美光科技 (MU) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to your Micron Technology second quarter earnings release conference call. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. It is my pleasure to turn the floor over to your host, Mr. Kipp Bedard. Sir, you may begin.

Thank you very much. I would like to welcome everyone to Micron Technology’s second quarter 2003 conference call. On the call is Steve Appleton, Chairman, CEO and President; Bill Stover, Vice President of Finance and Chief Financial Officer; and Mike Sadler, Vice President of Worldwide Sales. This conference call, including audio and slides, is also available on Micron's home page on the Internet at www.micron.com. If you've not had an opportunity to review the earnings press release, it is currently available on our Web site at www.micron.com. Our call will be approximately 60 minutes in length. There will be a tape replay of this call available later tonight. You may call into that by dialing 973-341-3080, with the confirmation code of pound 3791306. This replay will run through Saturday, March 22nd, 2003 at 530 p.m. mountain standard time. The web cast replay is available through Thursday, March 27th, 2003. We encourage you to monitor our Web site at www.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. During the course of this call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ merely. We refer you to the documents the company files on a consolidated basis from time to time with the Securities and Exchange Commission, specifically the company's most recent form 10-K and form 10-Q. These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward-looking statements. These certain factors can be found on the company's Web site. 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 the date of the presentation to conform these statements to actual results. With that, I'd like to turn the call over to Mr. Bill Stover.

Thanks, Kipp. On today’s call, I’ll provide detail on restructuring charges and our financial position in addition to commenting on overall results of operations. For those of you on the web cast, I have a number of slides to refer to today. The first slide depicts a number of the significant components of the quarterly results. The first column reflects the second quarter as reported in the attachment to the press release. Note that all of these numbers are devoid of any U.S. income tax benefit given the company's position of establishing a valuation allowance against operating laws to carry forward. Net sales were $785 million or approximately $100 million higher than first quarter of '03, and up approximately $140 million from the second quarter of 2002. The sales volume measured in mega bits rose approximately 20% comparing Q2 over Q1. The average price per mega bit was down slightly comparing those same periods. The second column notes $116 million of restructuring related charges, of which $8 million is reported in the cost of goods sold line. The third and fourth columns show the timing effects of generally accepted accounting principles required lower cost and market inventory adjustments. The third column notes $197 million of new second quarter charges and the fourth column shows $98 million of prior period write downs that relate to products sold in the second quarter. By working through these adjustments, you should be able to compare your models to the actual operating results. Let me give you a few more details on the restructuring related charges. As announced on February 18th, the company management agreed upon a plan which included an approximate 10% work force reduction, a curtailment of the 200 millimeter wafer processing at our Manassas, Virginia plant and this continuation of certain product lines. In accordance with the provisions of [inaudible]146, accounting for costs associated with exit or disposal activities and number 144, the accounting for impairment or disposal of long-life assets, the company recorded restructuring and other charges totaling $116 million. $57 million of that related to the closure of 200 millimeter line in Virginia. Less than $30 million of these charges are in cash. We're estimating that these restructuring activities will reduce expenses approximately $65 million per quarter. These savings and the redeployment of some of the equipment from Manassas to other sites is expected to provide cash savings to Micron in excess of $300 million over the next four quarters. The press release points out that the second quarter had lower cost to market inventory charge of $197 million. The charge was principally to account for the significant decline in DRAM average selling prices, which occurred in February. However the $197 million number also includes restructuring related adjustments, that is, adjustments associated with SRAM products of $27 million and adjustments on products manufactured on 200 millimeter line in Manassas of $45 million. Absent the current quarter write down and the effects of prior inventory write downs, cost of goods sold for the second quarter would have been lowered by an estimated $99 million. That would be the aggregation of the third and fourth columns on that prior chart. Of the cumulative inventory write downs, we estimate that approximately $290 million remains in inventory on February 27 and expect half of this remaining amount to work through the current quarter. Megabit production for the quarter increased by a high single digit per percentage and that's consistent with the expectation that we projected for the mid-winter analyst conference. Selling, general and administrative expenses came down slightly due to cost containment measures. If you can see the slide, you'll note that the third quarter and fourth quarter of fiscal year '03 are projected at $90 million each. Those future quarters seeing a modest reduction in SG&A as a result of the restructuring efforts. Most of the benefits during the restructuring are reflected in the manufacturing costs. Research and development expense totaled $174 million for the period, slightly higher than past several quarters as a result of large number of devices being ramped ahead of their qualification. This quarter's R&D costs include significant expenditures on the .11 Micron process development and on 300 millimeter development. You can see Q3 is expected to be up to about $195 million, due to further investment on the 300 millimeter line prior to qualification of divised and due to the extensive development .11 Micron devices. Fourth quarter is expected to drop down again back to about $160 million. As of February 27th, Micron had cash and investment balances totaling $1.2 billion. This number reflects the convertible note offer completed in January, which brought in a net amount of $507 million in cash. With the issuance of the convertible notes and capital raising through additional equipment financing, our long-term debt is slightly over $1 billion. Cash flow from operations; if you look at the attachment to the press release, you'll note as positive for the quarter and positive for the first six months of the fiscal year. Capital spending for fiscal year '03 we will reconfirm is approximately $1 billion and we're now anticipating fiscal year '04 will come in at about the same level. It means remaining capital spend for the balance of this fiscal year '03 approximates $300 million. I'll turn the commentary over to Mike.

