美光科技 (MU) 2005 Q1 法說會逐字稿

Good afternoon and welcome to today's Micron Technology's first quarter 2005 financial release conference call.

At this time, all lines have been placed on a listen-only mode and the floor will be open for 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 like to welcome all of you to Micron Technology's first quarter 2005 financial release conference call.

On the call today are Steve Appleton, Chairman, CEO and President, Mr. Bill Stover, Vice President of Finance and Chief Financial Officer, and of course, Mike Sadler Vice President of Worldwide Sales.

This conference call, including audio and slides, is available on Micron's homepage on the internet at Micron.com.

If you have not had an opportunity to review the first-quarter 2005 financial press release, it's also available on our website 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 may dial into that by pressing 973-341-3080 with a confirmation code of 5510813.

This replay will run through Thursday, December 30th, 2004 at 5:30 p.m.

Mountain Standard Time.

A Webcast replay is also available on the Company's website, and will be there and remain there until December 22nd, 2005.

We encourage you to monitor our website 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 website.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guaranty 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.

Let's repeat summary financial results for the first quarter which ended December 2nd for those listeners who may not yet have access to our press release.

For the first quarter, net sales totalled $1.26 billion, and the Company recorded operating income of 175 million and net income of 155 million or 23 cents per diluted share.

That compares to net sales of 1.19 billion in the immediately preceding quarter and a net income of 14 cents per share.

Net sales for the quarter increased approximately 6% over the immediately precede ing quarter, primarily as a result of higher megabits of memory production.

Gross margin for the quarter came in at 34%, holding pretty constant over the past three quarters.

Gross margin for the quarter was slightly negatively impacted by the production out of our 300mm fab which hasn't yet reached sufficient volumes to be more efficient than our mature 200mm operations.

Selling general and administrative expenses for the first quarter came in slightly higher than the average for the past year.

The slight increase is attributable to development costs associated with several system initiatives and legal costs.

Our current outlook suggests SG&A will run between 90 and $95 million per quarter in fiscal year '05.

R&D expense for first quarter was 148 million, the lowest level in over two years.

This level still reflects significant investments on our part into next-generation systems memory and Mobile Memories, inclusive of NAND, flash and specialty DRAMs, as well as in CMOS image sensors.

However in this past quarter, the expenses of wafer processing at the 300 millimeter line in Manassas, Virginia, postqualification of our latest generation 256 meg DRAM, that's the [hyper shrank 6F squared](ph) DDR device utilizing copper interconnect technology, were charged into inventory and cost of goods sold.

Future R&D expenses will vary significantly with the number of wafers dedicated to new device development and qualification.

Our current estimate of R&D expense is that it should run between 160 and $170 million per quarter.

The dollar value of inventories increased $127 million quarter over quarter.

Over three quarters of that growth is in work in process and is reflective of both the ramp of our 300 millimeter fab in Virginia and efficiencies being achieved in a number of other fabs which have allowed higher volumes of wafer processing.

The increase in finished goods inventories was limited to DDR2 devices in preparation for the market shift to this architecture, and to synchronous DRAM, which we built ahead to support a consistent level of demand by network, communications and PC customers.

Cash flow provided by operations for fiscal year '05 is starting out reasonably strong at just under 300 million -- $300 million for the first quarter.

Cash and short-term investment balances remain at approximately $1.1 billion, and capital spending for fiscal '05 is forecast to approximately 1.5 billion, of which almost a third occurred in the first quarter.

I'll turn the commentary over to Mike.

Thanks a lot, Bill.

In the November quarter, as expected, demand for our semiconductor memory and imaging components was strong.

As a result of productivity improvements in fiscal Q1 we sold about 5% more memory megabits into the marketplace versus fiscal Q4.

Our customers welcome the supply increase as evidenced by the stable quarter to quarter average selling price realization across the broader product portfolio.

As we wrapped up the quarter our finished goods inventory levels were quite lean and today we continue to see demand strength sufficient to absorb our production output.

The competing markets are quite healthy with respect to driving solid demand for semiconductor memory.

The compounding effect of expanded memory content per system, coupled with double digit PC unit growth, is creating what we believe to be a sustainable 45 to 55 percentage point annualized increase in DRAM demand from the competing platforms.

In this forum, and at investor conferences, we have been providing regular updates on computing memory interface transition from DDR to DDR2, and Micron's role in this transition.

This move is in full swing now as Micron crossed the $100 million quarterly DDR2 revenue threshold in fiscal Q1.

Our DDR2 shipments will increase in the current period as the notebook computer segment becomes enabled early in the coming calendar year.

I'll take advantage of this opportunity to remind you that Micron has established a sound base of platform qualifications with enablers such as Intel as well as our OEM customer base.

From technology and product breadth standpoints we could not be more comfortable with our position to support this transition.

Our customers do have some anxiety about the DRAM industry's ability both to ramp DDR2 output and to manage the proper mix of DDR and DDR 2 production.

These will be interesting variables to watch and key determinants of the effective supply and demand balance as we move through the early part of calendar 2005.

Beyond the world of traditional PCs, the market for hand-held electronic devices such as mobile phones, digital still cameras, and personal audio players hold substantial interest for Micron.

Unit sales figures for products in these categories are impressive, and what is really intriguing for us is the growth in content of semiconductor memory and CMOS imaging components.

The camera penetration rate in the mobile phone market continues to expand with several industry analysts predicting greater than 50% camera penetration in calendar year 2005, this will amount to over 300 million camera phones being manufactured and consumed next year with the majority being supported by VGA and 1 megapixel CMOS imagers.

Micron is currently shipping multiple millions of units per quarter of both VGA and 1 megapixel sensors into the mobile phone market.

We are growing our business with these sensors as well as securing design wins with our 2 megapixel and 3 megapixel sensors such that we expect to continue camera phone image sensor shipment growth profile for the Company in the foreseeable future.

