美光科技 (MU) 2005 Q3 法說會逐字稿

Good afternoon, welcome to the Micron Technology third quarter 2005 financial release conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce our host, Mr. Kipp Bedard.

Sir, the floor is yours.

Thank you very much.

Welcome to Micron Technology's third quarter 2005 financial release conference call.

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

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

If you have not had an opportunity to review the third quarter 2005 financial press release, it is 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. daylight savings time.

You may reach that by dialing 973-341-3080 and use a confirmation code of 6146538.

This replay will run through Thursday, June 30, 2005 at 5:30 p.m. daylight savings time.

A Webcast replay will be available on the Company's Website until June 23, 2006.

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 results and events 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 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 for 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 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's repeat our summary of financial results for the third quarter, which ended June 2, for those who may not yet have access to our press release.

For the third quarter net sales totaled 1.05 billion and the Company recorded a net loss of 128 million or $0.20 per diluted share.

That compares to net sales of 1.31 billion in the immediate preceding quarter and a net income of $0.17 per share.

Note that the number of shares used in the EPS calculation in the third quarter, 648 million shares, does not include the anti-diluted shares underlying the convertible debt.

With the dramatic decline in memory selling prices experienced by the industry over the last several months, it is not at all unexpected for Micron to have incurred a loss in its third quarter.

When you look beyond the reported loss, the underlying story is quite encouraging.

Micron's diversification efforts into CMOS image sensors and specialty DRAM's demonstrated their successes in the quarter.

Our CMOS image sensor business grew in excess of 40% quarter over quarter, our pseudo-static business grew nicely as well.

Both of these businesses had gross margins at the top of our product portfolio and achieved higher gross margin percentages in the third quarter than in the second quarter.

Our synchronous DRAM business continues to generate attractive gross and is being designed into product applications.

The third quarter also reflects initial volume sales of our 2 gigabit NAND flash memories.

All in all a success story for Micron's diversification strategy.

These successes were overshadowed by the dramatic decline in average selling prices for PC commodity memory.

Average selling prices for DDR memory fell approximately 33%.

Although we sold 6% more megabits of memory in Q3 compared to Q2, net sales were lower due to the steep declines in pricing.

The Company lost money on products purchased from our TECH Semiconductor joint venture, and at the last quarter purchase price arrangement.

And an environment of steep declines in average selling prices resulted in losses on product sales to our customers.

Over time the relationship with TECH has generated a very attractive return for Micron, given the limited amount of capital the Company has deployed in the joint venture.

We expect the long-term relationship with TECH to be attractive for Micron.

Selling, general and administrative expenses for the third quarter came in at 89 million, pretty consistent with recent quarters.

Our current outlook suggests quarterly SG&A expense will run between $85 and $95 million.

Research and development expense, for the last three quarters, has approximated 150 million.

This level reflects significant investments in NAND, flash and specialty RAM's and in CMOS image sensors.

Our current estimate of R&D expense is that it should run between 150 and 170 million per quarter.

Cash and short-term investment balances increased to approximately $1.3 billion.

Capital expenditures totaled 320 million for the quarter.

And our forecast for capital for fiscal '05 remains at approximately 1.5 billion.

I'll turn our commentary over to Mike.

Thanks a lot Bill.

We saw demand strength in fiscal Q3 and believe the primary end markets for Micron's products, PC's, servers, mobile phones and a variety of consumer electronic devices are healthy and continue to drive solid demand in the current period.

There has been an oversupply of commodity DRAM for PC markets in the first half of calendar 2005.

As a result, we saw nearly unprecedented price per bit declines in the DDR and DRR2 arena.

Although the quarter over quarter market price declines in the commodity area were the most severe in recent history, our overall gross margins remained in positive territory.

The silver lining of an 8% gross margin is the fact that this did remain positive.

In previous years, with a more concentrated product portfolio, this would not have been the case.

This fact highlights the impact Micron's product differentiation is having on the overall financial performance of the Company.

In the quarter we generated approximately 40% of revenues from products other than DDR and DDR2.

This provided some insulation from the severe price pressure in the commodity DRAM space.

In early May, at our analyst conference in London, I mentioned that we had a tolerance to accumulate some finished goods inventory given the unacceptable market prices being observed at the time.

As you can see in the balance sheet, we did build some inventory with the increases predominantly in the DDR and DDR2 space.

Micron's DRAM output in this product space is leveling and there will there will be ample market demand for these products well into the future.

We believed at the time we were more likely to see market price increases as opposed to further decreases.

This continues to be the case today.

In fact market prices have not declined in the past six weeks.

And we have recently passed on price increases to OEM without sacrificing volume or market share.

Taking into consideration all of the variables, we are optimistic about a more positive environment in the commodity DRAM space in the second half of this calendar year.

Beyond the PC platforms, we are quite pleased with the business environment, Micron's current position and continued progress.

Our lineup of specialty DRAM, which features synchronous DRAM and pseudo-static RAM for use in a variety of consumer, networking, mobile phone and general purpose applications is doing quite well.

We see a lengthy and stable demand profile for synchronous DRAM given the wide bread of applications that utilize this technology.

Our synchronous DRAM family is uniquely suited to meet the needs of virtually all of these applications.

The pseudo-static RAM and low powered DRAM businesses are experiencing strong growth.

We are benefiting as both the absolute number of mobile phones equipped with DRAM increases and of course the expanding memory content per phone has a compounding affect.

The feature richness of mobile phones, specifically growth in penetration of camera enabled phones, is driving strong demand for our image sensors.

We now have design wins with every known phone maker and have our sensors positioned in the highest profile mobile handset in the marketplace today.

Our lineup of revenue generating mobile phone image sensors today includes products ranging in pixel density from VGA through 3 megapixels.

The market has clearly demonstrated an affinity for the image quality, manufacturing knowhow and customer support infrastructure that Micron has put in place.

The business is scaling well and gross margins for image sensors now are at or near the top of our product portfolio rankings.

