美光科技 (MU) 2010 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Micron Technology first quarter 2010 financial release conference call.

(Operator Instructions).

Thank you.

It is now my pleasure to turn the floor over to your host, Kipp Bedard.

Sir, you may begin your conference.

Thank you very much and welcome to Micron Technology's first quarter 2010 financial release conference call.

On the call today is Steve Appleton, Chairman and CEO; Mark Durcan, President and Chief Operating Officer; Ron Foster, Chief Financial Officer and Vice President of Finance; and Mark Adams, Vice President of Worldwide Sales.

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

If you have not had an opportunity to review the first quarter 2010 financial press release it is also available on our website at Micron.com.

Our call will be approximately 60 minutes in length.

There will be an audio replay of this call.

You may access that by dialing 706-645-9291 and use a confirmation code of 45034396.

This replay will run through Tuesday, December 29, 2009 at 5:30 p.m.

Mountain Time.

A webcast replay will be available on the Company's website until December 22, 2010.

We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the Company, including information on various financial conferences that we will be attending.

Please note the following Safe Harbor statement.

During the course of this meeting 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 in the Investor Relations section of Micron'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.

I'll now turn the call over to Mr.

Ron Foster.

Ron?

Thanks, Kipp.

Our press release is available on our website.

Let me start off with a brief summary of the financial results of the first quarter fiscal 2010, which ended December 3, 2009.

The Company reported net income of $204 million, or $0.23 per diluted share, on net sales of $1.7 billion.

This is our first quarter of profitability in the past 12 quarters and is our highest quarterly revenue since Q1 2001.

With the profitability from the first quarter a couple items are triggered.

First, some potentially dilutive securities become dilutive and are included in the number of shares used to compute EPS.

This includes in-the-money employee stock options as well as our convertible debt securities.

Second, certain accruals for variable pay programs were recognized in Q1, where payouts are tied to financial performance.

This expense showed up primarily in SG&A.

In addition with the beginning of this fiscal year, a couple of new accounting rules are effective for Micron that caused us to recast prior financial statements to conform to the new presentation format.

First, the FASB staff position on convertible debt instruments caused us to bifurcate the accounting for our 2007 $1.3 billion convertible security into their separate debt and equity components.

Accordingly, about $300 million was reclassified from debt into additional capital in the equity section as of the beginning of fiscal 2010.

The remaining $1 billion balance, classified as debt, is accreted to the $1.3 billion face amount of the security through step-up noncash interest expense over the remaining term of the security.

This resulted in an additional $13 million in noncash interest expense in the first quarter and will be about the same amount in each of the remaining quarters of this fiscal year.

If you recall, our fourth quarter posted a net loss of $88 million, or $0.10 per diluted share, on net sales of $1.3 billion.

With this increase in noncash interest expense, the Q4 net loss has been increased to $100 million, and $0.12 per diluted share.

The second item is the reclassification of minority interest, or non-controlling interest, on both the balance sheet and income statement.

On the balance sheet, Non-controlling Interest is classified as a component of Equity where previously it was classified in the mezzanine between Liabilities and Equity.

On the income statement, Non-controlling interest is classified below Net Income, and before Net Income Attributable to Micron shareholders.

Note that the bottom line of our income statement that used to be net income is now called Net Income Attributable to Micron Shareholders.

In addition to these changes, we have modified the reportable segments you will see in our 10-Q filing to include Memory and Other.

This Other segment includes our imaging business and some recently initiated activities, primarily surrounding our Silicon Systems Group, which includes LED display and others.

None of these activities are individually significant at this point.

Now let's move on to discuss the results for the quarter.

Total sales in the first quarter increased 34%, compared to the fourth quarter, as a result of higher sales in memory products.

Sales in memory products increased 38%, while sales of image sensors decreased 13%.

Imaging revenue was $108 million in the first quarter and represented 6% of the Micron consolidated net sales.

Recall that the first quarter results reflect our manufacturing services, including wafer fabrication to Aptina, following the spin-off of that business in the fourth quarter.

As I mentioned previously we continued to account for our ownership interest in Aptina under the equity method of accounting.

Memory sales include royalties and technology fees of $35 million, which is roughly flat compared to the previous quarter.

DRAM sales increased 50% compared to the fourth quarter to just over $1 billion, primarily due to a 25% increase in bit shipments and 21% higher average selling prices.

Sales of NAND Flash products increased 21% compared to the fourth quarter to $568 million primarily due to a 16% increase in sales volume and a 5% increase in average selling price.

The DRAM quarterly average selling price increased in the first quarter for the second consecutive quarter, after declines in the prior 11 quarters.

The 21% increase in DRAM selling prices reflects the effect of a 32% increase in selling prices for core DRAM products, which was partially offset by the continued mix shift toward core products from the relatively higher price specialty DRAM products.

The greater mix of core DRAM products comes mainly from increased volumes from Inotera.