Thanks, Bill. We ended our fiscal Q2 at the height of seasonal Christmas and year-end demand for PCs. As a result, the market for DRAM was relatively robust in the early part of the quarter. We expected demand to moderate towards the end of December and this did occur. Demand was lackluster in the first part of January and DRAM prices began to decline, which was in line with our expectations. From mid-January to the end of February, the market supply demand dynamics for DRAM grew dramatically out of balance and market prices dropped. Specifically over the January to February time frame, we experienced an approximate 50% decline in average selling prices for our primary product, the 256 megabit DDR chip. Taking this into account, the HP mega bit for all products decreased slightly on a sequential basis. Since the beginning of March, we've seen prices stabilize and most recently prices have bounced off the lows seen at the end of February. While this apparent price bottoming was taking place, we've been encouraged by a strength in demand environment. You may recall that I previously mentioned receiving input from our customers indicating a projected range of 0 to 10% sequential increase in mega bit consumption in calendar Q1. As Bill noted, we shipped 20% more mega bits into the market in this time frame. This sales growth has resulted in finished goods inventory for the high volume DRAM products being reduced to a point that can go no lower without negatively impacting service levels to our customers. In recent years, the computing industry has constantly been in a state of anticipatory or actual memory technology transition. This time is no different. The industry has just completed a move from SD RAM to DDR266 as a primary volume vehicle and we are about to embark on a high frequency move to DDR333 and DDR400. Their industry wide technology and economic variables that may influence the slope of the ramp of DDR400 in the marketplace. From Micron’s perspective, the steeper the ramp, the better, as we are well positioned for high volume DDR400 supply today. This DRAM performance moved when coupled with the potential volume indication of dual channel memory systems in new platforms promises to make for an exciting memory market in the computer environment over next couple of quarters. I would be remiss if I did not mention the industry’s next transition to 533 megahertz and faster DDR2, which is just around the corner. In preparation for this, we have samples 256 mega bit devices. We've demonstrated system level technologies at a variety of industry forums and we have an entire array of products coming to market all on .11 Micron process technology. The .11 node is a technology platform that we are leveraging for all new devices, including the industry’s first announced DDR chip that is now sampling in component form and on 4 gigabyte registered memory modules. The markets for camera enabled mobile phones and digital cameras are starting to exhibit strong growth. Some of the contributors to this growth are the cost, power savings and image quality enabling features of CMOS sensors. In a winter analyst conference a couple of months ago, I spoke with the superb image quality of initial silicon of our 1.3 mega pixel censor. The 1.3 mega pixel chip is serving as proof of concept and is also generating significant commercial interest. We're closing in on securing digital still camera design wins for this product as we speak. Throughout the year, we'll be following this effort up with the introduction of additional high density sensors for the [DSD] mobile phone and specialized markets. We're on track to becoming a key player and growth enabler for this exciting new technology. About one month ago, Micron announced a corporate restructuring in which we declared our intention to suspend a variety of products. Among those discontinued activities are further product and technology development in support of T Cam and S RAM products. In light of the current business environment and uncertainty with respect to the timing of demand growth for these products, we concluded that further investment is not practical. By no means should this be interpreted as though Micron is backing off from the primary end markets for these technologies, networking and communications hardware. In fact, we have redeployed many of the resources to bolster our position and accelerate time to market for other products that we believe have stronger growth prospects. Examples are [audio break] cellular RAM or pseudo static RAM and the mobile SD RAM, products that are primarily supporting mobile and fixed communication markets and have characteristics that lend themselves to a Micron competitive advantage. We're now executing very well on our process technology migration path as we approach mature yields on .13 Micron and have started a very aggressive ramp to.11 Micron Technologies. Our product development pipeline is loaded with .11 designs that are completing design at a feverish pace. Micron is focused on executing. We need cooperation from the end markets to consume the increasing output from these productivity games. I'll turn it back to Kipp.

Thanks Mike. We would now like to take questions from callers. Just a reminder, if you are using a speaker phone, please pick up the handset when asking a question so we can hear you clearly and with that, we would like to open it up to questions.

Thank you, sir. The floor is now open for questions. If you do have a question or comment, please press the numbers 1 followed by 4 on your touch tone telephone. Please hold while we poll for questions. Once again, that is 1 followed by 4 on your touch tone telephone to ask a question. Our first question is coming from Scott Randall of Soundview Financial Group.