Semiconductor memory proliferation and content growth in hand-held products is a major theme driving our product portfolio expansion in the specialty DRAM and flash arenas.

In the course of just a few quarters, we have built up a solid base of DRAM business in mobile phone platforms with our family of pseudostatic or cellular ram devices and low-power synchronous DRAM products.

We are now shipping mobile phone friendly DRAM products in densities ranging from 16 megabits to 256 megabits and we are cost reducing these devices through 6F squared architecture enhancements and process technology migrations.

As we have discussed in past earnings calls and public forums, Micron is entering the NAND flash data storage market.

We have commenced volume shipments of the initial NAND component, a 2 gigabyte device produced from 90 nanometer technology.

Our NAND road map lists multiple new products in both lower and higher densities being commercialized in subsequent periods.

To assure optimum cost efficiency we produced NAND devices using the most advanced process technologies, with 70 nanometer right on the heels of the initial 90 nanometer product introduction.

The NAND family provides Micron with immediate access to a high growth market, is a logical means to leverage our R&D and capital spend and is a complement to the existing DRAM, NOR, NOR Flash and image sensor product offerings.

We have (indiscernible) on the past couple years and take pride in the establishment of a broad product portfolio in a semi-conductor memory and image sensor arenas.

We firmly believe that this strategy best positions the Company to excel in both an absolute and relative basis based on expected growth prospects in the various end markets for electronic products.

Thanks very much for your continued support and interest in the Company I'll turn it back over to Kip.

Thank you Mike.

What we'd like to do now is take questions from callers.

Just as a reminder, if you are using a speakerphone, please pick up the hand set when asking questions so we can hear you clearly.

And with that we'd like to open it up for questions.

Thank you.

The floor is now open for questions. [Operator Instructions] Our first question comes from Michael Masdea.

Thanks a lot, congratulations on the quarter guys.

The first question is making sure I understand all the moving parts.

It sounds like ASPs overall fairly flattish so you grew your bits about 5, 6%.

That's lower than what you were originally planning, was there a difference there or a mix or something else that we are -- I'm not getting?

Not much different than we had originally thought, Michael.

Production came in right around 10%, so low double-digit range as you did see we built a little bit of finished goods inventory as both Bill and Mike mentioned, both relative to SDRAM, a little bit of DDR2 getting ready for that launch.

If you look at the inventory, I would say it was somewhat inflated by the moving of the R & D over there.

Is that -- how much did megabits actually grown inventory, do you have a feel for that compared to how much dollars grew?

Well, we're still looking at -- in terms of finished goods inventory we're still looking at right around one of the lowest levels we've been in several years so around two weeks or so.

Okay.

And then, inventory as we go in the first quarter, do you expect to try to continue to build there a little bit?

Well, that's the one thing we're never quite predict.

I guess Mike can probably answer a few questions on how customers are seeing demand shape up and then with the bit production guidance that you can come to your own conclusion so Mike.

Yeah, Mike, this is Mike speaking.

Just to address the finished goods inventory build in the quarter we just were reporting on now, the primary components were DDR2, and that was just ourselves getting a little bit ahead of the market and getting ready for this transition that I referenced in the earlier comments that should be pretty understandable.

And the second is in the synchronous DM arena which has been a real strong product line for us both from a volume shipment standpoint as well as a margin standpoint.

It continues to be -- we did see some competitive pressure, some supply increases from the competition in the quarter we just reported, rather than really keep our foot on the gas pedal and continue to try to move everything we backed off a little bit, held prices up and were in a great position going forward.

So the two inventory components -- (indiscernible) components were SDRAM and DDR2 and I think pretty understandable why that occurred.

With respect to going forward, or into the current quarter, obviously, we're heading into what -- what is typically a seasonally slow period in terms of personal computer consumption.

We aggregate our customers' demand in the PC area, and from a megabit standpoint we expect demand to grow in the first calendar quarter by somewhere in the range of 0 to 5%, so flattish to slightly up, some reduced PC unit consumption being offset by increased memory content persistent consumption.

We will be -- our production output will be up greater than that.

So, for us to -- to move all that production up in the marketplace we are going to be in a market-share taking mode, and you can draw what conclusions you want from that.

Just the last piece for the model to understand it.

ASPs are generally flat from here, what does that -- overall, then what does that do to your blended ASP for the next quarter?

Follow?

I think you're asking us to predict ASPs, and as you know that's the one thing we can't help you with.

Not to predict but if they're flat from here, what does that look like when you compare to this quarter?

You follow?

So --

Sure.

Our average 256 megabit equivalent was in the high 5 range, Michael.

So we'll let you -- and of course we're helped quite a bit by the specialty DRAM diversification efforts that we've had in there, too.

So, I wouldn't look just at DDR and when you're try to go do a comparison, but factor in, also, as Mike mentioned, some of the pseudo-SRAM and some of the other specialty products.

Thanks a lot.

Thanks, Mike.

Thank you.

Our next question is coming from Glen Yeung.

Thanks, hi.

It's Glen Yeung from Smith Barney.

I wanted to just ask one question on this 300 millimeter 6F squared DDR qualification.

If we were talking about -- you know, all things being equal prices looking the same -- or I'm sorry, parts looking the same can you talk about the gross margin difference would be between, you know, standards, 200 millimeter based DDR and 300 millimeter based 6F squared DDR device?

Can't give you the specifics there.

We indicated in our earlier comments that we are not yet at the kind of volumes coming through Manassas in which you'd get an equivalency of the 300 millimeter relative to the mature 200 millimeter.

That transition does occur relatively quickly, as we previously indicated to you, we expect that to be in our second quarter.