DRAM production costs, excluding the effects of the lower cost or market write-downs and idle facility costs, decreased 9% compared to the fourth quarter.

The increase in production of core DRAM products from Inotera contributed to the cost decreases, as core DRAM products generally had a lower cost per bit compared to the portfolio average.

DRAM cost reductions in fiscal Q2 are expected to be in the high single digits, and bit production is forecast to increase in the low teens, including the supply from Inotera.

NAND trade selling prices in the first quarter also improved significantly, up 14% sequentially.

This improvement in trade prices was partially offset by sales to our NAND partner, Intel, which are sold at negotiated prices approximating cost.

NAND production cost per bit increased 8% in the first quarter compared to the previous quarter, as our 34-nanometer process technology achieved mature yields.

NAND cost reductions in the fiscal second quarter are expected to be in the high single digits again, and bit production is forecast to be relatively flat compared to the first quarter, as we have reached full production on our 34-nanometer process and prepare to transition to the next process node.

R&D and SG&A expense for the first quarter came in at 8%, and less than 6% of revenue, respectively.

Both within our target range for operating expenses.

SG&A costs in the first quarter increased compared to the previous quarter due to accruals in the quarter relating to the incentive pay compensation plans that I mentioned earlier.

Future quarters should be impacted less by these accruals.

We anticipate SG&A expense in the second quarter of fiscal 2010 to be around $85 million to $95 million, and R&D expenses to be in the $135 million to $145 million range.

Other non-operating income in the first quarter includes a credit of $56 million, which is a gain recognized through equity method accounting for our interest in Inotera relating to their recent issue of equity securities at a price exceeding our carrying value.

Currency exchange rate losses in the quarter exceeded $20 million, as the dollar weakened against the euro, sing dollar, and yen.

The first quarter ended with nearly $1.6 billion of cash on the balance sheet which includes the cash flow from operating activities of $326 million in the first quarter.

We continue to generate positive free cash flow yielding $215 million in the quarter.

Operating cash flow was adversely affected by an increase in the quarter end balance of accounts receivable, which was partly due to the higher level of sales in the first quarter, and partly due to a greater mix of sales to contract OEM customers as increasing demand from OEM customers is taking a greater percentage of our available production.

Sales terms to our OEM customers are generally slightly longer than terms for our other channel customers.

This led to an increase in our days sales outstanding compared to the previous quarter, although it is still within our regular operating range.

Despite significant production increases, inventory increased only 5% in the first quarter compared to the prior year-end, mostly in finished goods.

The net effects of inventory write-downs did not have a significant impact on the margins in the first quarter, and the remaining effect of previous write-downs on ending inventory balances as of the end of the first quarter is not significant.

With respect to our consolidated joint ventures, distributions were made to JV partners of approximately $88 million in the first quarter, which consisted of distributions from IM Flash to Intel.

With that, I will close here and turn the commentary over to Mark Adams.

Mark?

Thanks, Ron.

I had mentioned in our last call that demand signals from our key customers appeared strong going into the holiday season, and that is indeed what we experienced in our fiscal Q1.

For our third consecutive quarter, we experienced a strong increase in bit shipments in both our DRAM and NAND businesses.

The bit shipment increase was driven by continued demand improvement across most of our key markets, including computing, specialty DRAM, and the consumer markets.

In addition to the bit shipment growth in DRAM and NAND, we also saw ASP improvement in both segments.

While the end of the holiday season is historically a time where demand can ease due to seasonality, demand for Micron product remains strong as we enter calendar year 2010.

Revenue from our personal computing business, which includes desktop computing, notebooks, and netbooks, was up over 80% due to a strong price environment and a substantial increase in bit production coming from Inotera.

Rounding out the core DRAM markets, we saw continued growth in our server business with revenue up over 25% quarter over quarter.

Our networking and storage business achieved roughly 30% growth increase in bits shipped and remained a strong market for Micron's specialty DRAM products.

All in all, demand for Micron's DRAM products remains robust as we continue to face allocation challenges on numerous design IDs to support our strategic customers.

We continue to see a shift towards DDR3 memory in Q1.

Bit shipments of DDR3 product increased approximately 60% quarter over quarter, and this was after Q4 where we experienced strong growth.

DDR3 represented 40% of core DRAM bit shipments in Q1.

Micron's technology and cost leadership in DDR3 puts us in a unique competitive position to capitalize in the growth in DDR3 demand coming from both PC- and server-related customers.

In addition to the growth at DDR3, DDR2 also grew in bit shipment and revenue during our first quarter.

Our mobile business continues to achieve impressive growth with revenue up over 60% in the quarter.

We feel Micron's broad product portfolio, products aimed at the mobile segment, including mobile low-powered DRAM, MCPs, PSRAM products, EMC NAND-based technology and mobile memory cards remains a competitive differentiator as we look to expand customer (inaudible) in the segment.