Thanks, great. Good afternoon. Two questions, I guess. First, can you bring us up to speed on where the DDR400 calls are at Intel and secondly, relative to the product areas that you are going to be deemphasizing here, are you going to run additional wafers to set up last-time buy inventory or is this going to be sold out of inventory and that's pretty much it? Sort of trying to get at bit growth for next quarter.

The second question we're having a tough time hearing as you are breaking up.

I'll try that again. Just curious on the products that you are deemphasizing. Are you going to do anything to run additional inventory for last-time buys?

Yeah, this is Mike speaking, Scott. I can address those questions. On the DDR400 calls at Intel as well as the OEM, we've got several calls completed, as you know there are multiple densities and modules that get qualified on these platforms. We have several qualified. We have a couple more in the pipeline and we are working through calls on all of the platforms with all of the OEM customers as we speak. We'll be in good shape for the ramp that will occur as early as next month. On the discontinued products, we're working with customers on a case by case basis to make sure we're taking care of their last-time needs. I would add on the SRAM products. We've got quite a bit of inventory. We aren’t impacting customers at all. It's only on the high density SRAM products as well as the [TCAM] effort. The flash effort was barely commercialized. So, no major issues there with respect to working with customers.

Okay, got it, thank you.

Thanks, Scott.

Thank you. Our next question is coming from Joe Osha of Merrill Lynch.

Thank you, this is Matt Chen for Joe. Basic question on the restructuring. What products were written down? Were they mostly EDR products that were written down or mostly the products that you said you were discontinuing?

Again, you are cutting out a little bit. I believe you asked the question relative to restructuring. That did not have a DDR write down, as Bill mentioned in his comments. The write down came more from SDRAM, I believe, and Bill, would you like to chime in?

Yeah, I want to make sure we can be clear here. The restructuring charge indicated $108 million does not have any inventory lower cost to market write down in it. In cost to goods sold, there is a lower cost to market inventory adjustment and indicated that $27 million of that is related to SRAM. $45 million of it related to trench DRAM product on that Manassas site.

Great, thanks. I know this is hard to predict but do you have any other restructuring charges that you have in mind for the following quarter?

In terms of restructuring?

In terms of restructuring, not write downs.

As you probably appreciate, the new accounting literature does require that some restructuring charges only be recognized as they are incurred. We will have some modest amounts in Q3 but right now, they shouldn't be significant.

Thank you. Lastly, a technology question. Do you expect technology perspective to go to ramp first to DDR400 and then once you get the DDR to start at 533 megahertz?

Yes, that is our expectation.

Great. Thanks very much.

Thank you.

Thank you. Our next question is coming from Tim Mahon of Credit Suisse First Boston.

My question is regarding your R&D. It looks like you will be increasing R&D and I think you mentioned that it was for 300 millimeter specifically. I'm wondering if you can tell us if there has been any changes in the plans from Manassas-- is that moving from a pilot line to a production line and if so, what would be the time frame for that that? Thank you.

This is Steve.

Hi, Steve.

In the R&D number that Bill is referencing, there are a couple of components. It's not just related to the 300 millimeter, although that is continuing. We said before that we're going to continue to ramp that up to some level where we think we have a pretty good learning curve. That's on schedule and progress is going well there. The other part of the R&D component that is driving up next quarter that will drop off, as you can see from the estimate dramatically in the fourth quarter, is that we are right now in process of qualifying a lot of the .11 products around the world and currently until they get qualified, you know, we're going have some impact on the R&D there.

And Steve, any comment on Manassas, as far as the time frame there on moving that more from a pilot line to more of a production line?

We mentioned before that we would expect those products to be in the commercial market sometime, you know, probably mid to late summer, and really the intent right now is to take it at some point to approximately 500 wafers until the market demands more or unless we think that we need more to improve the learning curve, but we just won't know for sure until we get there.

Thank you very much.

Thank you. Our next question is coming from Adam Parker of Sanford Bernstein.

Hi. What was the impact of the JV during the quarter, and you know, was it helpful or did it hurt? And then if the quarter ended right now, this current quarter, would you be losing money on the JV agreement this quarter?

The second quarter impact was positive. It was a positive gross margin from the JV product. You really have to just draw your own conclusions going forward.

Right.

Recognizing it's a discount from the prior quarter pricing relationship.

Right, you know, because you guys do that on the calendar quarter and you are not on the calendar quarter, it's sometimes hard to guess at the contribution. You know, in the calendar 2003, sort of separately here, how do you think your bit growth is going to look versus Infinia and Samsung during 2003?

Right now, Adam, we're looking at a Q3 production bit growth of mid-teens. We think for the fiscal year, we're going to be roughly growing where the market is in terms of production, which is 40% to 50%. Relative to the other folks, I'll let them speak to for themselves.

Thanks, guys.

You bet.