I'm sorry, you expect to achieve -- quite -- expect efficiency in 300 millimeter, ie: you're at a certain volume at 300 millimeter where you're achieving efficiency?

Yeah, keep in mind that the -- there's no difference between the 200 millimeter and 300 millimeter 6F squared DDR.

So what you're really -- In terms of the 6F squared device, so you're talking about a difference between 200 and 300 millimeter and we expect crossover where the 300 millimeter will be more cost effective per bit to occur sometime in the summer of '05.

And just thinking about a fab efficiency, you're talking about like your starting over 40,000 wafer starts, fab, I believe, in Manassas, does that mean you need to be something like 20,000 wafers by next quarter?

No, not at all.

We -- we're currently, well, in fact we're on track where we said we would be.

In terms of 200 millimeter equivalents, we are currently right around 2500, we said that we'd be about 3,000 in the early part of '05, we're on schedule for that.

We're driving towards 5,000 equivalency sometime as we move towards the middle of the year.

And then we we've not said yet whether we're committed to go beyond that we're going to see what the market does.

But we expect on that current schedule to get a bit crossover in terms of cost efficiency (inaudible) millimeter sometime in the middle of the year.

Okay and then just two really quick questions.

One is, , when -- can you talk about exactly what memory per system was in the quarter and -- I think you said it was going up next quarter, what the expectation is going to be?

And then the second quick question is, what were trends in CMOS image sensor price ing?

Mike, I'll address both those questions.

On the content per system.

Today on basically all the -- the mid-range PC platforms whether it be notebook or desk tops, so I think that we're at about somewhere in the range of 450 megabytes per system, and what we're expecting, as we move through the next couple of quarters, is growth rates in the range of 2.5 to 3% per month.

The primary drivers being the -- the continued proliferation of dual channel memory subsystems as well as the increasing effect on memory content per system that DDR2 will have.

So, again to repeat that summarizing about 450 megabytes per platform today increasing about 3% per month for the next couple of quarters.

In terms of CMOS image sensor pricing, , the -- the two markets -- or the two products that are carrying the most volume would be the VGA sensors in mobile phones and one megapixel sensors in mobile phones.

Pricing, generally -- there is some price pressure particularly on the VGA in the effort to drive the -- the total camera module cost solution down to a point where we can achieve very high penetration rates but generally speaking at the central level it's been relatively flat.

Okay.

Next question.

Thank you.

Our next question is coming from Ted Parmigiani.

Thank you.

Good afternoon.

Just to follow up quickly to the image sensor question.

Could you talk about what the growth profile may look like over the next several quarters, you've talked a lot about design wins?

And then I have a follow up.

Sure.

The -- in terms of the growth profile over the next couple quarters again, we're getting into the predicting side of the business here and I want to be a little bit careful.

But, in terms of quantifying things we're probably looking at 10 to 15% growth quarter over quarter in terms of units, each of the next two quarters, I can't really tell you what what's going to happen to prices because it is kind of a dynamic issue.

But that's -- that's probably what our profile's going to look like over the next couple quarters in terms of unit growth rate.

And a continued move from VGA sensors to 1 megapixel and to 2 megapixel as well so richer with respect to megapixel content also.

And then you talked about 300 millimeter ramp and some of the the early products there, but could you give us an idea on a kind of corporate basis what's happening with costs and any efficiencies you're getting there, how that might aid your -- your overall gross margin over the next -- maybe for the year or even just qualitatively or percentage-wise, something like that?

Sure.

Depending on how we allocate wafers, Ted, you can probably model in at around 10% cost per bit per quarter reduction force over the next few quarters.

Great.

Thanks a lot.

You bet.

Thank you.

The next question's coming from Adam Parker.

Yeah, hi.

A couple of quarters -- a couple questions.

Seems like you got -- you know, less wafers out during calendar 2004 than you previously expected at the beginning of the year.

Can you -- can you explain at all what you've done to improve your productivity there?

Yes, you bet.

In fact, thanks for pointing that out, actually a pretty good quarter for us.

We ended up producing slightly over 50,000 wafer outs a week which was up pretty significantly from last quarter.

So the fabs are executing pretty well.

In past calls we've talked about somewhat the diversification effort, learning how to run different types of products and a multitude of products slowing us down a little bit on the wafer output but in the last couple quarters, since about that Q2, Q3 time frame, we've had a nice steady increase in the wafer outs.

That's all just from learning or was there some operational things that you did -- you put into effect to improve things?

I'll let Steve talk to the actual things we've put in place but then the other thing to keep in mind as well is the 300 millimeter starting to help us out.

Instead of being wafers that we expense through the R & D line you're now starting to see those show up as 200 meter wafer equivalents as well.

And then, Steve, maybe would like to address some of the operational issues.

Yeah, operationally, first of all, it helped us a great deal in the 300 millimeter as well, keep in mind that you're essentially getting no output and now that's really come up pretty nicely.

And will continue to grow.

That's going to be our net contributor.

The other is that there's really two other components to it, Adam, and one is that, we had a couple of fabs, had a difficult time with the 110 nanometer that affected us in '04 and that's behind us, they're doing well now, Kip already mentioned, that that output has now come back up from where it was based on the from the earlier difficulties were.

And the second thing as you can imagine, we -- we were on a fairly good learning curve about operations in terms of running these different devices so, we -- we also think we've been over the hump on that.

And as a result net effect is that the wafer output is coming up and we expect it to continue to come up based on a combination of factors as we move through '05.

Maybe just a separate question , Steve.

You know, when you look out over a kind of calendar '05 or in '60, maybe the next couple years, which year do you feel better about, you know, from the DRAM cycle standpoint, is it '05, or is it '06, or, you know, just in terms of visibility, has there been any changes in capacity plans from your competitors in the last few months that in your mind -- I mean we've seen what some of them have said but in your mind has there been any capacity changes that you think are kind of incremental in terms of, you know, the supply demand imbalance?

