美光科技 (MU) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Micron Technology first quarter of fiscal year '04 conference call.

At this time, all lines have been placed on a listen-only mode.

And the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Kipp Bedard, sir you may begin.

Thank you very much.

I would also like to welcome everyone to Micron Technology's first quarter 2004 financial release conference call.

On the call today are Steve Appleton, chairman, CEO, and president.

Bill Stover, vice president of fines and chief financial officer and Michael Sadler, vice president of worldwide sales.

This conference call, including audio and slides; also available on Micron's home page on the Internet at Micron.com.

If you have not had an opportunity to review the first quarter of fiscal year 2004 financial press release, it is available on our web site again at Micron.com.

Our call will be approximately 60 minutes in length.

There will be a taped audio replay of this call available later this evening at 5:30 p.m. mountain standard time.

You can reach that by dialing 973-341-3080 with a confirmation code of 4362562.

This replay will run through Monday, January 5, 2004, at 5:30 p.m. mountain standard time.

A web cast replay will be available on the company's web site until January, 2005.

We encourage you to monitor our web site at 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 materially.

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 would like to turn the call over to Mr. Bill Stover.

Thanks, Kipp.

Let me run through a few of the numbers and significant items affecting our first quarter results.

I will reminds that you the first quarter was a 14-week quarter which is necessary every four or five years to synchronize the calendar and our fiscal cutoff as compared to typical quarters which have 13 weeks.

Net sales for the quarter totaled $1.1 billion.

Compared to $889 million in the immediately preceding quarter.

Resulting in operating income of $22 million.

The 25% increase in net sales was a result of increased megabit sales volume in part a function of the productivity in the additional week of this fiscal quarter, and as a result of higher average pricing.

Average selling price per megabit fluctuated noticeably through the quarter rising early in the quarter and decreasing late in the quarter.

On average, ASPs were up approximately 7% quarter over quarter.

As we indicated in our press release, gross margin for the quarter was at 26%.

An improvement from 19% the prior quarter and from 10% the quarter before that.

Gross margin increase results are both from slightly better pricing and from cost improvements achieved in manufacturing.

Absent the effects of prior period write downs the gross margin percentage improved 12 percentage points quarter-over-quarter.

Note there was no new charge in the first quarter over the lower of cost or mark inventory test and the first quarter benefit from prior period write-downs was approximately $28 million.

For the first quarter, there are two lines on the income statement that warrant further explanation.

The restructure line reflects a $21 million benefit from equipment sales.

This is primarily 200 millimeter equipment pulled out of the Manassas Virginia site as that Fab was converted to 300 millimeter procession which was sold at better-than-anticipated pricing.

When originally booked the restructure charge last February, the equipment market was quite depressed.

The second line on the income statement, other operating expense picks up foreign currency exchange lost which aggregates $25 million as the dollar generally weakened against the Japanese yen and Euro.

Selling general and administrative expenses remained relatively flat with the immediately preceding quarter at $81 million.

SG&A for the second quarter is expected to be between $80 and $85 million.

Research and development expenses vary significantly with the number of wafers dedicated to new device development and qualification, and also vary with the timing of qualification of our 300 millimeter line in Manassas, Virginia.

The first quarter totaled $186 million.

With a significant elements being qualification costs, of .11 Micron device, and the development of our 300 millimeter line.

The second quarter is expected to approximate 170 million.

From this slide, on operating cash flow, you can see the improvement that occurred throughout the year.

There has been a steady improvement, mostly reflective of a strong execution across operations, resulting in reductions in costs per part.

And as at quarter end, Micron had cash and investment balances just over $1.3 billion, and our debt to equity ratio had returned to below 20%.

At December 4, -- it is 18%.

Capital spending for fiscal '04 is currently estimated to be approximately $1.3 billion.

And I will turn the commentary over to Mike.

Thanks, Bill.

From a market perspective, our fiscal Q1 proceeded about as expected.

As a follow on to the prior quarter we continued to see robust demand across all the computing platform, consumer electronics devices and communications products such as routers an mobile phones.

The network and communications infrastructure area in particular has seen a nice rebound in demand and our legacy DRAM product lines consisting primarily of synchronous DRAM have been major beneficiaries of the strength.

As the numbers increase a nice sequential growth of shipments as measured in megabit.

Major name brand computing OEMs had the DDR ram products as quickly as produced them.

The demand continues to be strong today as we have seen some price pressure, as we are well into the holiday season, and beyond what would be considered the season of strong consumer PC demand.

We ended the quarter with unprecedented low level finished goods inventory.

The inventory level coupled with demand strength as we head into the new calendar year, give us cause for of optimism about the market environment for 2004.

DDR 333/400 is now entrenched at I primary memory mainstream solution in the computer Democrat.

And Micron continues to be well positioned with the technology with the vast majority of the .13 Micron output beating the 400 megahertz speed grade.