Thank you. Our next question is coming from Matt Sheerin of Thomas Weisel Partners.

Thanks. Good afternoon. Could you give us the mix of DRAM shipments, DDR versus [inaudible] during the quarter?

In the quarter we completed-- I think it was around the neighborhood of 60% DDR in terms of bits. 60% DDR and 40% SD RAM -- it's going to go up higher, probably high 60s DDR, low 30s SDRAM.

What are your inventory levels DDR versus SDRAM right now?

Low and low right now. We are as low as we can be on both.

Which is what, about three weeks?

Less than two weeks.

Okay. And then lastly, regarding the $65 million or so in savings from the cost cutting that you are going to be getting going forward a quarter, can you tell us where that's coming from? Is that going to be in cost of goods sold? How much of it is coming from SG&A, etc.?

It's a relatively modest amount, hitting SG&A. We did have significant work force adjustments across all areas of the company, but many of those folks affected are charged back into the operation, so the dominant portion does hit cost of goods sold.

Okay, great. Thanks.

Thank you. Our next question is coming from Nimal Vallipuram with [inaudible].

Can you just give us an idea how much of your $1 billion of CAPEX this year has already been spent, and also, you said the next year, fiscal 2004, you are looking at another $1 billion or so. If that's the case, is it -- I mean, would it be possible to give us some idea when are you going to look at 300 millimeter production, some sort of time line on that? Thanks.

For the first part of that question, Nimal, we had about slightly over $700 million of that capital spend has been in the first two quarters. It looks like that remaining $300 million will be spread evenly between Q3 and Q4. The only other color with regard to the capital spend, I think it's about 70% front end fabrication related in the current year. On the 300 millimeter production timing, obviously, our primary motivation is cost per bit and when that transition would occur, and the only thing that would negate that, of course, would be what we believe is a learning curve on300 millimeter. Many people in the industry don't think that the 300 millimeter crossover to 200 millimeter, especially at the point where the .11 level will occur until sometime later in '04. We obviously are going to be prepared to ramp up that facility as we see the cost effectiveness of it in comparison to .11. I think realistically for us, we're several quarters away before we have to make that decision.

Just a follow-up on that. You know, given the 300 millimeter ramp, as you said, several quarters away from that -- do you find yourself losing the advantage-- cost advantage you had with companies like Samsung and Infinian or do you still think that you are one of the leaders out there?

Consistent with what I said previously, as we look at what we're able to achieve now on the .11, and you know, obviously the next couple of quarters are going to bear this out and people won't believe it until they see it. First of all, the 300 millimeter production that's in place right now at Infinian is on .13, not.11. There will be a reasonable cost for them to retool. So we absolutely believe, as I said previously, that the differential that existed between us and our competition is going to grow significantly over the next couple of months. On a relative basis to where we were at the end of last year. So we've already done the math. We've already shown the charts. .11 for us on 200 millimeter in our current capability and capacity is absolutely less costly for us to do than 300 millimeter, compared to anybody else.

Thanks a lot.

Thank you. Our next question is coming from Dan Scovel out of Needham and Company.

I'm sorry, can you repeat the current market prices since the beginning of the quarter and also your output in .11 versus .13?

I'll take the pricing question, Dan. This is Mike speaking again. The 256DDR is in the mid-to high 3s. The 256SD RAM is in the $5 range. Those are the two primary products in the bit movers. In the .11 versus .13, what you'll start to hear us say as we go forward by the way is the percentage of production that's better than .13, in other words lower genre than .13 or equal to .13. Right now, our currently wafer starts, we think we're in excess of 80% on .13 or lower. The .11 -- I'm not going to give you any specifics other than say it does continue to ramp. It's in the low single digits -- low double digits right now. It's going to continue to increase up to the, you know, the 50% we've been talking about towards the end of the year.

Okay. End of the calendar year?

Yes.

Thank you.

Thank you. Our next question is coming from Maneesh Goyal (sp.) of Newberger Berman.

I wanted to understand better how the division of the savings will be. Are you suggesting that almost 50 to $60 million will come out of cost of goods?

I apologize, could you repeat the question? We just didn't hear you very well. Just say exactly what you said, that would be great.

Sure, the question was, if you can help us allocate where the cost savings will come from. You said bulk of the cost savings will come from costs of goods sold. Should we just assume that almost 50 to $60 million of reduction in cost of goods from next quarter on wards?

That's probably a good reference. You're only going to see a couple million savings in the SG&A line. And we've already given you a reference for the R&D line, so your characterization with regard to that which is going to hit manufacturing is a good reference.

And could you talk about what happens to your taxes for the next three to four quarters?

Until we have a significant amount of profitability, you will neither see a tax benefit from a loss nor a tax charge associated with profit. We have in excess of a $1 billion of loss carry forwards that need to be utilized before you will see anything other than a modest amount of foreign taxation hitting the income statement.