We're eagerly awaiting your report so we can come to a conclusion on that.

But my --

My report?

I just mean people, you know, look at this data a lot putting out there.

I have no idea I'm asking you.

Ha ha.

What about the next couple --

I understand the question.

I'll answer it.

The -- clearly I think, as we know, there -- there always lots of activity surrounding expansion when the market looks pretty healthy and, as the market has been relatively flat of course some extension going on, you saw -- I assume that you saw the Infineon announcement that came out either today or yesterday from Mr. Ziebart that they're not to have any potential activity in '05 for capacity, and particularly pointed to Richmond -- I mean Richmond, and what they earlier -- earlier announced there.

And then you're seeing I think that there's been a fair amount of difficulty on the transition either from 130 to 110 or expectation from 110 nanometers.

So things aren't happening as fast I think as what people earlier announced or they were planning on, and as a result I think the industry will be a beneficiary of that.

When you talk about do I feel better about '06 compared to '05, I don't really have enough visibility in -- as we move out beyond about six months on what the end demand markets are going to be because that's obviously a very significant factor from what drives bit consumption.

And if the bits consumption ends up being 55% that's a lot different from 45% and as a result it'll affect us greatly.

So, I think in general, things aren't happening as fast as people thought they were.

They're having more difficulty transitioning processes, and by the way I will also point out that the DDR2 is not as efficient as DDR and so that slows -- that will slow down bit growth and then on top of that, the stronger the synchronous DRAM market stays over the next year also means that it's a lower density bit device that will all producing -- that also doesn't have the bit growth profile that -- that you would get in an advanced DRAM.

So, all those factors are going to have an impact.

So from the -- in the last three months, I mean it -- in your mind, some of the supply's been rationalized or pushed out a little bit, maybe that makes -- from whatever level you had before, maybe a little bit less supply burden in '05 than what you would have thought a couple months ago?

Yeah.

Or is that --

Yeah, I think that's accurate.

I think that's clearly going to happen.

Sorry, one last quick just housekeeping item.

What happened in this quarter with the reserves?

Was there any, -- how much sales did you get from already reserved parts and did you take any inventory reserves during the quarter?

No.

The -- Adam, the beginning of the fiscal year, there was about $4.5 million remaining in inventory of previously written down inventory.

I believe is where your question is coming from.

So, it's almost deminimus at the beginning of the quarter.

Right.

Virtually no effect.

And there's no current (inaudible) in the market -- current market conditions.

Okay.

Thanks a lot for your time.

Thank you.

The next question is coming from Chris Stanley.

Thanks, guys, , pretty good quarter.

From an end demand perspective, would you characterize sort of the Christmas PC build as normal seasonal or a little bit better than normal?

I -- best I can tell, normal seasonally.

I think within the -- within the PC market there are a couple of pretty significant sectors, notebooks, servers, desk tops, notebooks and servers in particular are quite strong, and those -- those two platforms are both pushing memory content more so than desktops, so I'd say typically a typical seasonal demand period we're quite pleased with the components of that with respect to notebooks and servers really being strong going out of the end of the year, particularly with respect to them driving both in increased memory content and the newer memory technology, DDR2.

Okay great and then a quick question on the inventory.

It crept up a little bit mostly on (indiscernible), you guys have any set goals or ranges that -- that you're -- you feel comfortable with going forward?

We're quite comfortable with the movement that has occurred because it's in direct correlation to the ramp at Manassas and the efficiencies that we're getting out of a couple other fabs.

So, it will continue to increase in dollar amount as we do have the progress in Manassas.

How about in days?

Days.

No.

Our management of that, Whip(ph), is really in -- in cycle time and we're -- we're pleased with cycle time.

Okay, great.

Last question.

If you take a look at the entire non-DRAM business.

What was the rough per cent of revenues during the quarter and then how do you expect that to ramp going forward?

Yeah.

It -- the -- when you say non-D remember we got some specialty stuff that fits in the category of -- I think the way to characterize it is kind of a non-core DRAM arena for us and that really has been -- and -- was between 50 and -- 15 and 20% for the quarter.

We -- we have a couple of effects going on that are -- that may counterbalance each other.

Obviously, the product that's coming out of Virginia is in the core DRAM arena, but we have more wafers that are being converted at the other facilities to non-core DRAM, if you will.

So, I actually don't recall the specifics on which one outweighs the other, but we expect the -- the -- in absolute terms, we expect the non-core to continue to grow, but keep in mind we also are having the core growing as Virginia comes up, too.

Exactly.

And out of the sensors, flash, and pseudo-Sram, which do you expect to grow the fastest over the next 12 months?

Well, on a percentage out of which products again, say that?

The Sensors, the Flash, and the SRAM.

Boy, that's tough.

Because -- you know, we just entered the NAND market the two-gig device is in the market and shipping it to customers and that has a pretty high ramp profile.

The pseudostatic ram has been enormously successful for us and as you know the penetration rate and the wireless market continue to grow in that.

And by the way, we can't discount the growth rate in the imaging business either because the CMOS imagers in terms of camera phone penetration you're talking about going from 150 million phones to 250, 300 million phones, that's the forecast anyway, so pretty high growth rate as well.

Okay.

So, last question, I guess a year from now you expect the sensors to remain the largest product line out of the non-core DRAM?

Boy.

You know what, it's going to be a close call because when I look at the -- what we're looking at -- where the -- where all three of those are going, they've got pretty steep ramp rapes.

I think what will be a determining factor at end of the day is what happened to the selling prices of those products.

Got it.

And we just can't predict that, you know, especially -- you know, the second half of the year.

Okay.

Thanks.

Thank you.

Our next question is coming from John Lau.

Great.

Thank you.