We are transitions to the .11 Micron 6 F squared DDR400 device, which has a greater 400 megahertz yield distribution and bring us another round of substantial cost per bit redetention.

The computing industry will undergo another main memory performance boost and memory transaction in 2004.

This time from DDR 1 to 500 megahertz plus DDR 2.

We are the leader in this year with three ships ranging from 256 megabit to 1 gigabit.

Supporting memory modules from 128 megabytes to 4 gigabytes.

We have a variety of system validations completed and in the early stage Micron is the OEM supplier of choice to enable the industry.

The benefits of a broad DRAM product portfolio have never been more than they have been before.

In addition to leading wait with new technologies like one gigabit and DDR2, Micron has invested to remain a synchronous DRAM supply capability.

Nontraditional applications in the consumer and communications space is now represents a more significant piece of the overall DRAM market, and having these devices in our portfolio on advanced process technology is further strengthening our strategic position with the diverse set of customers.

The mobile phone market is showing both positive unit growth and application complexity that is quite attractive to Micron.

For the first time we are seeing meaningful DRAM contract retraction in cell phones an our lineup of low power pseudo-static and ram and dramm products are good fit for these applications.

Most of these DRAM products are actually shipped in the form of a multiform package or MCP as we refer to it and include a NOR-Flash device as well which is also provided by Micron.

We are one of only two semiconductor manufacturers in the world with the capability of housing our own NOR-Flash and DRAM products in the same package.

As mobile communications infrastructure enables more user functionality, and CMOS image sensors bring low cost and low power features, a cash rates of cameras, to cell phones are increasing steadily.

Micron's VGA CMOS sensors are referring rave reviews from the mobile handset customer base, and we are process of ramping production of the Boise manufacturing facility to meet the results demand.

In the digital steel camera market we have both the one and two megapixel shifts in volume and move to three megapixel chip in volume production at the end of the current quarter.

In combination our broad family of CMOS sensors bring synergy to the marketplace and value to our customers in the communications and consumer electronics markets.

The end markets continue to look stronger as each month passes and we are quite encouraged in the strengthening demand environment.

We are executing well in bringing a wide array of products to the market in advancing the technology to reduce costs, and enhance device performance.

We appreciate your continued support and interest in Micron.

And with that, I will turn it back to Kipp.

Thanks, Mike.

We would now like to take questions from callers and just a reminder, if you are using a speaker phone, please pick up the hand set, when asking a question so that we can hear you more clearly with.

That we would like to take questions.

Thank you.

If you would like to register to ask a question, please press the numbers one followed by four on your touch-tone phone.

If at any point your question has been answered, and you would like to remove yourself from the queue, please press the pound sign.

Once again, that is one followed by four on your touch-tone phone touch-tone phone to ask a question.

Our first question is coming from Michael Masdea of Credit Suisse First Boston.

Thanks a lot.

Congratulations guys on a great quarter completed.

You sound pretty optimistic going forward.

Is that all enterprise driven, some of the networking kicking in or can you talk about the bit per box trend you're seeing out there.

This is Mike Sadler speaking.

A couple of questions there.

In particular we're seeing a lot of strength as I mentioned in the networking and infrastructure area, routers and switchers, both enterprise and I would call it consumer as well.

In the PC space, obviously we are just coming out of the strong consumer selling season, or just heading in or finishing the strong consumer selling season and we've seen appreciable demand results from consumer PCs.

We are hearing from our customers about a strengthening corporate environment in the PC area, and you know, we will see how strong that -- how that really materializes as we go through calendar Q1.

In the mobile phone area, clearly we're seeing a lot of strength and as I mentioned we're seeing a lot of complexity which is driving increased memory content as well as a very strong attach rate of cameras so I guess the answer to your question is we're seeing strength across the board, and on the memory content side, we saw a relative flattening in the early part of our fiscal Q1, I think that was primarily a result of the increasing DRAM pricing environment that we saw going into the quarter.

As prices have come down already we are starting to see content increases take hold as well.

And quite frankly, still the most -- the most effective way for the use tory increase the performance of the PC is by increasing memory content.

So we're pretty confident and pretty bullish about memory content accelerating going forward.

As more certainty is kind of forming around the price per bit here of the PC environment.

Great and then a quick follow-up if I can.

I have been hearing a lot of the competitors to a certain degree yourself, moving from production to DRAM to other areas, can you talk about the customer's reaction to that and if there is any concern about that and also if that is going to have an material impact of supplies as look out over the next six months.

Yeah in our case it is going to have an impact on supply, what we would call main memory DRAM for the PC market.

In our case, we're shifting some capacity from today, that would be by the way would be the DER synchronous DRAM product, we're shifting some capacity utilization from DDR to CMOS image sensors, to flash devices, primarily for the cell phone environment.

We are also maintaining a pretty consistent output of synchronous DRAM for a wide variety of applications, all none PC applications as well.