Our customers are affirming the belief that our ability to deliver semiconductor memory and imaging technology without being a competitive threat in the end market is a differentiator.

And this positions us to provide substantial incremental value to the customer base.

We are a couple of quarters into the ramp of our NAND flash business and are quite pleased with productivity and trajectory to yield maturity.

Demand growth in the mass storage markets around USB drive, solid state MP3 players, memory cards and mobile phone imbedded memory is impressive.

We are confident that the growth of these markets will benefit Micron directly in creating homes for our production output and indirectly in drawing competitor capacity away from the commodity DRAM area.

Although this quarter's results were not what we were striving for, given the severe price declines in the commodity DRAM market, our product differentiation strategy is paying dividends.

We are continuing to establish a healthier balance of end markets that is driving revenues for the Company.

Heading into the second half of this calendar year we see continued strength in these markets and are encouraged by what appears to be a more balanced supply/demand profile.

Thanks for your continued support and with that I'll turn it over to Kipp for Q&A.

Great, thank you Mike.

With that we would now like to take questions from callers. [OPERATOR INSTRUCTIONS] With that we'd like to open it up.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Glen Yeung of Smith Barney.

Thanks and good afternoon.

I wonder if you could talk a little bit, not about your inventories but what you are seeing in the channel inventories for commodity DRAM?

Glen, this is Mike speaking.

Our inventories again, are in the DRAM area in the commodities DRAM area would be in the four to five weeks range, which is consistent with the messaging, I think, that we sent out at the analyst conference mid quarter.

The - - it's really difficult for us to be - - to have an accurate gauge on what the channel inventories are.

Our customers would have no reason to carry inventory unless they were speculating on the pricing environment of DRAM.

You're probably familiar with our business model today which really calls for us to store inventory at the customer's site.

So - - and it's there at virtually at all times so they can pull it whenever they need it.

I don't really believe that they would have much inventory.

From my perspective, there's no reason for them to carry much inventory.

So my belief is that there's very little inventory in the channel.

Mike, maybe just a follow-on to that, you seem to be suggesting that DRAM prices could start going up from here.

And I've actually just talked to almost all of your competitors and they have the same view.

So I wonder if you're seeing any change in behavior from your customers that might reflect that potential price increase?

Not from - - not observable from our OEM customer base.

Although I would say the speculative buying activity or the attempt to buy speculatively , in the - - I'll call them in the broker markets, has picked up substantially over the course of the last couple weeks.

And it's probably directly related to the comment that you made, that there's a general feeling that pricing has bottomed out and that it's more likely to go up than go down.

And that is our belief as well.

And then just quick - - one last quick one just on the mix of what you think people are speculating on between DDR and DDR2?

There's probably more speculation today on DDR1 as opposed to DDR2.

And I believe that is because there's a perception that most of the manufacturers have potentially overshot in terms of putting DDR2 manufacturing capacity in place and in fact production output.

Thank you.

Thanks Glen.

Thank you.

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

Yes thanks a lot.

Maybe one of you can give us insight, typically pricing is pretty weak in the second quarter.

Typically a little bit better in the third quarter.

OEM's know that.

What percentage of that 3P demand do you think typically gets pulled into Q2?

And do you think this year is any different?

Michael, I don't think there's been any Q3 demand pulled into Q2 by our OEM customers.

As I mentioned earlier, I don't think they are carrying inventory.

I think there has been some speculative buying in the third party channels.

It's really difficult for me to quantify.

In our case we did not sell measurable quantities of DRAM into the speculative market in the second quarter.

So in our case we didn't put anything out there at all to speak of.

It would be difficult for me to say how much buying has been done - - pull ahead buying has been done by the third parties.

But in our case we've sold very little into that market.

And you just said the speculative is mainly in the DDR1.

Is that correct?

I think that's where most of the demand is today, correct.

Great.

And then there's a lot of flexibility capacity or increasing flexibility in the DRAM suppliers.

How much of the DRAM supply out there would you say has the ability to move the NAND or SDRAM or some of these other flavors?

I can only speak for our case and we can move capacity from DRAM to NAND and back the other way should we need to, although we don't have complete flexibility.

We've not build in complete flexibility in our manufacturing model to be able to do it from week to week.

It takes probably 90 days or so for us to make a real efficient transition in terms of capacity utilization from DRAM to NAND or vice versa.

Other of our competitors may have different kind of manufacturing models in place that enable them to be more or less flexible.

I don't really know.

You'd have to ask them in order to get the specifics.

Fair enough.

The bits per box, given we are seeing a lot of growth in emerging markets and also notebooks.

Just talk to us about what that means for your bits per box overall blended.

Well, right now we are at about blended 500 megabytes per box on both notebooks and desktop platforms.

And what we are getting from the customer base in terms of regularly pulsing them are growth of somewhere around 3% to 4% per month.

And that's still holding up fine with all the growth in notebooks and --?

It is, yes.

Thanks a lot.

Thank you.

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

Hi.

Just kind of a couple long-term questions.

Can you talk about what your sort of DRAM strategy or mission statement is?

In other words is it to be the lowest cost producer, or the most innovative with new products or the most profitable?

Or how do you think about your DRAM strategy?

Well, we clearly have had a change in the industry sufficient that the bit growth demand, and just the think of it as the desktop PC has dramatically changed from consuming almost all the bits that were produced in DRAM if you back up 5, 10, 15 years ago.

So that's in large part why I think a lot of us have had to rethink where do we continue to grow the Company and put the bits.

Because that demand has shifted from an average of 75% down to effectively, I think what Mike described is about 35% just in PC space itself.

So - - and with that in mind the other thing that's been a benefit of course is that the non-PC space has continued to grow.

So our strategy has been to continue to try to move in that direction as the growth of that segment starts to consume more and more bits.

Clearly it's less commoditized.

It's not that you don't have to be competitive but it's less commoditized and less evidenced by the success of our pseudo-static RAM's and low power stuff etc.