If we can circle back to your assumptions for the bit growth.

You had mentioned that the demand would be 0 to 5% and that the bit growth would be above that, are you targeting something in the double-digit range or something closer to the demand range?

Correct, low double digits initially on the production sequential bit growth.

Okay and then as a follow-up.

In terms of the CMOS sensors, you had give us a character a little bit of metric before as the percentage of wafer starts you had in the past mentioned 15% what is is that now?

And out of the non-DRAM, how significant was the CMOS sensors?

Thank you.

Well, the -- as I already mentioned, that the -- the non-DRAM in total was 15 to 20%.

The image sensors themselves I don't think we've actually broken out historically what percentage they've been and we for competitive reasons don't really want to do that.

Let me just make this statement.

The revenue from the image sensors hit a new high for us for the quarter.

So it's -- it's clearly continuing to grow.

Okay.

And as a percentage of the wafer starts?

Never given that number and I don't want to for competitive reasons.

Okay.

Great.

Thank you.

Thank you.

Our next question is coming from Joe Osha.

Hello, happy holidays.

Happy holidays.

Hi.

Just for starters, a high-level question.

If I look at the -- you know, trajectory of pricing here for the last three quarters, you know, it's been pretty benign in the volume DRAM business.

The gross margin has really been in quite a narrow range here.

I know that obviously the 300 millimeter end of things is beginning to -- to come up, but, you know, at what point do you think we might begin to return to sort of the -- what I -- I at least have thought of as the historic trajectory in terms of costs improvement for this company on DRAM side which has been sort of 6, 7% sequentially each quarter.

Joe, this is Kip.

A couple things, as you know, the 300 millimeter continued to -- or this quarter for the first time rolled from R & D to cost of goods sold, so that's one thing if you backed out and tried to compare quarter to quarter you would have seen some of the productivity enhancements that we got.

Number two, we did shift significant product to what ends up being higher cost per bit products, but some of the highest gross margin products that we have as well.

So if you're just -- if you are trying to separate out just a cost reduction program, it gets lost a little bit when you look at how we've been able to keep ASPs and and kept moving production to higher gross margin products.

So we're -- it's a kind of a little bit longer discussion maybe than we need to have on this particular call, but that gives you some of the pieces.

Then going forward, as I mentioned, we're probably now in a phase where as the 300 millimeter cost per bit starts to transition to a favorable environment for us versus 200 millimeter towards the end of fiscal Q2, you should start to see, generally speaking, a 10% sequential quarterly reduction on costs per bit.

Okay.

Thanks.

Next question would be looking at your FY05 here.

Would it be -- be fair to think now that you guys are going be able to sort of get back to -- growing in line with the market in terms of -- of the volume shipments after -- you know, growing -- (inaudible).

If you're asking for a bit production growth, we're currently estimating somewhere between 40 and 50%, and of course that can change depending on how we allocate wafers to, say, image sensors or some of the products we don't include in bit growth.

For the industry, if you look out across the broad spectrum of those people who try and predict that they've got anywhere from low 40s to mid-50s for production bit growth.

So, we'll be in there somewhere.

Clearly a significant -- significant pickup on the '04 numbers, obviously your FY04 numbers.

Yeah, Joe, we -- well, we said this a while back.

We expected to have some negative impact in our market shares, we went through the second half of '04.

Yeah you guys were quite clear on that, I'm certainly --

And we actually think we're gaining some of that back.

I think we'll probably gain market share in the quarter that we're in right now.

And then of course it just depends on how it balances out at the end of the year, but we should stay in line with the market.

Last question and then I'll go away.

If I look at the inventory, obviously, you know, a lot of whip -- a lot of DDR2, but because of the -- you know, some of the stickiness surrounding the timing of that DDR2 ramp, is there -- is there a risk perhaps in some of that DDR2 that, you end up having to maybe reserve a bit of that given that the -- the price trajectory that that market is on?

IE down.

From my perspective, there is virtually no risk in that whatsoever.

As a matter of fact, if I look out even in current quarter, Joe, we're going to be production limited I believe on DDR2.

So take the inventory that we went into the quarter what we're going to produce, I think the market has a much, much stronger appetite for -- for DDR2 than we have the ability to provide in the current quarter.

So there's not a -- obviously the stuff that comes off the line as your productivity improves tends to go on the balance sheet at lower costs than earlier stuff so there's always this issue of how the cost accounting works.

That's really what I'm trying to understand being as you indicated you may be tying the ramp maybe a little bit differently than what --

Yeah.

I think the question you're asking is are the market prices going to go lower than our costs?

And, boy, I -- I'm not going to stick my neck out on that one.

I think, Joe, Mike has just indicated that, if anything, our viewpoint is with the inventory that we're carrying on DDR2 and with the growth that we've indicated in DDR2 production for the coming quarter, we still don't see that meeting demand.

We're not --

Okay.

All right.

Fair enough.

Thank you very much.

Thanks, Joe.

Thank you.

Our next question is coming from Andrew Root.

Thanks very much.

A couple questions just following up on the profitability side.

The incremental improvement in wafer starts this quarter, does that really accrue to your incremental profitability next quarter as opposed to this quarter?

Yeah.

I would say most of -- will be next quarter.

So, basically the incremental gross margin, which was slowed down a little bit, part of it was the 300 millimeter (indiscernible) but another part is just the timing of 1 wafer (inaudible) when they're started?

Yeah.

Obviously, there's some benefit as we went through the quarter we were improved in production at some of the other sites.

Okay.

And then a follow-up on foreign currency, the U.S. dollars moved around a lot I know you guys have taken some charges.

If the dollar didn't move at all, what would your -- your incremental charge be next quarter for it?

I think the way for us to answer that for you, Andrew, is a -- a euro -- a single euro movement is about a million dollar effect.