In terms of what we are doing out -- having a material impact on supply for the PC environment, difficult to say.

Probably not.

I couldn't really speak for what impact the same kind of actions would be having from our competitors though.

Congrads on break even, guys, thanks.

Thanks.

Thank you.

Our next question is coming from John Barton of Wachovia securities.

Yes, good afternoon.

I wonder if you could comment on the product split in the quarter just closed as it refers to DDR sink, and 128 please.

Didn't change much from last quarter in terms of DDR in sink we have been running for the last couple of quarters 70-75% wafer routes in DDR and 20-25% in S DRAM and with the price premium on S DRAM it is a little higher percentage on revenues.

And looking to the quarter going forward, how much do you think you will switch toward sync?

Not a significant change going forward.

And if you could, just 256 versus 1228 versus greater than 256.

And the vast majority of our output in the DDR product line was in 256.

And that is shifting somewhat to 512 megabit.

I don't have the data at my fingerprints with respect to the specific percentage percentage so toe repeat that the vast majority is the 256 and the synchronous DRAM product line it is all over the board.

A lot of 64 meg, a lot of 128 meg, some 256 meg and some 5123 meg as well.

Final question if I could, flash, you talked about the first quarter quarter coming up being in the market.

Could you update us where are you there?

Yeah, the -- we're in silicon now.

We've talked about taking it out.

And we are relatively conservative with our schedule.

We want to make sure that we, you know, hit the targets.

I think essentially we're talking about getting the silicon, you know, and being able to sample sometime in probably -- I'm going to guess mid spring.

In terms of some of the early silicon.

And then you know it depends how well it goes after that.

But we think we that we will -- right now our target is to have production by the end of '04.

Thank you very much.

Thank you.

Our next question is coming from John Law of Banc of America.

Yes, thank you.

Records the CMOS sensor, can you give us the progress and the competitive landscape specifically the one, two, and three megapixel sensors and what do you think the volume of the Micron sensor production will be in 2004?

Which density would it -- in that category?

Thank you.

I will address the last question first, John.

On the density for -- I presume you're talking about the digital still camera market.

Yes.

The sweet spot today is two megapixels, moving to three megapixels through 2004.

With respect to the volumes, we're not going to talk specifically about volumes.

The competitive landscape, we're not the market leader in terms of market share today.

We're making progress.

Literally, as each week goes by I think we're gaining market share and our product, as I think you're aware, are being extremely well received from an image quality standpoint.

We're continuing to execute in terms of producing these products here in our factory in Boise and bringing the costs down as well.

We're very, very bullish about our prospects in this market.

Okay.

And as a follow-up, I don't know if you mentioned it before but what is the bit production expectations for Q2?

Looks like we are going to be roughly flat and I would just remind you that our Q1, our fiscal Q1 was a 14-week quarter.

Our fiscal Q2 will be 13 and as Mike has mentioned in his comments, we will be adding more wafer starts and resulting wafer outs for image sensors.

So that takes -- we do not include the image sensor production in the bit growth numbers.

So roughly flat with what you saw in Q1.

Thank you.

Thank you.

Our next question is coming from Andrew Ruth of Goldman Sachs.

Hi, quick question on the multiship package.

Can you talk about what the typical density would be for the various grades of memory in that and then also what proportion of cell phone will have multichip package with DRAM in them next year if you want to take a stab at that.

Sure I will take a shot at it.

The sweet spot density for calendar '04 is probably going to be 128 megabits of NOR-Flash, and 64 -- 32 or 64 megabits of pseudo-static ram which of course is a DRAM chip with an S ram interface.

That will the sweet spot for us.

There is a significant market for lower densities, well but we're probably knocking on the high end of the market or the mid to high end of the market with those particular configurations.

Our estimation, is that the attach rate of DRAM, and multichip packages, in cell phones in 2004, is going to be upwards of 50%.

Versus 2003, which was, you know, single digits probably.

So tremendous growth and obviously tremendous presence now of DRAM in cell phones.

Would most of those designs emerge more for the second half designs or hand set makers talking about those in the first half as well?

The designs are all been completed, have been completed now in 2003 and will be completed flew the early part of 2004.

We are looking at a pretty steep ramp to get to that overall 50%-plus penetration level in 2004 so by and large it is going to be the second half of the year.

Okay.

Thanks.

And then just one quick follow-up if I may.

If you can talk just on generalities on DDR2, what sort of structural cost increases the industry faces in terms of mass or round numbers, what you are expecting the industry will face.

Well, I don't really -- it is just a -- it is not a mass clear issue, it is a die side issue and in is some difference.

Obviously in the wafer side.

The die side is a little bit bigger but more importantly it will be a back end issue.

Requires a obviously higher speed test ers and so forth so there will be some premium associated with that as opposed to to the Fab side.

Great.

Thanks a lot.

Thank you.

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

Yeah, hi, I have a few questions so I will try and be fast.

