (62% banking clients) Neutral/Hold* 36% (58% banking clients) Underperform/Sell* 13% (52% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Micron Technology Inc. (MU.OQ)

Method: We are using EV/FCF ratio for our target price for MU. Our target price of $90 would represent ~8x NTM FCF. We rate MU OUTPERFORM as we believe that MU is near trough valuations and see fundamentals improving from here; specifically (1) we expect pricing to start stabilising and drive margin improvement for MU, (2) structurally, Memory is a different industry now—higher concentration

than ever (HHI 3,300 now versus only 1,900 in 2007), more diversified demand, and slowing supply—and we argue margins are more

resilient now than in the past, and expect a re-rating as investors realise normalized earnings of >$3 per year, and (3) we continue to argue that its strategic value continues to be under-appreciated, particularly given China's interest is memory.

Risk: Risks to MU's $90 target price and our OUTPERFORM rating are: (1) pricing pressure in the DRAM and NAND markets; (2) execution issues in NAND flash during 3D transition; and (3) execution issues in converting to 20nm DRAM. Major risks for our Outperform rating are (1) DRAM market could continue to weaken, (2) the company could continue to have execution issues in DRAM, and (3) new entrants from China could enter the market.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): MU.OQ, MCHP.OQ, ON.OQ, CY.OQ, GOOGL.OQ, AMZN.OQ, MSFT.OQ, ADI.OQ, MXIM.OQ, 0700.HK Credit Suisse provided investment banking services to the subject company (MU.OQ, CY.OQ, GOOGL.OQ, AMZN.OQ, MSFT.OQ, MXIM.OQ, 0700.HK) within the past 12 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: CY.OQ, GOOGL.OQ, AMZN.OQ, MSFT.OQ, 0700.HK Credit Suisse has managed or co-managed a public offering of securities for the subject company (0700.HK) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): MU.OQ, CY.OQ, GOOGL.OQ, AMZN.OQ, MSFT.OQ, MXIM.OQ, 0700.HK Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MU.OQ, MCHP.OQ, ON.OQ, CY.OQ, GOOGL.OQ, AMZN.OQ, MSFT.OQ, ADI.OQ, MXIM.OQ, TXN.OQ, 0700.HK) within the next 3 months.

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Micron Technology Inc. (MU) 10

Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): CY.OQ, GOOGL.OQ, AMZN.OQ, MSFT.OQ, 0700.HK Credit Suisse acts as a market maker in the shares, depositary receipts, interests or units issued by, and/or any warrants or options on these shares, depositary receipts, interests or units of the following subject issuer(s): 0700.HK. Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): GOOGL.OQ, AMZN.OQ, ADI.OQ, CY.OQ, MXIM.OQ, MCHP.OQ, MU.OQ, MSFT.OQ, ON.OQ, 0700.HK, TXN.OQ A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (MU.OQ, MCHP.OQ, ON.OQ, CY.OQ, GOOGL.OQ, AMZN.OQ, MSFT.OQ, ADI.OQ, MXIM.OQ, TXN.OQ, 0700.HK) within the past 12 months. Spouse of employee, Joy Hu Lan-Ya, is a Senior Officer of Tencent Holdings Ltd.

For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=370754&v=38uxupb8t9r7l03djwdldwf4o .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (USA) LLC .................................................................................................................... John W. Pitzer ; Charles Kazarian

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Micron Technology Inc. (MU) 11

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