Great. Quickly, if you can talk about the [dimensions] so far into the quarter and what you are expecting -- what you are hearing from your customers and what they are expecting for the next couple of months?

Sure. I think it's been fairly consistent the first couple of weeks with the quarter with how we went out of the quarter. Our inventory levels are roughly at the same. I would add, by the way, that we would expect to add some inventory from today's levels throughout the quarter. It's just not sustainable to keep them as low as they are. With respect to demand in the current quarter, I'm looking at -- I've got our top 10, 12 customers demand profile in front of me. One is up 17%, another is up 14%. I'd say in aggregate, probably in -- this is on a sequential basis, by the way, probably 10% to 15% is where it would be for an appropriate range. If you asked another question, I'm sorry, I missed it.

No, that's it. Thank you.

Thank you. Our next question is coming from John Lau of RBC Capital Markets.

Yes, thank you. Regarding the next generation Intel spring chip sets, correct me if I'm wrong, I think they used the DDR333 and DDR400. How do you think the market will unfold going into the second half of the year in terms of the split between the two or do you think the migration path will go over to 400, skipping the 333?

Your question broke up, but I think the question was on the ramp of 333 versus 400 as we go through the year. You know, there are a number of variables that are going to influence that, John. I think we have a slide up on the web cast that would indicate what [Victor Diehl] thinks. If you jump to the fourth quarter, he thinks the market will be at 31-- 30%, DDR400. I think one of the biggest variables will be multiple supplier’s ability to get to DDR400 with aa appreciable amount of their product at the 256 megabit level. If supply were unconstrained, you would go very quickly to a very high percentage of DDR. If supply were unconstrained and associated price per bit were equivalent on 400 versus 333, we would see a significant jump to 400. And to be honest with you, our preference would be a very significant jump for 400. We believe we're going to be in very good position with our .13 as well as our .11 products, but, you know, you ask a customer, they'll give you a range of somewhere between 10% penetration of 400 to as high as 30% or 40% penetration by the end of the calendar year.

And one final question-- circling back to the CMOS sensors. What are the design efforts for the cell phones is that further back from the digital still cameras because it's a different configuration or just a design cycle?

Well, it's not really a design cycle issue. It's really a slightly different device. The cell phones really want an SOC version and the digital still cameras still take it pretty much in a discreet form, even though it may be co-packaged with something else. So they are really fundamentally different devices. In large part, they are driven by some different dynamics associated with the application. Obviously, both of them are power sensitive, but the cell phone is really a lot more power sensitive, and I think that drives the design differences. It is not a design cycle time issue, it's just an application difference.

John, we have products in both applications commercially. It just so happens the first product we have in production at the Boise site is a center for a digital still camera.

Great. Thank you.

Thank you. Our next question is coming from David Wu of [audio break].

Gentlemen, moving forward, you seem to put more emphasis behind flash. Do you -- can you talk at this point about any plans besides expending the [Norflash] memory?

Well, obviously when you talk about [Norflash], that's different from mass storage, which depending on who you listen to, there is a variety of technology that may address that, whether that's some other version or some other technology as opposed to the NAN. We're evaluating all those technologies to determine what we want to do in pursuing the business. Clearly we believe we have some good products in the nor reader right now and are starting to get some descent traction. So obviously we believe it's an important memory market moving forward, and that's why we're focusing on it.

Uh-huh. You can comment just a tad on the traditional, seasonal trend. With inventory as low as you did, I guess I’m assuming that the summer seasonal factor still applies?

The summer seasonal factor. Are you talking about --

Low memory demand through June.

Well, I believe we are going to see accelerated demand around back to school and the yearly part of third quarter and the Christmas season north quarter. To be honest with you, I think we're probably through the weakest part of the year traditionally and seasonally, which would be the month of February, and we were pleasantly surprised by the strength of the market with respect to its ability to consume mega bits in the month of February.

Oh, I see. Thank you.

Thank you. Our next question is coming from Bill Divillum (sp.) of Stevenson (sp.) Investments.

You may have just answered the question, but I'm curious, at the last conference call, you folks said or thought that your consumption would be up flat to positive 10%, and then at the analyst meeting, you went to the lower end of that range and had us thinking about flat consumption. It turns out the actual number was 20% and I hope I'm comparing apples to apples. What was the difference in the driver that took place throughout the quarter to prompt those changes?

I think two things, Bill. Number one, we, as I mentioned, we were pleasantly surprised by the strength of demand in February. Actually, more specifically in the latter part of February. Secondly, we took share. There is no question that we took share in the last month of the quarter. It was those two things combined that resulted in the big uplift in terms of sales.

That begs the follow-up question of what prompted your success in taking share?

Salesmanship. We had the right product at the right time to meet the customers needs. It's that simple

Great, thank you.

Thank you. Our next question is coming from Tom Thornhill of UBS Warburg.

Asked and answered, thank you.

Thanks, Tom.