On your share count, you can help at all with what you anticipate to happen on your share count during the next couple of quarters and Kipp, I believe you mentioned the share count would go up somewhat like 90 million shares and return to profitability based on the intel money to convert earlier in the cardio year and the options and why did the share count 3, 4% as opposed to earlier expectations.

On the share count side, the intel shares are 33.9 million shares under lying their investment.

And only two third was those are recognized in the first quarter.

Due to the timing of that investment.

Okay.

So you've got another 9 million shares or so that instantly pick up at the beginning of the second quarter.

And you've got about 53 million shares underlying the convertible, and that will be dependent on the treasury stock method, stock price sow will have to get into some models as to the income and stock prices, to get a specific number.

The prior characterization of 600 -- or the 90 million increase is accurate but it is going to depend on income level and stock price.

Okay.

So this 9 million extra from intel, is that independent of you make money in the second quarter or not?

Correct.

Okay.

That's just recognizing the full 33.9 million shares outstanding for the whole of the second quarter.

Okay.

So you can comment more generally, so where do you think it is going to go in the next couple of quarters or is that too tied to your profitability?

As you know, Adam, we don't predict that.

Okay.

All right.

Couple of things, on the competitive cost position, I think Steve you outlined last January how you would sort of catch your competitors on the cost side by the end of this year and obviously guy made a lot of progress in the last couple of quarters, I'm trying to sort of get more color on where that is headed in the next couple of quarters given you guys are break even while a couple others are making money and if anything has changed versus your earlier expectations.

I think you have to -- well, first of all, we said that -- try to bring closure to the comments we made in the first part of the year, we had a -- we had a cost reduction target, we had a .11 conversion rate, we had a restructuring.

And so forth, and you know, we feel pretty good about what we've done.

In fact we've done everything that we said we were going to do in that time frame and when you talked about our cost structure, and in relationship to our competitors, the thing that we've been highlighting, the last quarter or two is that we've been spending a tremendous amount of money on developing some of these new products.

That all goes into the R&D expense or it goes into what you see as ur cost structure so it is a little bit deceiving.

As opposed to to I think some of the competition that is a little purer maybe in some ways.

We believe that we've now caught and surpassed our competition in our cost per bid.

We know what our number are.

We know what they announced for their numbers.

And we have a lot of runway for us.

Now we feel pretty good about where we are but let me just highlight we're not satisfied at all.

We think we made a lot of progress but we're just getting started on continuing to accelerate our position as compared to our competition and when you look at some of the things that we've endured, you know, obviously we have a currency exchange issue with the weakening of the dollar and we are probably affected by that as some others are and some others are not and we are spending a tremendous amount of time broadening our approval and making sure we got to the market earlier on products as you know don't always pay dividends on the same quarter you spent the money on.

Sure.

So we're definitely not done.

But you think you are the lowest cost producer on DRAM right now, is that what you said.

We believe probably last month or the month before we are now ahead of our competition and obviously some of that is anecdotal because we don't have their data.

But when you look at it, I mean essentially, you know, what I would throw out to you, is we have -- we know approximately 60% converted to 110 nanometer.

And when we talk about the conversion rates, a as opposed to some of our competition, remember our product, it is being foundered, and we're not categorizing it as our advanced DRAM.

When we say 60% of our DRAM, is on the 110 nanometer, we are talking about all of our DRAM, that includes the legacy product, and so forth.

So we have made just a huge -- I think conversion to that, and it has gone really well.

And in addition to that, we have the success squared, and we know we get about a 20% die side advantage of 6 S scared over our competition, so when you put those forth, I just think the data will speak for itself.

You can -- you know, there is a lot of things that gets said but at the end of the day, I think we have three things that are very strong for us, in the DRAM arena.

First of all, our 110 nanometer transition has gone very well.

And that 60% of all of our production as opposed to asking somebody the question, how much of their foundered product is really 110 nanometer.

Secondly, we are the only ones that have 6 S scared and thirdly when it comes to some of the new products that are being designed today, like the DDR2, there we're the only one out there with all three generations at the customer base today.

So when I say we have a lot of runway before us, that's what I'm talking about.

So that's great.

One last question.

Sorry.

You can talk at all, you said you talked about the volume or contribution of the JDV during the quarter which I imagine was positive to your bottom line?

Yeah, it is positive.

Obviously that fluctuate, depending on the movement of the market price and the way the agreement works but when we talk about, Jay the JV, remember we are the largest shareholder and our partners are in the DRAM business trying to make DRAM for themselves.

And so, the other partners are, as you know, the economic development -- it is the same report government, of course this was a structurally acquired from TI, and then cannon is an equipment supplier, and then HP has a small share.

So that JV's entire structure is around Micron.

And it it is all of our technology and all the output comes through us.

None of it goes to the market outside of that so we are the 100% beneficiary.

A little bit different than some of what you might think of some of the foundry models that were out there or are out there today and their contribution -- we don't give out specifics.