And a single yen movement is about 1.6 -- $1.6 million.

So the -- the way that the charge that you're seeing in the other expense line of 19.6 million in the quarter is a function of some long-dated yen debt associated with our acquisition of the Nishiwaki facility, and some euro denominated liabilities associated with the work force there that, again, are -- are relatively long-dated.

Okay.

That makes sense.

And then the ramp that you described, Steve, earlier on 300 millimeter, how does that foot with what's required as part of the Intel equity deal last year?

We're actually ahead of schedule.

Okay.

So there's not going to be any issue if you get to 5,000 wafers per week mid-year you're bang on track.

Yeah.

And we're -- 200 mill meet equivalent but that's right.

We're -- if you -- of all of the -- at least to date and our expectation of course going forward is all of the commitments that we've made to Intel we've either already met or are ahead of schedule of meeting or pretty close to it.

So, we don't think that that's going to be any issue for us.

Okay great.

And then the final question I think you've done this the last couple quarters.

If you could rank order the profitability of your products by sort of just ranking them as opposed to giving specific numbers but, you know, what's the most profitable, what's the least profitable, etc.?

Yeah.

We can -- obviously we can whip out the old Samsung trick.

If I list them in broad categories, we, obviously, the specialty DRAM was the most profitable, the core DRAM was the second-most profitable, the Flash was the third, and the Imaging was -- was in the last category, but remember that business is still building, we've got lots of investment going on to build market share there.

Right.

That makes sense.

Great.

Thanks.

Thank you.

Our next question's coming from Mona Erabby.

Hi.

I just want to ask.

Do you think for the imaging -- I know right now you have a lot of investment in it, do you think -- how far out do you think we could see margin for -- for the imaging coming, you know, toward the core or the specialty products?

Well, that's one of skill, of course.

The margin will improve, I think, at a pretty accelerated rate as that business grows.

So, you know, what you're asking, too, is what -- what 's the -- the price movement -- what's the ASP movement on the other products?

You know, we've already said that we expect that in fact our gross margin targets internally for the imaging group are higher than the other groups, because of the inherent nature of the business.

Including the specialty ones, the specialty DRAM?

Yeah, actually in combination, that's true.

In specialty you have a few things in there as well.

So the answer is, yes, the targets are higher for this business.

So that's what we're driving towards.

Thanks.

Thanks, Mona.

Next question, please.

Thank you.

Our next question is coming from Krishna Shankar.

Yes, you said 15 to 20% is the non-DRAM which includes Flash, CMOS, image sensors, of the 80% which is DRAM, can you break that up between computing DRAM and, you know, specialty DRAM for things like networking, consumer and other applications?

Yeah.

It's roughly -- roughly two thirds computing and one third non-computing.

Okay.

And can you give us some indication of the trajectory of RAM for NAND Flash, you know, how rapidly that'll -- you know, grow over the next 6 to 12 months and the profitability metrics there versus your core DRAM business?

Well, we'll answer the first part.

That's easier for us.

Our wafer start capacity is aimed at between 3 and 5,000 200 millimeter equivalents in the summer time frame.

The profitability profile today, if you took everything into consideration, is NAND Flash would be a highly profitable product for us above the average.

I'm not going to predict what it's going to be in 6 months just again because I can't predict what the ASP's going to do.

Okay and finally you said that you're sort of blended average DRAM equivalent pricing was in the high 5s, that's very different from the -- the $4 or -- you know, slightly -- not the $4 spot market pricing, I do realize that there's a fair amount of specialty DRAM and other types of DRAM in it, but do you expect your sort of overall -- you know, can you give us your read on why the spot market has been weak in November and do you expect things to strengthen there as we get beyond the seasonal weakness in that December?

I guess one thing you need to keep in mind is we've been talking to you about the efforts we've put in place to broaden our product portfolio and what you're seeing are the fruits of that.

We will get a higher price in the spot market price period, and it's because we're leveraging the broad product portfolio that we have.

Now, with respect to why the spot market price has -- has weakened in the latter part of November, it's -- you know, it typically does.

Seasonally, things start to slow down in terms of build rates for the Christmas selling season right around Thanksgiving, maybe slightly before Thanksgiving and I think that's -- that's -- from my perspective that's about what happened this year and they did spot market prices did come down.

Interestingly enough, in the last week, spot prices were dear enough to come back up again, which I certainly wouldn't have predicted.

So, it's -- it's really, really difficult to predict.

Now, you also need to keep in mind that our exposure to the spot market and DRAM is quite limited.

It's probably in the range of 10 to 15% of our revenue generation of our megabit output.

So, you know, when the spot market moves up and down it really doesn't have a -- a significant impact on -- on our financial performance.

Okay.

So you -- confirm that your blended DRAM is in the high 5's you said?

Yes.

That's correct.

Okay.

And last question.

Can you comment on the rate of learning curve efficiency on DDR2 versus what you expect the trajectory for price declines and DDR2?

I think, Mike did a pretty good job of -- of trying to outline the issues going forward, in the near future we don't think we'll have enough DDR2 output to meet market demand, so we we'll let you interpret what that means in terms of pricing.

In terms of cost reductions, again we're not going to specify any particular product in the way they're going to come down in cost but in general you can model us in for about 10% sequentially quarter over quarter.

Great.

Thank you.

Thank you.

Our next question's coming from Bill Devilin(ph).

Thank you.

I had a question relative to cost reductions I guess I'm going to come back and beat a dead horse.

You had mentioned that you're looking at 10% sequential cost reductions going forward for the next few quarters. (Inaudible) really at the beginning of the hockey stick, or does -- does the cost reduction benefit to -- to the firm overall?

Is it actual -- does it actually accelerate beyond that 10% at some point in the future?

Can you help us just subjectively understand where we're at in that -- in that process?