From a pricing perspective, ASPs for our DRAM business were up significantly despite the mix shift driven by the commodity DDR2 product from Inotera, which has a lower ASP versus our portfolio average.

We saw our OEM contract price follow the spot market trends from our Q4, which helped continue the upward trend in Q1 ASPs.

We are seeing a strong demand in price support from where we left Q1, with prices up 5% quarter to date versus the average of Q1.

While there is some precedent from the past for seasonal drop in DRAM prices in our Q2, we are encouraged by the strong demand and stable pricing we have seen so far this quarter.

Demand from Micron's flash memory products remains strong as well.

In Q1, nearly all of our NAND product shipments were based on our industry-leading 34-nanometer technology.

We feel this technology provides a strong cost advantage, and thus allowed our NAND business to continue making strong contributions to our operating results.

It is also worthy to note that Micron launched our RealSSD C300 product, which represents the highest performance drive in its class on the market.

This allowed to us cultivate additional design wins, setting us up for a strong year in 2010 for our SSD business.

We continue to be pleased with our retail business, which includes the Lexar branded flash memory products, the Crucial aftermarket DRAM module upgrades, and our award-winning Crucial.com e-commerce business.

The price environment in the DRAM and NAND component markets has led to more stable pricing in the consumer end user segment.

These combined market conditions have helped the retail business at Micron continue to make positive contributions in our first quarter.

Overall we continue to see a relatively strong retail sector through the holiday season.

Retailers were prudent in their inventory management coming out of last year's challenging conditions.

In addition, we are seeing improved sell-through year over year, and that's remained bullish heading into the new calendar year.

Trade component pricing for NAND memory increased in Q1.

Coming off an increasing ASP market through most of 2009 in NAND, we managed to drive quarter over quarter NAND ASPs up 14% in Q1 by sales of most of our product to key OEM customers.

Although quarter to date we've seen NAND ASPs down roughly 10%, this is well within our expectations given the consumer driven seasonality of flash memory.

We continue to see the market migrate to higher density chips and we feel bit consumption will continue to grow throughout 2010.

It's amazing to think in that in 2010, some smartphones are projected to ship with 64 gigabytes of NAND flash, which is roughly the same size of a hard drive in a notebook computer within the last 24 months.

We remain optimistic that market segments such as mobile, netbooks, and SSDs will continue to drive strong bit consumption, and that the NAND market will be in balance during the course of 2010.

As we close the calendar year 2009, we remain encouraged by the strong demand from all of our customers.

Inventory in our hubs and distribution channels remain very tight.

We have mentioned on our recent calls that we felt the reduction in capital expenditures that we saw in 2009 will lead to more stability in our business.

As we enter calendar year 2010, we are optimistic that these favorable market conditions will continue.

With that, I'll hand it back over to Kipp.

Thanks Mark.

We will now take questions from callers.

Thank you.

(Operator Instructions).

Your first question is from the line of Gary Hsueh with Oppenheimer.

Thank you so much for taking my question.

It seems like you still got some pretty good headroom and execution on the DRAM side, specifically with Inotera.

But it sounds like you're near-term constrained in terms of your capacity, particularly at 34-nanometer for NAND.

So could you just help me out, explain what the capacity is, or the strategy for capacity growth in NAND is at 34 nanometer this fiscal year, and whether or not you plan to revisit, or where you are in terms of revisiting your capex budget plans for 2010; where you are in terms of revisiting your decision about IMFS in Singapore?

Sure, this is Mark.

First of all, on the 34-nanometer front, we continue to finetune our operations as always to optimize and eek out a slightly better capital asset utilization.

But really the story for us in 2010 at this point is the transition to the 2x node, which as you're aware we've been saying for some time will occur throughout the year.

So that should drive it, it's a pretty significant shrink.

We're not in position to say exactly how big that is yet.

But we soon will be sampling, and you will have access to that information, but it's a pretty significant shrink for us and should drive some pretty significant bit growth.

Beyond that obviously we're looking at lots of different alternatives as to how we might add additional square inches of silicon on a go-forward basis, but we're not really in a position to talk about exactly where or when that might occur at this point.

Okay -- just a quick follow-up here, and Ron a question for you -- if you could help me understand some of the break points or how you calculate the $0.23 number.

Obviously if I take $204 million in terms of net income and divide by 1 billion shares outstanding, I don't quite get -- I don't get $0.23.

I get $0.20.

So is there anything you can help me in terms of modeling, on -- as converted basis on getting to that number, and how I should model that going forward?

Sure, Gary.

First of all, we have to take the most diluted calculation in computing our EPS, so the effect you see here is you can get to it by adding back the interest expense on the converts into net income.

And then dividing by the weighted average shares, including the convert shares, which shows in your share divisor at the 1 billion share count.

So that is how you get to the EPS number.