Thank you. Our next question is coming from Matt Gable of Calypso (sp.) Capital.

Did you mention what CAPEX was in the current quarter and also, could you reiterate what the demand on a sequential bid basis in the current quarter is from your top 15 customers? I missed that as well. I'm sorry.

On the capital spending side, Q2 was just over $300 million, indicated for the first six months, we're just over $730 million on the CAP spending. With respect to demand from the top customers in the current quarter, I'm going to give you a range again, somewhere between 10 and 17%, megabits and consumption growth. Calendar Q2 through Q3 is what the customers are projecting.

Our next question is coming from Tai Nguyen (sp.).

You mentioned about the 0% to 10% increase in consumption in last quarter. Is that due to more load in the content per PC or just true end demand?

Boy, you know, I think you're probably better off asking that question to our customers with respect to the granularity of the demand. I think it's probably a combination of content growth as well as some moderate growth in system demand, but you'd be much better off asking our customers that question.

Okay. How about going forward-- the demand you're seeing 10% to 17%. Are you assuming that's more content per PC or is it just --

We are assuming more content for PC. The assumptions we’ve made with respect to mega bit consumption growth for the whole calendar year, approximately 50%. The assumptions embedded in that would be somewhere around 5 to 6 to 7% system growth and 40% to 50% content per system growth.

Okay. So do you see the impact from the Spring Dale, meaning they now require two channels per PC? Is that adding to content for PC is that what you are seeing as well?

We haven't seen it yet because those platforms are not available in the market place. However, that is something that we are assuming is going to be a significant driver of content per system. You stated it accurately. As that platform is introduced into the marketplace, we believe that we're going to see a significant jump in content per system, driven by the dual memory channel features of those systems..

Great. Right now, is the majority of your output into 256 mega bit and did you see a trend that the market will go to the 512?

The majority of our output is on 256 mega bit. That is the most cost effective-- lowest cost per bit chip density for us currently, and as we are able to achieve that lower cost per bit on 512 mega bit, we will migrate more of our output to there. That's probably -- I couldn't even project when it's going to happen. It's out into the future.

Great. Back into your sensor imaging, you just announced a 1.3 mega pixel and you will have design wins coming out of that. When will you expect to sample the 3 mega bit pixel?

The 1.3 is out now, of course, in sampling, and the 2 mega pixels is very shortly following that and 3 mega pixels following that. All of that comes out in the next several months. There is not a lot of delay between those devices because the design cycles had already been started and because the base technology, we're able to utilize as we move forward from the 1.33 on into the 2 and 3.

Great. The last question is on those platforms, since you are late into the market, what is your marketing strategy going against like the marketing leader like OmniVision?

Well, our strategy from the beginning was to -- remember, we're already in the marketplace with the devices now, so don't get the impression that we don't already sell product into both the cell phone business and into the other application that exists in some of these areas. We're already there now. Our units are growing and our revenues are growing on plan. So, what we're really referencing here is the technology that we developed inside of Micron to address these markets and the 1.3, you can read the literature. When we demonstrated the 1.3, the quality of pixel was far better than anybody else out there, including Omnivision. If you want to look at all of the measurements that images are measured by, you'll see that the 1.3 is very, very favorable in terms of its resolution and capability, etc. So we absolutely have an advantage on the base technology used in these devices, and we're just going to continue to roll that forward into the 2, 3, 4, 5 mega pixel arena, and that's our strategy, use the best technology to get the best device and obviously, we can produce those devices very cost effectively as a result of what we've achieved in the memory business.

Thanks a lot.

Thank you. Our next question is coming from John Joseph of Solomon Smith Barney.

Mike a quick question for you and then one for Bill. With regard to the length in February and March, does that make you want to change your forecast for five to six percent system growth? Are you edging that growth forecast up at all in your own mind?

John, again, that would be probably a better question to ask of our customers. I'm only just relaying to you what our customers tell us. We're not experts on, you know, demand for PC systems.

John Joseph And then 10 to 15% bit growth growth, what would that translate in the system? Would that be flattish system growth for the June quarter or up just a little bit?

I would assume it's up just a little bit, but again, I have to direct you to the end customer for that as well.

Okay. And then Bill, I want to ask you you, with regard to your operating loss net of all one time charges about $386 million, that was about $40 million wider than the charge in the previous quarter. I appreciate you breaking that out. It's very helpful on a $100 million increase in revenues, which suggests lower operating, you know, or higher leverage or higher operating profits. What was the reason for that? Was that bringing up a 300 millimeter [fad],, lower utilization or other reasons?

I think we indicated that we've got a higher productivity coming through and it's really the transition to the .13 devices, really moving up the maturity and density that's allowing us to have a little bit of efficiency there, because as we've indicated, there is only a modest amount of that that's starting to pass through Q2. It's been trapped in inventory for us. And then as you have seen us indicate, we're expecting that benefit to start coming through Q3 and Q4.