We have three programs underway, a couple of them we've talked about, the 300 millimeter becoming an advantage for us on a cost per bit versus where it is today.

The matured effect of the plight(ph) 11 transition, which will be at -- at basically full maturity here very shortly.

The wafer output coming through plight 11 also peaks here in the next quarter, too, as well.

And we have an increasing effective of 6F squared being now over 50% of the outs as we go forward here the next quarter too.

So those three things will combine to help us on a cost per bit basis.

We won't get, Bill, too specific to say exactly where we are on a hockey stick, but, I think you can infer from what we're saying, we've had pretty good results on cost declines, especially with all the movement and product changes going on, and now we're -- we're getting into a phase where you're probably going to see several of those programs come -- come to light here.

All right.

And just as a follow-up, if we understand correctly, these are -- are -- if we look out over the next 12 months, these three programs that you just highlighted, those are the major programs for cost reductions for the next 12 months or so, and -- and therefore -- you know, there's a point that the hockey stick hits whether that's now or shortly is really a function of those programs, there's not another component lurking out there later to come into the equation, is there?

Well, the -- the -- one of the things to keep in mind is that the -- the DDR2, which we've already mentioned, will be of course a less efficient device than the DDR.

For Micron, we have DDR products and high volume on six F squared.

We are just in the early stages for DDR2.

So our DD2 cost structure so far has been based on 8F squared device.

The 6F squared device though is now just coming into being.

So we -- we should get a benefit from that.

A little bit beyond what maybe the normal company would.

Great.

That is helpful.

And then, also, make sure we understand correctly, you will get that benefit, but still nonetheless DDR2 is less efficient, and therefore on a cost per bit basis just on an absolute sense, will cost more but one would hope if relative to Mike's comments about you folks and the industry being production constrained that the margin, in fact, may in fact be better.

Yeah.

Obviously we're hoping for a premium on that device.

It will shrink over time as it becomes the mainstream device.

But no matter how you slice it, it is a -- on a comparable basis, it is a bigger die.

That's helpful.

Thank you.

Thank you.

Our next question is coming from Allan Davis.

Yeah, hi.

Just a couple questions here.

First of all, where do you see non-DRAM products as a percentage of the business a year from now?

And with the camera sensors where does your product road map -- ramp --excuse me map take you at the end of 2005 in terms of megapixels, and where do you think the sweetspot will be in terms of megapixels at the end of '05?

This is Mike I'll take the second question first on the -- on the -- on the sensor road map.

The bulk of the -- the bulk of the -- the sensors that we're shipping today are going into mobile phones.

So the vast majority of our -- of our sensor shipments are going to mobile phones.

I would estimate that the mobile phone market in -- in 2005, which will probably be about 300 million cameras would be split roughly half VGA, half megapixel with the 2 megapixel really just starting to enter the market.

In 2005, we will have VGA, 1 megapixel, 2megapixel and 3 megapixel sensors in high-volume production for the -- for the mobile phone market.

In other words, we're a ahead of the market.

Now, beyond 2005, we're going to start to see significant -- I believe significant increases in the sensor applications in automobiles.

And that is a kind of a different ball game we're not really pushing the -- the megapixel, I'm sorry, the pixel density curve there, because the application is somewhat specialized but we're going to be looking at VGA sensors and 1 megapixel sensors in 2006 and beyond automotive applications.

Of course in the stand-alone digital still camera area it's completely different.

There really is a pixel density war, if you will, there, and it's generally speaking the more megapixels the better.

That's a relatively insignificant market for us today.

The sweet spot there is probably at -- at 3, 4 megapixels and now even pushing above to 5 megapixels.

But again, what we're really primarily looking at mobile phones next year is VGA and megapixel moving towards 2 megapixels.

And Allan I'll take the first part of that.

We've said in the past, we've targeted between 20 and 25% of either wafer outs or revenues into some non-DRAM category.

What you've probably witness witnessed over the next -- or the last couple of quarters is that we're now positioned to have great flexibility with how we allocate those wafers whether we see an opportunity in specialty DRAM or pseudo-SRAM or NAND Flash or image sensors we will take advantage of that.

So basically, in your modeling consider anything more than 60 days or so we can have a pretty dramatic impact on how we shift those wafers around.

We'll continue to look at markets and under Mike's direction we'll address productive capacity in the areas we see advantages to.

Okay.

And a quick follow-up.

Sounds like automotive applications that may be -- may see announcements in '06 rather than '05.

We're making announcements now.

Got a couple products in the marketplace today and we are securing design wins.

In terms of these really amounting to meaningful revenues, you're probably correct.

In '06 we're going to see some regulatory moves by Japan, by the U.S. and by the EEU in terms of mandating usage of image sensors in a variety of automotive applications.

So we will start to see some -- I believe some significant revenues being generated in '06 and beyond.

But I'll -- tremendous amount of groundwork is being done today in terms of securing designs and working with camera makers and the automotive parts manufacturers as well.

And necessarily, how do you size that market against your other non-DRAM markets today?

The automotive piece?

Yes.

Today, it is certainly single digits in terms of driving revenues for us.

We are selling quite a bit of memory in the automotive applications today for onboard computing applications, audio applications -- you know, basically user-friendly applications.

But it's single digits.

It's -- the big growth is going to come from the cameras, from the image sensors and again that's probably not really going to occur basically until the '06 time frame.

Okay thank you.

Thank you.

Our next question is coming from Tai Nguyen.

Yes, hi.

You mentioned that -- about 15 to 20% of your bit growth you're going to the non-DRAM?

So, and you guided for the next quarter to have a low double-digit bit growth, and on top of the inventory that you carry right now on DDR2, so is that -- would be safe to assume the bulk of the bit growth for next quarter is going to go towards the non-DRAM side?

No, not necessarily.

Not at all.