I think their contribution as a part of our total Fab structure is, you know, going to be somewhere between 20-30% which you would expect given the size of the operation compared to the others.

Right.

So without that -- without the JV, given what happened with pricing this quarter, you would have lost money; that fair?

Without their output, sure, I mean we would have had -- our structure would have been changed by 20-30%.

Going into this quarter, clearly with the price erosion over the last couple of months, it doesn't appear it is going to have positive margin contribution during fiscal Q2?

Or can you just not comment?

Yeah, we can't give you details there.

But we would expect positive contribution from it in the second quarter.

You would expect a positive contribution again during the second quarter?

Correct.

Okay.

Thanks, guys.

Thank you.

Our next question is coming from Joseph Osha of Merrill Lynch.

Hi, guys.

A couple of things.

For starters, this $25 million currency item, I mean, you know, the dollar moves around a lot, both up and down, this is the first time at least I can recall seeing you break this out.

Is this an aggregation of, you know, some previous items?

Or is it just large their quarter?

So you're mentioning it?

Can you help me out there?

We, in any prior period, we account for it exactly as you would expect, adjusting to the exchange rate at the close of the period.

In no prior period has it been significant.

The recent movement in both the yen and the euro, is triggering it.

And we have debt associated with our acquisition of our Nishywhacky plant in Japan.

And we have equipment liability, denominated other than in dollar, and we have operations in Italy, which are carrying euro liabilities.

So --

Okay.

As to the euro and yen, it has moved --

All right, good.

It hasn't been this big ever before?

It has been totally immaterial in any prior period.

Okay.

Great.

Second question, this came up briefly once already, but just to nail it down, was the 60%, .11 that you referred to percentage of wafer outs, during the quarter?

Or starts?

No, I thought -- we've always given that reference at wafer starts although it has been pretty high for us for some time now.

Can you give me a sense as of right now today what percentage of your output is .11 out?

I don't know that right offhand.

But it is fair to assume it is toggling toward that number.

All you have to do is look at the cycle time of the Fab.

Fair enough.

And you know in that period it is going to hit that anyway, so.

Okay.

What -- can you give us some rough idea as to what we can kind -- we've been kind of dancing around this either in revenue or wafer start terms what percentage of your business now is CMOS sensors and NOR-Flash.

We've given some references in the past.

It has been running 1-2% of wafer starts in prior quarters.

That will go up to 2, 3, 4% and 5, 6% in the next couple of quarters.

Is that both items in a gated or --

That is for the image sensors alone.

In total of all other products outside of DRAM you will see that percentage go from currently around 2, 3, 4% up to around 10%.

And last question, I was a little -- I guess it is a little surprising given the low inventory that you're talking about and the very robust PC market, that, you know, pricing -- pricing hasn't gone up more.

Mike, do you see still the same behavior with, you know, PC makers, deacon figuring machines at, you know, at the slightest sign of an uptick in prices and do you see any end to that?

Any sign that this business could actually hold the line on pricing for more than say half a quarter at at time?

Well, this think it is an interesting observation.

By the way, I would not necessarily characterize it as DT as opposed to stalling content increases.

Yeah.

As we see things as dual channel systems taking much more hold in the marketplace, that tends to drag quite a bit more memory content with it and clearly we're seeing increasing penetration of dual channel memory systems in PCs.

And as we move -- as we transition to DDR2, and, you know, a variety of new applications come to the PCs as well that will tend to drive up more memory content so no question we are going to continue to see content.

I don't think any reasonable person would argue that we will see content stall or not physician to increase.

Clearly the memory pricing or the relative certainty of memory pricing is a factor in determining how dramatically it increases and I think we will continue to see, as memory price goes up, we will see temporary stalls in terms of memory content increases.

But in general there is no reason to not expect we won't he seeing swings in the neighborhood of 50% content increases going forward.

And your comment a moment ago was that this recent round of price weak changes appears to have stimulated another another round of pickup in densities as of say the last part of December here.

Very clearly.

There are a couple of our customers in particular, as a result of the memory prices coming down, or I presume it to be a result of the memory prices coming down, putting on some of the high volume platform, have really stepped up memory content.

Just in the last 30 days or so.

Okay.

And I'm sorry, this is truly the last one.

Just a quickie.

You guys had suggested once or twice that this R&D number was going to be probably close to $20 million higher than it was.

Is that -- is those smaller numbers just a result of starting fewer R&D wafers than you thought?

Well, there's some combination of things in.

There but we were able to get a couple of products qualified that previously weren't anticipated to qualify in the quarter.

And as a result, that then moved to cost of goods sold.

Okay.

Very well.

Thank you.

Thank you.

Our next question is coming from Clark Fuse of Folcrumb Global Partners.

Yeah, thanks.

Just on three points.

Just on the write-down of the inventory, or the inventory issues, you had no write-down and there was a $28 million benefit from prior write-downs.