We compute both with conversion, as if diluted, and without conversion, to see which one has the most dilutive effect, and that's the EPS number that we're required to report by GAAP accounting.

So to give you a little bit more specific perspective on how it works -- if you take our $1.3 billion convert, it will convert -- and an as-if converted accounting basis of about $190 million of net income.

So since we're over $190 million, the share count, which was 91 million shares, goes into our diluted shares, and there's $19 million of interest income that gets added back to the net income line, and that's how you get to the EPS number on that particular convert.

You have to go through each one to come up with the math.

But that's the approach.

That's really helpful, thank you.

Your next question is from the line of Daniel Amir with Lazard.

Thank you, and congratulations on the good quarter.

A couple of questions.

In terms of your DRAM, can you provide kind of the mix between core and non-core mix in the past quarter, and where do you see that tracking into next year?

Sure, this is Kipp.

In terms of core DRAM, in fiscal Q1 it was about 45% of revenue; specialty DRAM was around 13%; and total NAND was around 33%.

Of course that adds up to about 98%, and the other 2% is captured in the royalty line.

I'm going to stay away, I think, from giving you any guidance on predicting where those go, because as you know, there's so much of it related to the ASP changes.

Right.

So maybe a follow-up question to that.

Where do you see the state of the DRAM industry right now, after a year that started very challenging, talked about consolidation, never consolidated really in Taiwan?

But where do we go into next year and how do you see the PC market playing a role in the DRAM industry?

This is Steve.

With respect to the state of the suppliers, we ended the year obviously in a pretty difficult situation.

And subsequently, I would say probably within the 60 to 90 days of entering 2009, about a third of the world capacity came offline.

Some of it, as you know, never came back online, ie [Kimona] had filed bankruptcy and that was essentially liquidated, and most of those assets are gone, or they're either not in production or never will be now, or, as you know, if you read the media, TI basically bought all the usable 300 millimeter from the US facility and is now using that in some of the capacity.

So, that never came back on, and if you've been following Taiwan, I think all of the capacity, at this point in time, the best we can tell, all the capacity that could have come back online is back online.

And those that have access to financing or funds, are essentially just marching down a path of upgrading their technology.

And there's really, I would say Samsung and Micron are probably in the best position both DRAM and NAND, and then the others are all trying to figure out how to do that, but as you know, most of them have a lot of debt they're also facing and trying to grapple with.

It was interesting, I was last week talking with one of the CEOs in the equipment business.

And I didn't know the statistic, but if what he said was true, it's the first time it's ever happened, at least since I started in this business, and that is that as of this moment, there are no new fabs under construction for the memory business.

None.

None that we know of.

And there are fabs that have been constructed.

Obviously Micron has the Singapore one, and we're optimizing the Inotera operation, and so forth.

So clearly there are companies that are going to optimize the facilities that they already have, but I found it interesting that there are just no new fabs under construction in the memory business, and that's the first time I can ever remember that being the case since I entered the business 27 years ago.

So what happens in 2010 is always depending on what happens in the broader economy.

I would tell you I think some of the success that we're experiencing now, which is either due to our own competitiveness or due to a lack of supply in the marketplace, it's one of those two things.

It's not really because the demand is so great, everything's on fire and the economy is recovered, because I think most people know that's just simply not the case.

To the extent that we actually do get an economic environment that starts to recover, those will be very favorable circumstances for the memory industry.

And then with respect to how much the PC is going to play a role going forward, I am going to turn that back over to Mark Adams and let him comment.

Thanks, Steve.

I think we -- from the PC, and even from the server sector, what we're seeing is continued upside on the commercial enterprise markets, continued investment on the infrastructure side, which has been very strong and one we want to continue to take advantage of from a portfolio mix.

On the desktop notebook side of the house, things look a little bit better coming out of December than we might have projected.

I think a lot of that has to do with companies putting off purchases they're no longer putting off and they're investing in that application as well.

So in computing overall, pretty favorable, and we are seeing even a slightly increased density per box which is helping on the demand curve as well.

Great, thanks a lot.

Your next question is from the line of Daniel Berenbaum with Auriga USA.

Hi, good afternoon.

This is Jie Liu for Daniel.

I've got two questions.

First, what is the maximum supply growth that you think is possible for 2010 for DRAM?

The ranges we've seen for DRAM are out there anywhere -- it's a wide range, about 30% on the low end to about 50% on the high end.

So you think that 40% is more the likely case?

Probably.

As you know and we've been chatting about, a lot of that just depends on how successful each company is at executing the shrink strategy.

Okay.

My follow-on question is your use of cash.

As you generate tons of cash, are you thinking about acquisitions again?

Well, I think that clearly we want to be pretty flexible in terms of how we think about what additional consolidation can happen in the memory business.

We -- I think could you expect us to be fairly conservative.

As you might imagine, a lot of companies will be going into 2010.

We leveraged our balance sheet a little bit in the last year or two, and we're still looking at how much do we want to de-leverage that.