You're kind of mixing different numbers there.

Okay.

We will have -- when we talked about productive bit growth we include in DRAM of all sorts and Flash, and we do not include image sensors.

When you're asking us for breaking out revenues and things on non-computing and different types and we're starting to cross some of those boundaries, so the -- I would not assume it's all -- all the bit growth is coming in -- in non-DRAM applications, no.

But the -- you said that the demand in terms of like the bit -- the bit 4 demand next quarter is flat to 5%, but as your bit grows much higher than that so I guess not all of that is going to go towards DRAM though.

Again you're talking about sales versus production.

We're giving you production growth numbers and then Mike characterized on the zero to 5% more of the computing or bit growth demand numbers.

And then he also characterized that we could be in a market-share growth phase.

Mike, would you like to take any more of that?

Yeah, if I -- I'm sorry if I confused on that let me clarify that.

When we poll our computing customers for calendar Q1 and we aggregate all that we're talking about bit consumption.

So, bit demand growth a range of 0 to 5%.

We -- our production output will be growing faster than that.

So, assuming that we place all that production output, sell all that production output, we will be in a market-share taking mode in the computing space over the course of the next -- or the current quarter.

So just one last question.

In terms of like the gross margin for your Image sensor.

When do you expect to reach to your corporate level on -- what are you expecting.

Again, Thai, we can't make any predictions on what ASPs are doing, still in a high-growth mode environment there, we're getting a lot of design wins, cost reductions are coming along very nicely but we're just not going to give you any forecast on what we think gross margins will be outside of a time horizons where we know what ASPs are.

Thank you.

Our next question is coming from David Wong.

Thank you very much.

With regard to NAND Flash, can you give us any idea of, , any of your competitors that might be entering the market in a similar time frame as you, who else do you see actually out there with newly qualified NAND Flash?

Well, I -- I -- I don't have a real good view of that.

You know, I read the same stuff probably that you read that says that Infineon's working on NAND Flash, Hynix has entered the market.

Of course the primary players today would be from a silicon standpoint, Samsung, Toshiba and Runasis.

So that's pretty much the landscape.

Thank you very much.

Okay.

Thank you.

We have our next question coming from Neil Gagnon.

Good afternoon.

My question on currency is: Are you being helped by the weakening U.S. dollar?

As we have previously done analysis on the competitive position, we believe that our situation is slightly favorable to the major other semiconductor players in the changing currency environment.

Difficult for us to get with precision but that's our -- that's our best calculation.

It's helping you?

Slightly.

Thank you.

Thanks, Neil.

Thank you.

Our next question is coming from Ben Lynch.

Yeah, hi, there.

I've got two question areas, please.

The first one is on pricing.

I'm not asking you to predict pricing, of course, but could you tell us where your -- you know, current mid-December blended ASP is versus what it was on average for fiscal Q1?

And, also, could you update us on second half of December contact prices and I have a follow-up for Bill after that.

Yeah.

Let me -- let me see if I can give you some flavor for ASPs, blended today are, I'm going to generalize here.

But they're down slightly from where they were for the average of fiscal Q1, roughly in line with where they were outgoing fiscal Q1.

In terms of contract pricing, I presume you're referring to the typical two-week -- every two week price negotiation with primary the computer, customers, prices were down slightly in the second half of December.

As we would have expected.

Right.

And then, -- thanks, Mike.

The second question I had was for Bill. , just make sure I understand that the balance sheet situation.

It looks like the cash and short-term equivalents fell nearly 200 million in the quarter Q on Q in what what's arguably, you know, a peak -- peak seasonal quarter, and in addition your short-term debt is about 260 million.

In what quarter is that short-term debt payable?

And how generally do you feel about your cash balance outlook for the rest of the year, please?

Appreciate the questions, Ben.

We did indicate that we had a very significant capital spend in the first quarter.

We had suggested that that was what would likely play out at the beginning of the quarter and that is actually what did occur, so one third of our capital spending roughly for the year occurring in the first quarter and that did have some affect on the cash and short-term investment balance.

Of that $259 million of current long-term debt, there's $190 million that's associated with -- we're going all the way back to our Texas Instruments acquisition, subordinated debt that's due September 30th, this year.

We're actually feeling very comfortable with our position.

We have, even in recent weeks, looked at additional equipment financing over the years we've carried up to about $350 million of equipment financing that's -- it's just a rolling five-year maturity that's in place based on some significant capital expenditures each year.

As we're looking at the markets right now, it actually is fairly opportunistic to top up 100 million, 150 million due to the rate situation right now.

So, we may well do that but we're quite comfortable with the capital position that we're in.

And I don't see any real challenges ahead.

Great.

And the September 30th, '05, right at 190 million?

190 million associated with that subordinated debt, correct.

Great.

Thanks very much.

Thanks, Ben.

I think we have time for one more question.

Thank you.

Our final question is coming from Mr. Doug Friedman.

Hi, guys.

A quick question on the impact of the TECH Data wafers and your cost basis there given the fact that you were flat, I would expect that you're going to have a negative impact on margins to do your pricing on TECH Data, can you give me an idea of how that's going to work going forward.

I'm going to repeat the question because we didn't hear it quite clearly tell me if we did.

The question was basically, margin contribution to our TECH joint venture and your assumption is going forward, if prices come down would that be a negative impact?

And the percentage of wafers that you're getting from that.

To the first part of that question, the gross margin on the product purchased and resold from TECH is slightly negative relative to the overall gross margin that we're reporting, as you've heard we won't predict what ASPs are going to do and what that future relationship might be.

In terms of wafers outs we're still running between 20 and 30% of our productive capacity comes from TECH.

Great.

Thank you.

Thank you.

And with that I'd like to thank everyone for participating on the call today.

If you 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 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 10Q and 10K.

Thank you for joining us.