Have I got that right?

Those correct.

And that leaves an NRV of 37 million left?

Have you that right as well.

Hi had it rounded to 38 million.

And it is a little difficult for us to now predict just when that final benefit will flow through as some of that is associated or virtually all of it is associated with noncore DRAM product.

Okay.

Fair enough.

On the demand side, what are your customers telling you right now in terms of calendar Q1 demand in terms of bits sequentially?

And is that above, below or about the same as is typical?

Typical would be zero to 10%.

Our customers range -- I would just aggregate them somewhere in the 5-10% in Q1 relative to Q4.

And that is a decline rather then right.

No, no, no that is an increase.

That is an increase in bit demand.

An increase of bit demand of 5-10 Q1 relative to Q4.

Okay great.

And on the production side, what percentage of your wafer starts are expected to be 6 S squared by the end of quarter '04?

Well, we've given some given pretty loose guidance on that clark.

Not real specific.

But let me address the question a little differently.

The next couple of quarters are mainly high highlighted by the .11 transition wrapping up and by the mid to latter part of next year, then the 6 S squared will become the majority of the next part of the shrink so to speak.

Right.

Right.

So a -- the majority of the .11 Micron run; that the way to think about it?

6 S squared can be on all process.

Right.

.13, 110 nanometer, 95 nanometer as well.

Oh, I see.

Okay.

Great.

And when does 95 nanometer start coming into play?

Well, right now, it looks like -- obviously, we already have done a lot of work on it.

I would anticipate sometime in mid to later '04 we will start seeing more of that.

Okay.

Great.

Thank you much.

Thank you.

Our next question is coming from Zac Chavren of Waddell and Reed.

Excuse me Mr. Chavren, your line is live.

Do you have a question?

I will check his line.

Our next question is coming from Bill Dezelam of Davidson investments.

Thank you.

I would like to circle back to the Manassas facility and have you folks walk us through what is take can place there, and where you're at in the process relative to the 512 DDR, and the 300 millimeter production in terms of qualification, just generally what is going on with that facility, please.

Sure, this is Steve.

The -- the discussion at this point in time has been pretty straightforward.

Obviously, we are in the process of qualifying it, as you -- as you might remember, we mentioned that we switched it oaf to copper, in fact, the first copper DRAMs out probably in the world.

And we think we will also get a performance benefit from that so that's why we're just bringing the entire facility up on copper.

That product is in qualification right now.

It will occur very shortly here.

I'm guessing sometime between tomorrow and the next couple of weeks.

And then that will of course come off the R&D exspensing and then go into cost of goods sold so that facility as we get that product qualified will continue to ramp, but remember that one of the challenges and it relates a little bit to the question that came up in the -- by Clark, was that, you know, our power to convert of course also has to be in sequence and timing with our customer base because some of them have product qualification ties that are lengthy and as a result, we always have to go through that -- that maneuver and make sure we are matching up the parts that we do have qualified from the facilities that we have that are specifically qualify from some of the facilities that we have that they specifically qualify together, so it takes a little bit of a transition.

Having said that, we are ramping the 300 millimeter facility as we qualify between now and we've already mentioned the first part of '05.

Or if you want to talk about wafer starts either the last part of '04 or the first part of '05 up to this 10 to 12,000, 300 millimeter wafers per month.

Now, depending on the market strength of course, we can dial it and that is quite a ways out there.

So we can dial that number higher if we feel it is appropriate and will continue to try to evaluate that.

But in summary, the 300 millimeter looks pretty good.

We expect it to qualify here very shortly.

As you mentioned, it is on the 512 initially.

And then we will just be basically being in a wafer rent between now and the first part of '05.

Steve, I heard you say 200 millimeter qualification.

Did I hear that correctly or is it 300 millimeter qualification?

No, I'm sorry if I said 200.

I meant 300 millimeter.

Okay.

And then talk to us about what you know of in terms of other facilities around the world from your competition.

That are in the process of ramping up similar to Manassas which during the last downturn had been turned off.

That had been turned off?

I'm not sure you what mean by that question, Bill.

I'm trying to get -- get my arms around what you may be seeing out there in terms of new facilities that are providing or will be providing wafers coming online and a really defining new as either Greenfield, like someone else's Leehigh, or in the case where a facility that was moth-balanced temporarily and is now turning back on.

Okay.

Well just to clarify, first of all for Micron, we have the Virginia facilitate which is in the ramp as I just mentioned.

We also have the Leehigh facility.

Which would be I think a facility that you referenced that, you know, we had built the facility and now we're just waiting to equip it.

On the facilities that are like that, I'm not aware of them.

I do -- there are obviously a bunch of them that that are in various stages, as they've run it, maybe they're only do 5,000 per month or 10,000 per month or some limited capacity as opposed to the full capacity.

So I don't think there is a lot of them sitting out there that is there is nothing going on out there for 300 millimeter.