And so - - and even to some extent what we call the specialty DRAM, which has to do with even an older generation interface, like synchronous DRAM.

So we have continued to migrate that way.

Clearly it can consume all of our output and clearly we have to be in the PC space in order to maintain a competitive profile.

So, whereas before we were making essentially one device going into one application, it was pretty easy to focus.

And you could say that you would be the most efficient in that space.

The problem is being the most efficient in that space doesn't necessarily mean that that's the best return you can get for your asset utilizations.

So we will continue to add this other product portfolio to what we're doing.

As a result, of course, our cost structure starts to change as you do that.

We, really it's Micron and Samsung and the product breadth our DRAM portfolio; and I'm setting aside NAND and CMOS images at the moment, but just the DRAM portfolio alone, the product breadth of Samsung and Micron is probably two times that of the next guy.

So, we clearly continue to broaden that portfolio and a lot of that goes into the specialty arena.

And as a result it does impact some of our cost structure, because those are typically lower density devices or special devices and we just have to accept that.

So, really we need to be the lowest cost producer for the portfolio that we have.

But that doesn't mean we're going to necessarily be the lowest cost producer of a bit going into the PC market.

Right.

So you're saying the real strategy is to have the broadest DRAM portfolio.

Yes, it's to have the - - a broad DRAM portfolio so we can extract the best margin that's available for the consumption of those bits.

Okay.

So what's - - that was actually leading into my other question, which is; can you talk about extracting that value, in terms of what you think is going to change in the next couple years?

Maybe not just for DRAM for desktop PC's but across your broad product portfolio, what's going to change that's going to enable you to have the industry best margins across your product portfolio?

Or how is your cost competitive, how is that going improve?

And maybe as specific, can you talk in retrospect about whether you wish you had a different 300 millimeter strategy?

Or do you still feel strongly that your ramp and switch to 300 was prudent from the cost perspective?

From a cost perspective - - part of it is getting the efficiency utilization out of the capacity that you have.

So, when you talk about some of the specialty DRAM, there's not near as much benefit of moving it to an advanced process on 300 millimeter because the densities just aren't that high.

Right.

And as a result you wouldn't want to migrate that.

If you look at kind of the bifurcation of the product that we have, clearly the product that we're building, going into the - - if you think of it as the PC market, which is essentially the DDR, DDR2 high density stuff.

For us that's almost all shifting to the 300 millimeter that we have in Virginia, which is going quite well and with our partner TECH Semi in Singapore.

And they have of course a transition strategy of 300 millimeter as well.

That's where the focus is.

And that's where the focus will be for making those bits that actually go into the desktop space if you will for PC's.

Really, when you look at the rest of our portfolio and the rest of our capacity I should say that, that capacity is getting consumed more and more on these other products like imagers and specialty DRAM.

So, we think that it's - - we're just now starting to see some of that benefit.

We're starting to see some of the capacity efficiencies that we would have expected to get.

And that's where we are headed.

Okay.

So can you point to any specific on the cost competitive side that you think will help you kind of close the gap or pass some of your competitors?

Or is it just kind of more the product diversification helps accomplish that by nature of the strategy?

Well, yes.

First of all, clearly our 6F(2), which we have talked about, which is essentially now deployed on almost all of the advanced process devices going into the PC market, we clearly have a competitive strategy there.

And then really everything is going to the 300 millimeter that goes into that space.

So - - and you can argue' well, did you bring that up in the right timeframe, etc.

But the fact of the matter is we're over the hump on that.

And it is starting to getting better and better every quarter that goes by in terms of contributing.

I - - everyone keeps talking about cost, the other thing that you have to recognizes with our product portfolio is what your average ASP.

And we are now clearly starting to differentiate what our average selling price is to a lot of these other guys in the space.

Right.

Sorry, one last totally unrelated issue.

What do you think Intel's NAND flash strategy should be or will be?

And is there any opportunity to pursue a relationship with them?

Or do you have any fear at all about Intel in terms of their NAND flash strategy?

Well, you're going to have to ask them what their NAND flash strategy is.

They've clearly had NAND flash strategy for quite some time.

In fact they still talk about introducing new devices for, at least some of the higher density, but maybe not quite as high a density in that space that you would get from a NAND in the wireless space.

So, I think they have got to do a lot of thinking about what their strategy is in the flash space.

And to get more specific you probably ought to ask them.

Alright.

So they're not coming to Boise for it.

Well we'll sell it to anybody that wants to buy it.

All right, thanks guys.

Thank you.

Our next question is coming from Christopher Danely from J.P. Morgan.

Can you just talk about what has led to the pricing stability slash going up over the last six weeks and maybe talk about your views on PC demand right now?

Sure, I think a couple factors.

First and foremost would be seasonality of demand for PC's.

We poll or customers regularly, as I mentioned earlier.

And our expectation based on a sampling of our top 10, 11, 12 customers or so is that DRAM consumption in the PC space alone, calendar Q3 versus calendar Q2 will be up about 12%.

Now there's some margin for error there so I would say somewhere in the range of 10% to 15%.

Our growth profile in the commodity DRAM space in the third calendar quarter is basically flat with calendar Q2.

So we are not growing output significantly.

Based on snippets that you read in the press and so forth, we see comments from competitors to have the ability to deploy capacity in other areas.

That they're DRAM capacity to NAND flash.

So I would say that it's the basic law of economics.

We believe that demand is growing faster than supply in the commodity DRAM space.

And that has led to stable pricing and will lead to increased pricing over the course of the next several months.

Sure.

And then inventory popped up a little bit here.

Where are you guys comfortable with inventory and what are the plans to bring it down?

We think that - - so we're at as I mentioned four to five weeks worth of inventory now.

Virtually all of the inventory growth that occurred for us in fiscal Q3 was in one of two product areas, in the DDR and the DDR2, which is essentially the memory solution for notebooks and desktop PC's.