I see. So this is basically appreciation associated with improved yields, which haven't been realized yet but will be coming in the next quarter?

It is the efficiency side that we have accomplished in the manufacturing line that you'll now see coming through cost of goods sold as that product is -- comes through inventory and costs of goods sold.

All right. Thank you.

Thank you. Our next question is coming from Ben Lynch of Deutsche bank.

The question was asked earlier on about where you are with the DDR400 qualification with Intel, and you sort of answered it by referring to OEMs. Could you maybe answer it please, by referring to Intel specifically and how important you think it is for it to be Intel qualified. And then the second question I have is, could you give us an up update on what you expect your DDR400 yields to be on different line width, please?

I'll address those questions. The -- yes, the qualifications by Intel are important. We have multiple qualifications complete. We have multiple in progress. we'll have the whole portfolio qualified shortly before the ramp takes place. So very important, in progress or completed. Good shape there. With respect to our needs on 400, I'm not sure we're prepared to share specifics with you other than to say that our distribution at both .13 and .11 are greater than what the market demands.

Greater than what the market demands. Okay, but I guess if there is going to be some premium on DDR400 parts, those companies who have higher yields relative to their own profits, technology are going to do better?

That's a logical conclusion.

Okay, but we're just going to have to take you on faith for that? Is that right? Okay. The other question is, you've sort of discontinued the TCAM operations and you had a -- acquired these from music. The charge of taking is really really -- was there any sort of goodwill write down or anything like that, related to the charge?

Well, the -- this is Steve. Yeah, it was not that Significant, frankly. With when we acquired the music stuff, it was at a pretty low dollar amount. We did take a charge for whatever was related to that, whether it be goodwill, whatever we allocated it to, at that time. There was some product, there was some IP, there was some good will. I would just tell you that was not -- that was not a significant amount of money.

Okay, thank you very much.

Thank you. Our next question is coming from Mona Arabia from Rosetta Group.

Yes, I wanted to go through the cash flow statement, if that's possible at this time?. I just couldn't reconcile what you had at the bottom of the release.

Yeah, fire away with your question, Mona.

Could you break out the cash flow? You spennt $300 million?

Well, there is a lot of things that go into that cash flow statement.

I know, what is the net from the operation that, you know, you lumped it in six month number?

Mona, on attachment to the press release for the press he release, it shows the $125 million, indicated that both the second quarter and obviously as indicated here the six months are positive and operating cash flow.

You can't break that out for us?

What are you thinking Mona, we're having a tough time understanding how we would break that out for you additionally.

Right. I'm just trying to get your margin, excluding everything, and to see, you know--

The margins on the gross margin?

Right, exactly. How did you reach this number?

It wasn't clear from the press release. I'll call you off-line for that.Okay?

That's a great way to handle it.

What about the AFP for the quarter? What's your expectation for -- I didn't get how much mega bit production you expect for next quarter that you are capable of producing.

We're going to produce mid-teens in our fiscal Q3 and Bill will answer your ASP questions for fiscal Q2.

All right.

For Q2, the 256 meg synchronous device was about $4 on average and for 256 meg DDR, about 550.

What about the blended AFP for the quarter?

As we said in the press release, it was down slightly, but you have to be careful with that, Mona, because that's relative to prior quarters AFPs and does not reflect the weighted average. As Mike stated in his opening comments, we saw more than a 50% decline in the main volume runner, the 256 meg DDR.

Okay, okay.

Thank you. Our next question is coming from Chris Avery of Deutsche Banc.

It seems that you are more bullish on the DDR400 now than at the analyst day. I think your statement was the majority of the Springdale demand was for the megahertz. I'm wondering what has changed your view on that.

We're talking about two different issues here, just to be clear. One is the demand for 333 and 400, an the other is our ability to produce 333 and 400. I'm still not sure that 400 is going to be deeply penetrated at a 30 or 40 or 50% by the end of the year. It's largely going to depend on the ability of multiple suppliers to get that technology to the marketplace. What I am confident about is our ability to, let's say, produce more than our fair share of the DDR400 material. If we were the only one to get that technology to the marketplace, I think you would see a more shallow penetration. So that's really two somewhat different issues there.

Okay. So the DDR400 is somewhat limited by the ability to supply it for the penetration in the Springdale?

Of multiple suppliers, correct.

Okay, thank you.

Thank you. Our next question is coming from Clark Fuse of Fulcrum (sp.) Partners.

Thank you. Just wondering if I could understand a little bit about the wafer out situation. You've been at the 50K level and you lose a few coming out of Manassas. Is that equipment being reallocated to other facilities so the overall wafer output stays about the same or are wafers being -- you can work us through that a little bit? Can you give us an update on the megabyte per box trends?