In addition, as you already noted, we have some facilities that are capable of taking additional equipment for more capacity, and we're also, of course, looking at that.

And then on the M&A front, we still think there's some opportunity out there.

So I would say that we're going to keep some of our powder dry at this point as we look at these various alternatives.

But clearly we think we'll be moving forward from a position of strength and being able to take advantage of any of the directions we want to go.

But we think, as you know, we think we're in a pretty good position in terms of our cash generation moving forward.

Great, thank you.

Your next question is from the line of Tim Luke with Barclays Capital.

Thanks so much.

I was wondering if you might have been able to give a comment on how you've seen inventory, either in the OEM or in the channel broadly, coming out of the quarter.

Maybe wondering also if you might have been able to provide some color on how you see NAND growth for the period 2010.

Thank you.

This is Mark Adams.

I will take the inventory question.

Openly, things are still very tight, both on the OEM side as best we can see and our channel, and as I mentioned in earlier comments, in our hubs, really across the board and all applications.

We're trying to do our best to meet key customer needs, but it's -- I think a lot of that is driven -- as Steve said the demand is pretty good but not staggering upside in demand.

What we see is just a lot more prudent management coming out of last year's downturn, and the inventory levels being appropriate for the time, and coming out of the holidays we're pretty tight going into calendar year 2010.

Tim, this is Kipp.

On the supply side we're seeing estimates in the neighborhood of 80% to 90% supply bit growth in 2010 over 2009.

How should we think about, Kipp, how you approach your bit growth going forward?

What are a couple of different elements that come in for your consideration?

Lastly, if I could, Kipp, just squeeze in a last question -- you had a very significant improvement in your gross margin.

What are some of the key variables in that going forward?.

This is Mark, let me cover the NAND capacity first.

As I already alluded to, we'll see it through slightly more silicon in our existing fabs, a significant technology migration to 2x node, which I think for Micron, those two combined would drive less than the overall 80% to 90%.

And it will be a little lumpy throughout the year depending on how it goes.

Relative to any new silicon, that would be 2011 it would be released.

Thank you.

And this is Ron on your gross margin question.

Obviously, as I commented, the ASPs had significant effect in the quarter, and pretty broadly across the board in all segments of our business.

I commented last quarter that we were in the black on gross margin in both DRAM and NAND, and obviously we're substantially better on both scores as we report this quarter.

We also had idle charges, for example, last quarter in our cost of sales, and those are effectively zero this quarter as we're taking our full production assignment from Inotera, and also working on the technology transition as we go through this fiscal year to get them up on our stack technology.

But in the meantime we're taking all the trench supply and doing well with that in the market as well.

So all of those contributed to the margin story.

Thank you.

Good luck.

Thank you.

Your next question is from the line of Jim Covello with Goldman Sachs.

Good afternoon, guys.

Thanks so much for taking the question.

I guess first question is a little bit around the content per box issue.

You touched on it, that you were seeing some good trends.

But maybe particularly around some better than expected adoption of 64-bit Windows 7 systems, if you could talk about what you see there, currently and then in 2010.

Sure, Jim, this is Mark Adams.

On the desktop, notebook, and netbook arena, the overall PC landscape, we've seen continued increased megabyte per system there.

Obviously netbook drags that down, or it would even be a lot more impressive.

But if you go back in terms of overall 2009, we didn't quite break through the 2.7 range, 2.8 range.

And as we go into our first quarter, we're anticipating that to be well over 3 megabytes per system for both desktop and notebook.

You can see that both at the corporate level and even if you do your retail checks, you can see the advertisements of 4 megabyte systems at pretty good ASPs on the desktop level.

The notebooks -- the netbook piece will still kind of drive itself to be a low density offering.

So all in all, pretty favorable, certainly better, I think, than the projections were about six to 12 months back.

And so, even though really kind of the theoretical limit of what you could use in a traditional notebook or desktop is kind of in that 3.2 to 3.4 range, you're still seeing people go to 4.

And I guess again if you could talk a little bit about the 64-bit operating system adoption, and when you think that could -- how you see that right now, where you could see that going and what that could mean for DRAM content looking forward.

Well certainly I think this is the first Christmas that we're seeing those results.

I'm not sure I have all the data, but the adoption right now is pretty strong, so we feel really good about that.

I was taking your original question in terms of the context of where we got to date.

We still feel pretty good about that.

The adoption, both at the corporate level and even in the consumer level, the incentive here on the supply side, the OEM side, namely Microsoft and desktop vendors is to drive that increasingly.

So we feel pretty good about it, but we've already got some headway going into that.

We think overall it's going to be very positive for us in 2010.

Then maybe final question for me, is the incentive for the OEMs to adopt 64-bit systems or for customers to be buying 64-bit systems right now sort of future-proofing the systems?

Because there really isn't any software written right now to take advantage of that of 64-bit.