We believe that with a flat, flattish output scenario for us in fiscal Q4 relative to fiscal Q3, we will bleed off some of that inventory as we move through fiscal Q4.

And in summary I'm not uncomfortable carrying four to five weeks of inventory.

And we believe that that's going to come down as we move through the current quarter.

And then last question, any thoughts on fiscal '06 Cap Ex?

Current spending for '05 as we have indicated is 1.5 billion.

Right now it's a pretty wide range looking forward to '06.

We have a spread of 1 to 1.5, we will tighten that up as time moves along.

Okay.

So it's still 1 to 1.5.

Thanks.

I want to add one more comment, Mike was mentioning the flat output quarter over quarter essentially in the desktop space.

But that's not to say that we don't continue to have a greater conversion of 300 millimeter and the wafer wraps will continue to go up there from Virginia because they do.

But you have to keep in mind that we're also allocating more capacity that's been making DRAM over to some of these other products, as we have already stated they continue to grow at a pretty good rate.

What was the DRAM versus non-DRAM and non-core DRAM split again?

Well, from a revenue perspective it's - - we're not really dividing it as core and non-core DRAM, so to speak.

When we talk about the desktop space versus the non-desktop space it was about 35%, 40% was into the non-desktop space, which is a pretty significant transition for us.

How about next quarter, any thoughts there?

It's just going to keep migrating.

Okay, great, thanks guys.

Sorry to take up so much time.

No problem.

Thank you.

Our next question is coming from Hans Mosesmann of Moors & Cabot.

Thank you.

A couple questions, a clarification first.

What is the bit growth production assumption for the current quarter?

Hans, you can figure that to be about high single digits.

Sequentially quarter over quarter

Okay.

And in terms of the polling that you have done with your top ten or so customers, what's the seasonality this quarter, I think you mentioned last quarter was in the 12%, but what is it for this current quarter?

The current - - keep in mind our fiscals are offset somewhat from the calendar quarters, that 12% figure I mentioned Hans, was calendar Q3 relative to calendar Q2.

That would be DRAM demand in the PC space calendar Q3 relative to Q2.

I don't have visibility into the granularity of how much of that demand increase is driven by content versus number of units.

But that would fall in the ramp of kind of normal seasonality from your perspective?

Yes.

That's correct.

Okay.

And then one last question, from the TECH joint venture do you have a sense on when they'll build out a 300 millimeter fab?

Well, they have a conversion plan, I don't necessarily want to speak for them.

But - - and it all depends on of course the market as well but we have several partners there in that venture.

So, we may have a transition phase that occurs.

Essentially some of us starting to look at sometime next year and then that goes through the '07 time period where it occurs.

Thank you.

Our next question is coming from Tim Luke of Lehman brothers.

Thanks.

I was wondering if you could give us some sense of what the - - some of the profiles may be in the NAND flash area for the next six months?

And maybe give us some color on how you see demand developing in the CMOS image sensor with demand seemingly reasonably constructive in the handset arena?

Thanks.

Tim, I didn't quite hear the first part of your question.

Was that demand profiles in different segments for NAND like it was for image sensors?

Yes, and maybe just what some of the milestones may be for that business going forward maybe for the second half of the year?

Okay.

Well I'll let Mike start with demand profiles maybe for image sensors and then I'll cover the NAND business plan.

How's that?

Thanks.

Yes.

With respect to the image sensors, mobile phone or camera enabled mobile phones are still the primary driver of demand for image sensors at least for Micron's image sensor business.

And the growth is actually pretty extraordinary.

And as Bill mentioned in his comments, our revenue growth in the quarter was over 45%.

That's sequential, not year over year.

And we are in for what we believe to be a pretty healthy growth quarter again this year.

And I think that's probably a combination of us incrementally increasing market share as well as the market just going through the roof with respect to the penetration rate of cameras and mobile phones.

Our mix of sensors in the mobile phone space today, is roughly 50/50 VGA, 1 megapixel with both 2 megapixel and 3 megapixel starting to pick up some steam for increased production in commercial shipments later this calendar year.

I don't know if I adequately addressed your question.

Maybe just a little bit, could you touch on the breadth of your customer base in the mobile arena?

Everybody.

Every phone maker.

We had design wins with every known phone maker and I'd say that there are probably five to six of those phone makers that are driving the bulk of our revenues.

I don't want to be too specific as to the names of them but it's virtually everybody.

We have got design wins that we have counted up over 200 design wins.

And of course there's several design wins with each of the phone makers.

But over 200 design wins and probably closing on 300 here as I speak.

So, it's a broad customer base and the design wins are really expanding in terms of numbers.

So we couldn't be more pleased with respect to the progress that we have made and with the trajectory that we have in place right now for continued progress.

And is it fair to say that these full costs have moved upwards as you've moved forward over the last several months?

Sure. yes.

Again the business is continuing to grow and it's both market share capture on our part as well as just that - - it's no secret growth rate or the penetration rate of cameras and phones is growing tremendously as the costs comes down and as the image quality continues to improve.

Okay.

On the NAND front, really we have just started to make a significant progress in the market as you know.

We introduced the 2 gig part, which is the part that we have now, a 90 nanometer 2 gig part.

But I think equally more important, that is ramping by the way in terms of number of wafer starts and really every month that goes by it's an increased record for us that are going into that space.

But when you think about kind of the second half of the year, or 70 nanometer NAND looks pretty good.

That's coming into production.

We also have introduced a 1 gig and we will have a 4 gig and 8 gig And obviously then expanding into some of these other markets, the more parts we produce.

So, really for milestones for us it's just a continued ramp and it's to get a couple more densities into that space and then get the 70 nanometer production ramping up.

Do you have any outlook for pricing in the NAND flash area or your expectations on how we should frame that going forward?

Yes, we are expecting continued price reductions in the marketplace as we're able - - the manufacturing side is able to take down costs as well.