I'll take the first part and Mike can take the second part. On wafer allocation, we have two things occurring. We are redeploying some of the capital that was in Virginia to the other site, and as a result they will have higher wafer output. We did take the wafers and put those into the remaining product line. So you should expect the wafer outs to remain about the same. We don't think there's going to be either a big plus or a negative. It'll be pretty consistent as we redeploy some that have capital. So I think you will see obviously a greater number applied to the remaining products, so those individual product lines will have some increase as a result of reallocation. Mike?

On the megabytes per box trends, I think if some of the data we shared earlier, if you look at the three primary platforms, the consumer and commercial desktops and notebook platforms, the content increase overt last 12 months has been about 46%. We're seeing a pretty significant uptake now in 512 megabyte modules both from our OEM customers as well as through our crucial upgrade business. We do believe the introduction of the dual channel memory systems here later this spring is going to be a significant catalyst for additional content growth. So we're generally pretty bullish on content growth as we move forward, as well as looking at the trend data recently.

Great. If I can have one more question. The split in the shipments by density, I know your main progress in 256 megs. Can you be more specific with some of the splits at 128, 256 and if you run any 64?

Yeah, we can handle that. We've been running between 60 and 70% 256 megs for almost a year now. This particular quarter ran between 65 and 70%, which means we ran 25%, 128 megs and then we run a few 512 megs, high single digits and then a little bit 64 meg as well.

Great, thanks.

You bet.

Thank you. Our next question is a follow-up coming from Tim Mahon from Credit Suisse First Boston.

Can you make any comments about what percentage sold at the spot market was. Mike can you talk about -- you said February was particularly strong. I'm curious. Was that sparked by some of the promotions out there on double your memory for free or can you talk specifically why February was so strong? Thanks.

I think the percentage of sales in terms mega bits into the spot market and Q2 was somewhere in the range of 25 to 35%, which is not atypical for us. With respect to some of the explanation for the strength in February, I would presume that cost was a driver, and you know, the double your memory for free essentially responds to low cost of memory. I think there was also, again, this is my opinion, I think there was some speculation on price bottoming in the marketplace from some of the DRAM traders and that was also driving some of the demand. It was a variety of things, but primarily cost-related to be honest with you.

Great. Thanks, Mike.

Thank you. We have a follow-up coming from from Nanne Schoil (sp.) of Newberger Berman.

I'm just struggling with your cost of goods number. Can you talk about if you exclude the inventory write off and the restructuring charge, what is the real cost of goods number? I mean, the one that you have on the press results includes some write downs. Could you talk about that, please?

The cost of goods sold as reported was the [inaudible] It then indicated that there is $8 million of restructuring related charges that you would back out of it. There is the $197 million dollars of new lower of cost or market charge hitting the second quarter that you would back out of it. And depending upon how your modeling, we presume that you would have already taken into account the amount of prior lower cost to market prior period cost to market adjustments that we have indicated as related to product that's been sold in the current quarter.

How much is the benefit of that?

That's the $98 million that we had up on one of our slides earlier.

Okay. So, if the DRAM prices were to stay at current levels, would you expect to take another inventory write down?

We won't go into specifics for you there, as you are really asking us what our cost trend is going to do in the future. You can look at pricing being pretty depressed right now, so it's difficult to believe that there wouldn't be some NRV at currently pricing levels.

And how -- okay. And how should we think about the loss of revenues from the product line that you are discontinuing?

Not significant-- not significant. Number one, on the SRAM product that we're discontinuing, what we're actually doing is discontinuing further development. We're still on the SRAM market, and the revenues that we're going achieve in the current quarter versus what we incurred in the prior quarter and actually for a couple quarters into the future, not any material difference at all.

Great. Thank you.

Thank you. And our last question is a follow-up coming from Bill Divillum of Stevenson Investments.

I wanted to follow up relative to your comments about the market share gain that you folks had in the quarter. I'm curious to what degree that prompted or any insights you have about competitors desperate behavior.

Well, we -- you know, on the market share data, it's difficult for us to tell where that came from. Obviously -- the whole industry is being negatively impacted by hind necks continuing to put an inefficient supply into the marketplace. Obviously that continues to depress the price. And you know, there is just not a lot we can do about that. It's tough for us to say where we got the market share. No doubt, you know, they are very active, and they are still putting a lot of supply out there. So, all we can worry about is what we can control internally, and we're focused on that.

Steve, as you gained share, did you sense any change in behavior or was it just more of the same from the competition?

I think it's more of the same for the competition. I think, as Mike mentioned, we are well positioned with our product mix and what the customers needed.

Thanks, Bill.

With that, we would like to thank everyone for participating on the call today. If you will please bear with me, I need to repeat the safe harbor protection language. During the course of this call, we may have made forward looking statements regarding the company and the industry. These particular forward-looking statements and all other statements that have been made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC, including the company's most recent 10-Q and 10-K. Thank you for joining us.

Thank you all for your participation. That does conclude your teleconference. You may disconnect your lines at this time. Have a great evening.