There are probably a few companies that already has a facility in addition to the one that is already ramping that is ready when we decide that we want to start installing equipment into it.

So, you know, from that perspective, that is the best data point I can give you.

I'm not -- you know, most of the others are in some other various stage of ramp and you can get that from the media.

Right.

Thank you.

Appreciate it, and merry Christmas to all of you.

You, too.

Thank you.

Our next question is coming from Manish Goyle of Newberger Bermen.

Hi, most of my questions are answered.

Could you just talk about your operating expenses for next quarter?

Sure.

If are you asking for R&D, and SG&A guidance, Bill mentioned that he expects R&D to be right around 170 million number and SG&A in the 80, 85 range.

Great.

Just one more thing.

If you are expecting about 5-10% sequential growth in demand and your production will be flat, could you just walk me through the process there, why would you change the mix of the business there?

Or not have as much DDR wafers?

You're asking a couple of different things.

First of all keep in mind when we're talking about our bit growth being flat, we're comparing a 14-week quarter to a 13-week quarter.

The 13-week quarter now will line up to more like a calendar quarter.

So don't get those two confused.

In terms of mix allocation, the team here always goes through wafer allocations very routinely, and tries to match up the product that we have coming to where the market is headed.

And so what you see changes in terms of our mix is relative to their input from customers as to how we should respond to that.

If you are just -- for the extra week you have, you will have roughly speaking 7% sequential growth, is that -- the right way to think about it. 7-10% maybe?

Right, we had an extra 7% in the quarter we just announced.

That was our 14-week quarter.

Right.

Okay.

Great.

Thank you.

You bet.

Thank you.

Our next question is coming from Quin Bolten of Oppenheimer and company.

Hi, two questions.

One, you guys have talked now for a couple of quarters about the low inventory potentially affecting customer service levels.

Just wonder, you know, at one point do you think you have to start to grow bit production faster than bit shipment to put a little more finished good inventory in place?

And then the second question, I don't know if you can answer it, is with pricing declining for the last say four to six week, you know, how low does price having to go before we need to start looking at factoring lower cost or market inventory charges starting to hit cost of goods?

What is that level that we need to start to get concerned at?

Let me try to take that last one first.

And I will have Mike answer the inventory question.

Normally, the -- whether -- how low it has to go with respect to some type of ARV charge which is I think what are you referencing is constantly moving target because we're dropping our costs every quarter.

So it is really just based on the timing and exactly what that ASP is based on our cost because our cost is a moving target every quarter so I don't think we can even speculate as to what that might be because it is so dependent on the timing.

Mike?

Yeah, on the inventory, on the inventory level question, I -- you know, I've said before, I think we need to maintain about two weeks worth of finished good inventory, give or take a couple of days in order to provide adequate service levels to our customers.

We took it down well below that this past quarter and you know, it is not a unilateral decision on our part, the customers need to be -- need to be pulling the material and need to be buying the material.

At obviously a very strong rate.

Again, I will say we're probably going to need -- need to at some point, and maybe this quarter, bring our inventory levels back up to that two-week level in order to maintain an adequate service level for the customers.

Okay.

Thank you.

Thank you.

Our next question is a follow-up question from Joseph Osha of Merrill Lynch.

Hi, guys.

Trying to be pedantic here but I'm still trying to untangle the previous comments.

You're 5-10% sequential growth in demand refers to your upcoming quarter against your previous quarter, right.

Joe, our quarter is offset somewhat from the calendar and our customers typically report demand to us on a calendar quarter basis and the 5-10% that I'm quoting is -- it is the PC customers that we have, and it is referring to their calendar Q1 versus calendar Q4 demand.

And we don't have any 14-week against 13-week affect on this comp.

There is an apples-to-apples comparison.

That's why it disconnects.

Okay.

The other question I had, especially if you look at the desk top end of the business, that did appear, if you watch some of the, you know, perhaps not that useful, you know, time when these mother board number, to decelerate in November, can you comment on whether you saw the same thing and if so, what you think it means?

What we're starting to -- we didn't see it in November.

We started to see it in the early part of -- early part of December and quite frankly up until now, I would say the fevered pitch of demand today isn't nearly what it was in November and I would have attributed that primarily it is typical seasonal patterns in -- when particularly the indirect player notice marketplace, they've already filled up the channel to the extent that they are going to for holiday -- holiday sales and there's no long area real push to bring in materials such to repopulate.

Based on your --

I wouldn't --

I'm sorry, go ahead.

I wouldn't suggest that we're seeing anything materially different this year than we have in past years.

Based on your experience, what do you think levels of inventory of your product and distribution are right now?

Very little.

Because we haven't -- you know, the vast majority of our sales in the quarter that we just completed, and in the first couple of weeks of this quarter have been directly to the OEMs and unless the OEMs were speculating in other words buying our inventory and selling into the channel, there would be very little out there.

So it is all in the hands of OEMs at this point.