Just as a reference point, the current market price for our chip, the 2 gigabit NAND flash today is somewhere in the $11 to $12 range per chip.

And we are expecting the prices to continue to come down here pretty dramatically as we move through the balance of the year.

Thank you very much.

Thank you.

Our next question is coming from David Wong from AG Edwards.

Thank you very much.

Can you give us some numbers with regard to 300 millimeter wafer production growth in the coming quarter?

And also whether there's any change in your 200 millimeter wafer output?

We are now running about 60,000, 200 millimeter equivalent outs per week.

That will go up a couple percent here in our fiscal Q4.

Of that we are running around 10%, 300 millimeter.

And as we've previously stated we will be around 25% of our DRAM output on 300 millimeter by the end of this calendar year.

And at around 40% roughly towards the second half of '06 calendar year.

Thanks very much.

You bet.

Thank you.

Our next question is coming from Jim Covello from Goldman Sachs.

Good evening, thank you.

Quick question; on the NAND flash side we have seen some pretty steep drops in the NAND flash spot pricing for certain densities.

Do you think that's going to have any impact on some of the DRAM companies' willingness to continue to shift DRAM capacity over to NAND in the second half of this year and into next year?

I think that's a continuing variable that we will look at.

Every week that goes by we look at the margin on NAND, we look at the margin on DRAM.

And as Mike described, in our case we really have a few month turn time.

But as those margins shift it clearly will change motivation as to whether you want to go through the effort to change your product mix line.

Right now, given where the higher density DRAM product is, demand is still attractive to keep that conversion going.

So, I think as long as that's the case you will see more products switch that direction.

And as soon as it become equilibrium, and who knows when that will be, then you will clearly see a change in the motivation.

How much - - would you say that in - - how much of the view of the market do you think is based on the view in the market that the DRAM pricing will improve in the second half of the year, is dependent upon continued migration of DRAM over to NAND?

And when - - is there a pricing at which you think - - specific pricing at which you think that becomes a risk?

My perspective is that at least for the next probably couple of quarters you have a number of entrants into the NAND space, and I probably should have qualified my last comment by this.

You have a number of entrants into the NAND space where they really just are trying to achieve critical mass in some scale.

Clearly Micron is in that direction, where we need to ramp in order to get more critical mass and so forth.

Because of expenditures, R&D, people out there trying to build a customer base, etc., But I think that's indicative of a couple of these other players that have moved in that space too.

You take a company probably like Samsung and it's really more a pure economic decision for them, or some kind of strategic decision for them because they already have a large percentage of the market anyhow.

But I think for several of the newer entrants into the NAND space it's really - - there's first a drive to get some critical mass and a good customer base and then they'll start optimizing between the two products.

That's helpful.

If I can sneak one more in.

Traditionally, when DRAM companies start to lose money if I'm not mistaken you see two things.

You see increase in content per box, because the prices are lower, the elasticity kicking in.

And then you see CapEx cuts in order to sort of fix the supply demand situation.

Now, one way that can get fixed is increased allocation from DRAM over the NAND.

But if that were to stop do you think that we really need to see CapEx cuts to fix the supply demand situation?

And do you expect that at all?

It's hard for me to really know for sure what the other producers are doing because a lot of times what's announced ultimately doesn't happen or it tends to vaporize as the market changes.

In our particular case, we actually think we will get more capital efficient because we are having higher utilization of our technology that's in place by virtue of some of these other products.

And of course as the DRAM market has weakened then we also take a look at whether it makes more sense to put more capital in that direction.

So, we really kind of have two things going on.

The other companies; it's hard for us to know but of course the expectation is that there will be adjustments in capital based on just the return generated from the product into that space.

And - - but those tend to be a little slower moving, those kind of decisions.

Either to increase the CapEx or decrease the CapEx, those are actually a little slower moving because they are the kind of commitments you have to make for some of this capital.

And I would say in particular in the lithography area.

Great.

And then on the elasticity issue, any difference this cycle versus previous cycles on the increasing content per box with lower prices?

I don't think so.

I think we might see a temporary plateau at 512 megabytes.

There are certain increments where I think you see things level off.

And it's the most efficient economic model for the user from a memory content standpoint in terms of increments.

But - - so I think we might see a temporary stall or slow down at 500 megabytes per system because the next logical jump there would be to probably to 1 gigabyte.

So we might see some slowdown somewhat there.

But on the application software and operating software side we have got a big new operating system upgrade coming our way next year, which I think is probably going to result in a huge boost in terms of memory content per system.

So, again that addresses the DRAM elasticity issue, specifically in PC's.

On the NAND flash side, interestingly enough we believe that there's even more price elasticity there.

Actually, substantially more price elasticity there than there is in the DRAM area.

And as producers we believe that we have the ability really to instantly create demand by passing along prices increases to the end user.

And in fact, I think that's proven out true particularly in the case of USB drive.

So, if you look at the flash market I think we have the advantage of really being able to almost instantly create demand by passing on cost reductions.

Terrific, that's really helpful, thanks a lot.

Thank you.

Our next question is coming from John Barton from Wachovia Securities.

Of the 40% of revs that were "non-DRAM" could you break them out a little bit more of what drove the CMOS sensors, what percentage was that of pseudo-statics etc. please?

I don't think we want to be real specific on it, but it was - - it's not non-DRAM.

It's not what we consider to be non-core DRAM or non-DDR and DDR2 DRAM.

And I'll just tell you the mix of it would be, and these are all in very substantial numbers, synchronous DRAM for the consumer and communications infrastructure applications.

CMOS image sensors primarily for camera enabled mobile phones, flash memory for a variety of consumer electronics and low power DRAM for mobile phones.

So, it's those products that make up the 40%.

And I don't want to be real specific on the percentage or the dollar amount that we're going to attribute to each one of those

Could you narrow down what CMOS image sensors are as a percentage of that 40 or no?

Well, it's - - let me just sai it's approaching - - well of the 40.