Is that just a situation where people are thinking ahead, ultimately expecting the software to be available, or is it something else that's currently driving what is for a lot of people in the supply chain better than expected adoption of the 64-bit at this point?

I think the future proof argument holds a lot of water.

I would also suggest that from a channel perspective, when people are upgrading their desktop and notebook purchase in their next generation for a full system, when I look at the behavior there, they're certainly looking to add value in the channel side of that business to upsell customers, and the people -- the consumer making the decision is cognizant to make that buy at a pretty significant discount at time of purchase versus to have to go back and do that downstream.

Makes sense.

Thank you so much.

It's very helpful.

I appreciate it.

Your next question is from the line of Uche Orji with UBS.

Can you hear me?

We can hear you.

Can I just start by asking you about the comments you made on your server business, I think it was revenue growth of 25%?

Can you just put it in context of what's driving this demand and whether it's a kind of [coverage] loss for Q4, or whether this is setting up for a fairly interesting refresh cycle for servers?

Any comments on the server demand, that would be helpful.

The best comment could I say is that we were in constraint on a number of our product segments, but I think server was the leading product in terms of our allocation positioning we're in at the Company.

We've gotten multiple upside forecasts from just about everybody, so we don't think it's a tug-of-war in between share gains between customer A and customer B.

The upside seems to be across the board in that business, and openly we could have used a lot more product to ship in the quarter, and our forecast for the foreseeable future out in Q1 and Q2 calendar year remains very strong, both in terms of density, but also in terms of just the number of raw units.

And it seems to me that a lot of the infrastructure dollars that the government put in place on a global basis is taking hold and where a lot of the dollars being spent both in the enterprise and networking space is driving tremendous upside versus where we might have forecasted it back in the first half 2009.

Great.

Another question, please.

So on your bit demand, your projection for bit supply for Micron, can you tell me how much you think your base will grow next quarter and also where you think you will come out by the end of fiscal 2011, and taking into concentration Inotera as well?

So I'm just trying to make sure I understand how this is placed?

So if you can just help us understand how you expect to see (inaudible), and also, if you can talk about capex, the (inaudible) of your capex?

Is it going to be back-end loaded, or is there going to be [some bit slide] through the year?

Thank you.

Sure.

On the production side, next quarter will be up low teens.

And we're staying away from a full year-over-year number for now.

As we have stated, we have a strong growth profile.

I think Mark has mentioned it in several conference calls, not only due to our own shrinks, but also the capacity coming on at Inotera and their shrinks as well.

And in terms of capex, as Ron's mentioned before, it is back-end loaded, and I'll turn it over to him for additional details.

As we previously said, our guidance for the year is $750 million, $850 million.

We spent about $111 million in the first quarter, so it's heavily back-end loaded.

Of course, we'll be monitoring our technology transitions and timing which can affect that and pull things in or out slightly in the fiscal year.

So that's the range we're predicting.

Just one last question.

Can you just tell me, in terms of your gross margin, for core DRAM versus NAND, if you can just tell me where the gross margins rank at the moment?

Sure, as you know we don't break them out but we do rank them for you.

We had a real strong quarter as has been alluded to by both Mark and Ron on specialty DRAMs.

It was our number one gross margin.

If you look at just our trade NAND, it would be number two.

Core DRAM after that, and imaging after that.

Of course, topping the list would be the licensing royalty category.

Next question is from the line of David Wong with Wells Fargo.

Thank you very much.

Can you give us some idea of what your PC customers are indicating in terms of their bit requirements for their calendar March quarter?

Hi, this is Mark Adams.

Going back to my earlier comments.

We're not seeing what might be -- what's a traditional seasonal pullback in Q1.

We're seeing continued strong demand coming out of the holiday end of year, both in the PC side and the server side, really across all of our segments.

We're not seeing any pullbacks on the demand forecast going into our calendar Q1 at the end of our Q2.

It seems very strong and the best we can see throughout the remainder of our quarter here.

And what were your weeks of inventory for DRAM and trade NAND exiting the quarter?

We're running real minimum, we're running less than a couple of weeks in both DRAM and NAND.

Thanks very much.

Your next question is from the line of Vijay Rakesh with Thinkequity.

Hi guys, good quarter.

Just going back on the license side.

(Inaudible.) looks like they're growing bit load [70%] for 2010.

Just wonder what your license expectations were on the quarterly run rate for 2010.

This is Ron.

We had about $35 million in license revenue, as I mentioned this quarter, similar to last quarter.

Those are approximate trajectories as we look through the year here in terms of the payments for our node technologies to this point.

But don't have any further adjustments or change to that trajectory to call out at this point.

And going back to that Windows 7 comment, 64-bit.

I mean given the (inaudible) post Christmas, what (inaudible) do you think approximately of shipping with the higher density per box?

And if things start to work in your favor, where do think that percentage could go as you move to 2010?