I would presume most of it in the hands of an end customer right know in terms of a purge commuter or router or something of that nature.

We fondly hope.

Thank you very much.

Thank you.

Our next question is coming from Hans Mosaven of SoundView Technology.

Thank you.

Guys, let's go through this one again.

The flat guidance, I'm having trouble understanding that.

I understand the week, there is an extra week in the CMOS sensors but you've done a fairly aggressive migration to 110 nanometer.

Wouldn't that offset that to some degree?

I think that's represented in what our guidance is.

You're going to compare -- if you're trying to drive bits to get a revenue number, you will have in Q1, 14 weeks of bits, produced, and in Q2 you will have 13 weeks.

So our flat would equal in essence, if you went back to a 14-week quarter, high single digit bit growth number.

Even taking into consideration the fact we're sending more wafers to image sensors.

Okay.

That's about an extra 2 percentage points more or less of capacity going to CMOS sensors; that a good way to look at that?

In it is in terms of the actual number of wafer bus that is a different equivalent number which is probably best taken offline to try to understand.

The way we've tried to shape it up before is we expect our production bit growth based on all the ramps of the product mix we see today to be in the 40-50% range in memory.

If we were not moving more wafers to other products, like image sensors, that could be as high as 55-60%.

I see.

Okay.

Thanks a lot.

Sure.

Thank you.

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

Thanks.

Nice Christmas present.

Mike, can you repeat your comments about yielding on the DDRs?

Yielding on the DDR, are you talking about the 400 megahertz?

Yeah.

Sure.

I think I stated that the vast majority of our output on .13 meets the 400 megahertz speck.

And actually, we're yielding higher than the market can digest currently to 40 megahertz and as we transition to the .116 F squared device, that is only going to improve.

Okay.

Also, when you're talking about the 6 S squared can you just give us a brief run down on why that is so much better?

Well, essentially, 6 S squared is nothing more than feature size.

And a given piece of silicon.

So what we're able to do is to got the same capability in a smaller piece of silicon by about 20%.

The standard today for the industry is what we call an 8 S squared device so it is 8 feature sizes and we're able to do it in what we call six feature sizes so the relevant way to think of it is we can get more into a piece of silicon, we can get the same amount into a piece of silicon that is 20% smaller.

So we get more die per wafer.

And also, your clarification on -- in terms of bit growth, that is -- some of us have usually been sort of using bit growth as a proxy for, you know, potential cost reduction.

Is that generally not inaccurate way of looking at it?

And is that something we should digest on a normalized basis going into this 13-week quarter?

Well, set aside the 13 from the 14-week quarter for just a second and make a general comment.

As we migrate more silicon to the nonDRAM products, in particular, when you think about something like a CMOS image or of course bit growth isn't a relative factor at all.

And as we -- as we have more product going that direction, our bit growth may change.

It's not a good assumption that our cost reduction then will occur because we still are spreading the, if you will, the overhead of the company and the R&D expense of the company over a greater number of product, if you will.

It is just not calculable on a DRAM bit basis.

So we need to be more careful as we move forward.

And frankly, even internally, we're having discussions about how can we better present the data so that all of you can understand it better.

Maybe percentage of sales might help as an idea.

Well, to the degree that we are concerned about giving away competitive information, I think that is the only thing that we struggle with.

Obviously, you know, as a company, we've been pretty open and we kind of say it like it is.

And in the backdrop of all of that, S-as we know, we also have all our competitors listening to everything we say and that adds some concern.

Thank you.

Good luck.

Thank you.

Our next question is coming from Matt Gable of Kalipso.

Could you tell me what was your bit production sequential growth in the November quarter?

I missed that.

It was about 10%.

10%?

It is supposed to be flat in the February quarter sequentially?

Correct.

And then what do you think the sequential cost reduction will be in the current quarter?

Again, I think for competitive reasons we've stated several times we're not going to give specific guidance on that.

And somewhat dependent on product mix as well.

So pretty difficult to guide to.

Okay.

Thank you.

Thank you.

Our next question is coming from Clark Westland of Smith Barney.

Hi, can you hear me?

Sure can.

Go ahead, Clark.

Sorry about that.

Just a minor detail on the share count, can you give us an idea of what the fully-diluted share count would be in a possible, you know, GAAP profitable scenario?

The -- depending upon the level of profitability, and the stock price, which affects the calculation of the options, you will run from something between 690 million-ish shares to up around 735 million shares.

Okay.

Thanks.

Thank you very much and with that we would like to thank everyone for participating on the call today.

If you will bear with me I need to repeat the Safe Harbor protection language.

During the course thereof call we may have made forward-looking statements regarding the company and the industry.

These particular forward-looking statements and all other statements that may 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-K 10-K and 10-K.

Thank you for joining our call today and thank you all for your participation.

That does conclude tonight's teleconference.

You may disconnect your lines at this time.

Have a great evening.