Of our total revenues we have said that imager historically, we've really talked about in terms of wafer starts and where they relate to the total.

They are where we said they would be about this time of year.

They are just in the neighborhood of 10%.

And you could give it maybe slightly a little more.

But it's right on track with what they thought would happen.

On the topic of DRAM I thought I heard two different messages there.

I must have misunderstood you.

I thought I heard flat production for PC oriented DRAM's.

But then I thought I heard high single digit fifth growth production going into next quarter.

Where am I mistaken?

I should probably clarify that.

This is Mike speaking.

The flat production comment was specific to what we consider to be the commodity or core DRAM; the DDR and DDR2 that is tied specifically to personal computers, or almost entirely personal computers.

Our output growth in fiscal Q4 is going to come from the specialty DRAM area, and from the NAND flash area and the low power DRAM areas.

So, virtually all of our production output growth in the current quarter is coming from the, I'll call it the non-core DRAM or today the more - - the higher profit margin DRAM products and NAND flash.

And then final question if I could.

The comment was made that most of the speculation in the broker market is in the area of DDR because you thought DDR2 was kind of built up already, maybe well beyond what the OEM's had needed, so to speak.

How is that transition going from DDR1 to DDR2?

And how do you think it plays out for the balance of the year.

Is your question specifically on the demand side from a transition or on the supply side?

Demand side.

Demand side, I think actually in recent weeks our take on the penetration rate of DDR2 for the balance of the year is probably slowed somewhat.

And I think that is generally perception on the part of the PC makers that the optimum balance between increased performance and potentially increased cost is probably not real clear right now or it's not as transparent as they would like it to be.

So it's probably slowed somewhat.

Our take on the crossover in terms of demand for DDR 2 versus DDR 1; if you asked me that question 60 days ago I probably would have told you we'd cross over in late summer, fall timeframe.

Now I would say that may be pushed out even into the first part of next year.

Thank you very much.

Our next question is coming from Tad LaFountain from Wells Fargo.

I'm wondering what the gross margin in the quarter would have been without the TECH effect?

I'm not willing to give a specific percentage there, but it would have been a noticeable swing.

Just leave it at that.

Okay.

And with corporate gross margin at 8%, that obviously says that some areas were doing very poorly, what amount of inventory reserves were booked in the quarter?

Your question runs to the heart of was there a net realizable value adjustment and there was none in this period.

Okay.

With pricing stabilizing over the last several weeks if that trend continues does that mean that we need not worry about inventory reserves in the fourth quarter?

You appreciate the calculation that we have to make at the quarter end is looking forward to the average selling prices predicted for the period in which the inventory is going to be moved.

But what we're really saying is we have had manufacturing costs, efficiencies and there's margin in the ASP as we look forward relative to the current cost profile.

Okay.

And Mike, a question for you.

One of the concerns about the DRAM business is the extent of the ramp of 300 millimeter capacity and what that signifies for excess production.

Yet it appears with the April SIA data that looking at a three quarter moving average that the worldwide bit sales were up 8% quarter to quarter and over 60% year over year.

Would that sort of bit growth - - I'm sorry, bit demand growth from your perspective chew up the sort of capacity that you're seeing in the industry?

Well, basically we have talked in the past about what we think the supply profile is for '05 over '04.

And with all of those things you're talking about: Additional 300 millimeter coming on line, transitions to perhaps a less manufacturable, less efficient part DDR1 to DDR2 and capacity moving from DRAM to NAND flash, all of that put together gets you about 45% to 55% sequential bit growth on the supply side '05 over '04 based on the current CapEx numbers that are out there today.

Okay.

So when we're seeing 60% year over year bit growth out of the SIA for DRAM, that would imply that the extent of the per received over capacity isn't as great as it was thought to be.

I think Mike's made the comment before that we think there's very little inventory outside of the PC type memory.

Okay.

Thanks.

You bet.

Thank you.

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

You mentioned earlier that you expected by the end of the next year output on 300 millimeter to be something like 40% of your total.

That is correct.

Okay.

Does that - - can you tell me what assumptions are involved there?

Is that all out of Dominion or does that assume a conversion of TECH or some other things?

Joe, there are two things that are going on when we talk about DRAM output.

And we just have to be careful how we categorizing this.

Because when we talk about total DRAM output you have to take into consideration does that include the lower density stuff that isn't really going to an advanced process.

Do you or do you not include pseudo-static RAM's, which is the DRAM and static RAM interface, etc..

I think actually when you look at the percent of our output that's on the advanced process mode, the highest density that will be on the 300 millimeter, that essentially almost all of our output in that category will be coming from our 300 millimeter.

And then really as to what extent does TECH start to get their 300 millimeter on line and converted.

So, Kipp, I don't know if you want to add more commentary to that.

But just keep that color in mind when you hear this 40% number.

Well I'm just trying - - I appreciate the detail.

But it's probably more complicated than I need, because I know and you all have done a great job describing what the sort of core versus non-core memory looks like.

All I'm trying to figure out with that number in mind is if - - it sounded to me like you were saying 40% of your output in wafer terms was going to be 300 millimeter.

All I want to know is is that in fact what I heard?

And if so, is that all going to come out of Dominion or not?

Yes, basically that's right Joe.

The Dominion facility can run approximately 10,000 300 actual millimeter wafers per week.

And as you - - we just commented on the fact we're running about 60,200 millimeter equivalents per week today.

So, just by ramping that up you can get to 40%.

The only other qualifier I would put on is kind of where Steve was headed it's of the DRAM output more so.

So things like the image sensors can be very, very competitive at 200 millimeter for several years forward.

So we don't anticipate initially moving those to 300 millimeter

Okay.

And then I guess by extension then the plan is to backfill in the neighborhood of 240, 250,000, 200 millimeter wafers a month with non-core products by that point in time then, CMOS sensors and specialty memory?

That part of our business will certainly keep growing based on demand profiles we are seeing right now, you bet.

Okay.

Thanks a lot.