I'll take the first part of that, then if Mark would like to jump in.

We've seen various reports.

Looks like total systems in, you're looking at about 2.7 gigabytes.

Expectations for the year are to averages somewhere in about the 3.2 or 3.3 range.

Anecdotally, I can tell that you I've probably had, between the last two or three conferences, chatting with people who have bought new systems, I'm hearing ranges of 9 to 16 gigabytes per system.

Now, you guys are pretty powerful users, but there's some anecdotal information to maybe match whatever Mark is going to say here.

We haven't seen that demand at the per unit level, but the bit shipment demand that I suggest is pretty healthy is reflective of trend down that path.

We haven't seen the per unit box density being around 9 or 16 in that range yet, but we are seeing the forecast from our customers to be pretty staggering year-over-year from 2010 when we look back at 2009.

I think a lot of that is reflective on the desktop side at least of that growth.

Last question, on the NAND side, what's the expectation on bit growth for 2010 for the industry and for you?

We're going to stay away from a Micron prediction.

For next quarter, it's fairly flat for us.

For the industry, we think supply is going to be up about 80% to 90%.

Okay, great, thanks a lot.

Your next question is from the line of Kevin Cassidy with Thomas Weisel.

Hi, I wonder if we could change topics a little bit and talk about the RealSSD.

You mentioned design wins.

Can you say who they are?

Normally we don't comment on those.

I will tell you that with the launch, obviously we launched the products, we've been working with some key OEMs on the development ahead of our launch.

They're significant customers and we're very excited about the progress over the last quarter.

Okay.

And it's mainly desktop right now, and notebook?

Today, the current design wins that I referred to were desktop, with the announcement of our Client product, the RealSSD Client 300.

Okay, can you give an estimate of what percentage of revenue, or will it be significant this year?

Again, as Kipp has mentioned a few times on the call, we don't normally forecast out that far.

What I will tell you is that we're very pleased, and I would say the business will be ahead of our plan that we had going into the year.

Okay, great, thank you.

Your next question is from the line of Hans Mosesmann with Raymond James.

Thanks.

Going back to DRAM, the transition to DDR3 from DDR2, how different is it relative to other DRAM transitions in the past when you went from DDR to DDR2, and then from EDO to DDR, and so on?

There seems to be some differences here.

What are the implications for the DRAM industry?

It has been, I think, pretty normal overall, from what we've experienced before.

Obviously, the transition, depending on the application and the price points they're trying to target and so forth.

But we, in terms of moving forward from here, think it's going to finish out, so to speak, to be a pretty normal process over the next year.

And then from a supply perspective, there's no difference?

Seems that a lot of the supply out there may not be capable of DDR3, and could there be more shortages in that area than history would suggest?

This is Mark Durcan.

I think you're exactly right.

There are a number of competitors that can't really deliver DDR3 without the 50 nanometer node.

And as you know, that's constrained at some of those same competitors and unlikely to be assuaged.

So some of those competitors will have difficulty participating in that market.

Fair enough.

Thank you.

Your next question is from the line of Bob Gujavarty with Deutsche Bank.

Thanks guys.

Just a quick recap.

Did you mention that the NAND cost reduction in the quarter was high single digits?

Did I hear that right?

Yes.

Okay.

Just a quick point on NAND.

It's been a couple of quarters, you've had pretty good pricing.

UF 50 has been a powerful motivator for NAND.

Is it encouraging that you've been able to see good demand despite the price increases, and can you talk a little bit about the trade-offs you're seeing is in your customers between price and capacity?

This is Mark.

The difference we've seen really, in the applications that traditionally have consumed a lot of NAND, while the densities went up, the street pricing held pretty much throughout the year.

The normal vehicle, when you talk about distribution -- and I think you're really referring to retail versus distribution.

But the normal mechanism to enforce that is through some type of price rebate or price protection.

I can tell you across the board in retail they were unable to do that, use that mechanism to manage the pricing curve.

So we actually had significant demand of the higher density, but they didn't drive pricing down.

So it wasn't very surprising to see that happen because the application stayed very strong.

In addition to that, when you look at some new applications online, i.e.

smartphones, a number of smartphones are shipping with 32 gigabytes of flash memory.

There hasn't been an application like that in flash ever in existence.

So a combination of some real applications of MP3 and photography and USB that have been around for a while, legacy applications with the growth in things like smartphones and the evolution of the introduction of SSDs, it created a pretty robust pricing environment and demand curve.

That's a great answer, thanks Mark.

Just a real quick one, what's your PC unit working assumption now for 2010?

Just a range would be fine.

I didn't quite catch that question.

PC unit growth?

Yes, what's your view on PC unit growth at this stage for 2010?

We're hearing from customers probably somewhere in the range of anywhere from 12% to 16%.

Great.

Thanks, guys, great quarter.