And Joe, you appreciate that we've indicated we are ramping the NAND.

And that's for the near term consuming 200 millimeter capacity.

And I take it the plan is to continue to manufacture NAND on 200 millimeter.

It is in the interim.

Clearly at some point in time it will probably convert, about 200 millimeters as well.

But that's what we're looking at now is what that strategy is downstream.

Okay.

Just as that kind of begs, I wasn't going to ask this, but it is headed this way so I'll ask it, is Boise, Avezzano or KMP on the table for conversion at all?

Clearly Boise is.

Avezzano actually is ramping our image sensors right.

So, the expectation is that that facility will be consumed by the image sensor business.

And then what was the other fab you mentioned?

Well, TECH you mentioned today.

I believe - -

Yes, TECH will convert.

Yes, and then you have got KMP, Boise and Avezzano.

So I'm just trying to get a sense outside of Dominion as to what the longer term road map is for maybe shifting out those other facilities.

Yes, well, first of all I already said Boise will ultimately convert to 300 millimeter I think.

And then Virginia is there and TECH is there.

So, Avezzano is going to be consumed by imaging.

Japan in some ways kind of becomes a swing fab for us to determine whether the lower density devices and how long they continue to be consumed, because we have to have somewhere to build those.

Things like the lower density synchronous DRAM and the pseudo-static RAM's and so forth.

It can be converted by the way.

But that's really going to be kind of product dependent as we move forward.

Oh, okay.

Would you care to comment, are we going to begin to see any of these fab conversions occur let's say for example in 2007?

It sounds like you're telling TECH occurs even earlier than that.

But what about the other?

Well, it's just a cycle time-out, it takes you about a year to get the equipment to put in place.

Take you about a year to put some kind of building up to do it.

Remember, we also already have Lehi sitting there that's 12 inch capable, we just have to put the equipment in it.

And the lead time on ordering equipment as you know is somewhere in the near timeframe, in particular for litho.

So, we have a facility now that can run 200 millimeter.

We don't have actually go convert or build one.

We just have to order the equipment and put it in place.

Thank you, our next question is coming from Adam Benjamin from Jefferies.

Thanks a lot.

Just a couple questions on the sensor business.

Can you talk just in general terms about the pricing environment and what you guys are expecting kind of on a year over year basis on a price decline?

We are, this is Mike speaking, interestingly enough our average selling price per sensor in the quarter was relatively flat versus the prior quarter.

And that's primarily - - well, for two reasons.

Number one, there's not a tremendous amount of price pressure on the sensors.

And number two, we are transitioning to a higher pixel density in our product mix as well and those command higher prices.

We are expecting price reductions in the sensor business that will run along the lines of how we are able to reduce costs and that's primarily by shifting to smaller format sensors.

Not nearly as severe as I would say as is the case of the memory business, but we are expecting price declines that will roughly match what our ability to - - or match our ability reduce prices.

Reduce costs I should say.

And you touched a little bit on your gross margin for each of your business lines.

With respect to your sensor gross margin can you talk a little about what your long-term target would be for that product?

I think we probably want to avoid that.

For competitive reasons we would just assume avoid talking about specific margins on our sensor business.

Okay.

Then lastly one of your competitors, OmniVision, reported tonight and they seem to indicate that they're shifting over from the 1.3 and jumping over that and going for the 3 megapixel and the camera phone market.

While you've done pretty well on the 2 megapixel from what I understand.

Where do you see that market evolving?

Do you see the market jumping over the 2 megapixel and jumping to the 3 megapixel?

Or do you see the 2 megapixel lasting longer?

And kind of what's your positioning and what you think - - how you guys are looking at that market?

Let me clarify.

We have been very successful at the VGA density in the mobile phones.

We have been very successful at 1 megapixel.

We are in the process of it being successful at 2 megapixel.

We will undoubtedly be successful and 3 and we will be very successful at 5.

We're not skipping any generations.

We are basically knocking the cover off the ball, everything we are doing in the imaging business.

And we believe that the market will be strong for all the products I just stated.

Right now the bulk of the market is at VGA and 1 megapixel.

And I would characterize it as shifting, at least in the high performance area shifting to 2 megapixel and really starting to win some designs at 3 megapixel.

But this is where we are right now, VGA and 1 megapixel driving most of the volume. 2 megapixel and 3 megapixel kind of skimming the high end of the market.

Starting to engage customers at 5 megapixel as well.

Okay.

So with respect to '06, if you were to break out the percentages given where we are today and given what '05 is looking like, a roughly 50/50 VGA, and 1.3 and then maybe a small percentage of that being 2, where do you see '06 in terms of the breakout between including 2 megapixel and 3 megapixel?

Sure.

We have a business plan with those particulars in it.

Obviously I don't have it in front of me so I'm going to give you some rough approximations here.

But there will still be a significant VGA market in 2006 for phones with two cameras as well as for low end, I'll call them entry level phones.

That may be a third of the market, VGA sensors, something along those lines.

I would say that 1 megapixel may be another third and the balance, which would be one third would probably be split between 2, 3 and 5.

And any views as to the 2, 3 and 5 split?

Not off the top of my head, sorry.

Okay, thanks so much for your time.

You're welcome.

Our next question is coming from Michael [Holfouder] from HDB.

Actually I had a follow-up question on [Paganos] on the bit growth.

On - - what actually are your plans for financing the conversion or what's the current state of the financing for the conversion to 300 millimeter next year?

And the second question was actually the bit growth for commodity DRAM's in the last quarter also flat?

On the TECH financing piece, as I have mentioned we have several partners there.

So the expectation is that as they go through whatever capital needs we will be sharing that among the partners.

And obviously it all depends on discussion and times the participation of each partner to what level.

But basically that's how it's occurred in the past.

And then in addition to that they also have a syndicated loan that they have done and refreshed as we've gone through periods of time.

So it will be a combination of all those factors and they have a plan for that.

On the bit growth for commodity DRAM, last quarter, I don't have the specifics in front of me but it was low single digits.

This is our bit growth.

Okay, great.

Low single digits.

Thank you very much.

Thank you, our next question is coming from Nimal Vallipuram from Benchmark.

Thanks a lot.

Mike, I'm just trying to understand what happened for the pricing in the last three months.

If you look at the PC market which is still your largest end market, the PC demand for the last six months has not been out of the ordinary.

Despite what people were thinking the PC demand turned out to be reasonably okay.

And - - but you've indicated that the last quarter that pricing has been one of the worst you have seen in the last couple years.

I'm trying to understand on the equation, that what is going to change in the next six months or so that we believe that the PC market will follow the normal seasonality?

What is going to change to see even a sizable pick up on the DRAM pricing?

If you can just share with us what you're thinking on that?

Sure.

We believe that the tempering of the supply growth, Nimal, perhaps even a reduction in supply growth.

We had - - the industry had very strong supply output growth in the first half of the calendar year.

There was big significant CapEx that occurred in 2004 off of a strong year for Semi.

And that resulted in pretty significant supply growth in the DRAM manufacturers in the first half of the calendar year, Micron included.

We look at the outlook from our sales for the second half of the calendar year, basically, as I mentioned earlier, flat output in the commodity DRAM area.

We believe based on some of the things we're observing in the press and so forth from our competitors is tempered supply growth from a commodity standpoint.

We have the seasonal demand factors coming into play for us in the second half of the year.

We believe that's going to result in a much more favorable supply demand balance, if you will, in the second half of the year.

So, in other words, what you're saying is that if essentially improvement as a result of the improved increased capital expenditure in the last year, has most of the efficiency improvement has probably happened for this year.

And an improvement would be somewhat marginal going forward for the rest of the year.

I think that's the case, yes.

Thank you, I appreciate that.

You're welcome.

Thank you, our next question is coming from Gus Richard from First Albany Capital.

Yes, could you talk a little bit about the season mix in your core DRAM, DDR2 versus DDR in the last quarter?

Yes.

I can help you, it was about two to one.

And where do you see that mix exiting the calendar year?

It's probably going to be about three to two.

Okay.

And then quickly, if your bit output on your core DRAM is going to be flat is it fair to assume that the wafer starts in that business is declining a bit in the current quarter?

The answer is yes, but the wafer starts that are occurring on 300 millimeter are actually going up.

But because of the allocation of the wafers of other - - of the 200 millimeter capacity product lines net/net it's what described as probably going down a little bit.

Right.

So is the incremental change, the conversion of Avezzano to CMOS image sensors, is that really where the capacity is being pulled away from?

There's three things, it's imagers for sure.

The pseudo-static RAM business continues to grow and we're also ramping the NAND.

And there are some things like low power DRAM that are ramping as well, but those are probably the three primary products that are impacting it.

And sort of exiting the quarter as far as production is concerned, what will be the mix of non-core DRAM versus the other product lines?

Is it going to move up toward 45, 55?

It will be well over 40%, in fact we are well over 40% now in starts for the non-core DRAM product.

Okay.

Is it going to be 50/50 exiting the quarter, any guidance here?

We will keep you posted as we move through the quarter.

I think we have time for one more question, then we will wrap it up.

Our final question of the day is coming from Ben Lynch of Deutsche Bank.

Thanks guys.

The first question I have is could you give some commentary on the specialty DRAM pricing Q on Q?

I guess it wasn't the message is wasn't as bad as 30%, but what did it contract please?

We have four - - interestingly enough we have four densities of synchronous DRAM.

Which is probably what you're referring to Ben, 64, 128, 256 and 512.

Two of them were up quarter over quarter and two of them were down.

On the margin they were - - I consider them to be essentially flat pricing.

Okay.

Is there any sort of dynamic there in the near term relative to the stabilization which you have seen in mainstream DRAM?

I would view them --

Or are they in sync or out of sync or?

Yes.

The customer base and application base is entirely different and I would view them almost as being completely decoupled.

So to the extent that today's environment would be relatively flattish I would say is just coincidental.

Okay.

And then a quick question I have is on production.

So I heard the wafer stock growth is I guess going to be 2ish% in the quarter?

Correct.

And the - - I don't know how you measure it, but I guess DRAM production growth high single digit.

Should I assume therefore that, if you like, the productivity gains in the quarter are sort of the difference between those two.

So let's say high single digit is 8 and wafer starts is 2 and therefore you have a 6% productivity growth is that --?

Be careful because what we talked about was the bit growth.

And we don't count imagers in bit growth.

So, you've got to decouple those.

So I guess I'm trying to go then Steve is the - - what sort of productivity improvement do you think you're going to achieve in mainstream DRAM?

We won't give you the exact number Ben.

But you're on the right track if you also included that the image sensor wafer allocation will continue to go up this quarter over last quarter as well.

So, the actual improvement in the DRAM business and NAND business will be higher than what you're anticipating there.

Okay, great.

And then just the last and I will finish this little train of thought.

So TECH Semi, your costs are going to be down a lot Q on Q in this quarter.

For the other stuff you're subject to that sort of productivity.

If DRAM prices, mainstream DRAM prices stay where they are today what will that imply about the Q on Q ASD decline given that you have the sort of steep drop through the May quarter?

Well we can tell you this, part of the data we provided you was on Q2.

We averaged right at just over $5 on 256 meg equivalent.

And we mentioned of course, in the release that it's down about 30%.

So, that puts you in the area for what we average for fiscal Q3.

And then we will let you look at the market data and decide where you think we will be in Q4.

That will help you.

Okay, thank you.

I would also like to thank everyone else who participated on the call today.

If you will bear with me please I would like 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 material, please refer to our filings with the SEC including the Company's most recent 10Q and 10K.

Thank you for joining us.

Thank you and thank you callers.

That does conclude today's conference.

You may disconnect your lines at this time.

And have a wonderful day.