Your next question is from the line of Bill Desmond with Titan Capital Management.

Thank you.

We had a couple of questions.

First of all, the Inotera volumes, where are we at in terms of that ramp?

Did we hear earlier in the call that that is now fully ramped because you don't have idle facility charges, or do you have more to go?

That's the first question.

Then the second question is, relative to your royalties, at what point do we see a step function increase?

Because if we understand correctly, when Inotera makes the transition to your technology that could be a meaningful increase in those royalties.

So, this is Mark Durcan.

On the first piece, relative to capacity online, Inotera is essentially fully ramped at this point, given the fact that we have to have a certain amount of capacity offline to effectuate the transition to stack DRAM.

So there's a small amount of tools that have come out of play so we can install new tools to affect the transition to 50 nanometer, and that's progressing well.

Relative to the 50-nanometer transition, I think we'd probably let Inotera comment on exactly how that's going, other than to say we have a pilot line up and running and we're very satisfied with the way that transition's going.

Oh, on royalties, I'll let Ron handle the royalties.

As I mentioned earlier, right now we're getting royalties for previous technologies, and you are correct, as I previously communicated, there's a formula for future technology rollouts and payments on a revenue basis relative to that technology rollout.

So it'll be a function of the revenue and timing of the new technology nodes and the ramp-up as well as the revenue levels.

Don't have any specific call-out on that.

So then, to make sure we're understanding, the way to think about this is that the Inotera volumes are essentially at the level they are going to be until the benefit from putting your stack technology in the fab is in place, at which point there will be volume growth that will come from that.

Concurrently, that would also then lead to an increase in your royalties, but the timing of either of those activities you're going to step aside from discussing.

Are we hearing all that right?

Yes, those are correct assumptions.

We should get substantial growth from the next generation of technology as that rolls out and there is a formula related to that.

And then the final question, can you reconcile for us the finished goods being up and yet being on allocation?

I think there's a piece of the puzzle we're missing.

It's pretty easy, Bill.

If you look at the increase in wafer output from Inotera related to WIP and then also finished goods servicing a higher shipment level to customers.

Great.

Thank you.

As a matter of fact, overall inventory was only up 5%, and there wasn't substantial growth in overall FGI, so there was some growth related to Inotera.

Just reinforcing what Kipp said.

Great, thank you.

Your next question is from the line of Atif Malik with Morgan Stanley.

Hi, and thanks for taking my questions.

Nice quarter.

If I look at the DRAM cost of the percentage of a PC box, somewhere around 7% to 8%, versus maybe more normal levels of 5% to 6%, do you think OEMs are in the position to transfer some of the costs from memory, also LCD pricing that's kind of inflecting to the consumer if the loading keeps on going up and pricing remains stable at these levels?

Yes, I think we do.

As we look at -- we just talked about earlier in the call the 64-bit phenomenon, and we looked at people who have forged on a tough 2009 in terms of PC purchases across the board in consumer and in enterprise.

We think that there is an opportunity for that.

We certainly don't see any behavior at this point of driving densities downward.

In fact, we've seen the contrary.

So at some point, we understand that dynamic would be there, but we don't think we're there yet.

Okay.

And then question on the supply side.

There is a perception out there that the supply is bottlenecked by lithography tools.

I just want to -- as you guys are kind of contemplating your plans on the NAND side, do you see any issues with you not getting the slots for the lithography tools if you don't make up your mind on NAND expansion right now?

We, I think, are in a pretty good position and have already been dialoguing with the suppliers over the last number of months, if you will.

So I don't think it's a bottleneck, per se, for us.

I think it might be in the event that those in the industry that haven't really looked at upgrading their equipment will run into some issue there.

But I think it is in general true that lithography is the longer lead-time item of all the equipment that you would buy.

I guess I could defer to the litho guys with which to -- let them tell you where they think their lead times are.

But our experience at the moment is that if you go in and order a piece of litho equipment, and the caveat I will give you is that we're talking about the most advanced stuff that they have.

If you want to go in and order the most advanced stuff that they have, it's probably going to be in the neighborhood of 10 months, maybe 12 months.

Then if much of that happens at all, then it's just going to keep pushing out from there.

For your supply goal for next year, you're not bottlenecked anywhere?

Well, we've already -- we already have our delivery slots.

Obviously, Inotera has been in plan for the conversion for some time and so forth, so that's all set up already.

And the last one, can you tell us -- DDR3 migration to netbooks, where is that?

When is that?

I'll turn that over to Mark to answer, but I just had one other thought real quick on the last subject.

The other thing, in terms of equipment, you're talking about the bottleneck, I think ordering equipment and getting it has the lead times that I just described.

But that assumes that you have the money to go do it.

The equipment leasing business, if you will, which is how a lot of companies finance their equipment acquisitions historically, that market is still completely shut down.

When I say that I'm talking about the Macquaries, the GE Capitals, etc..

There's essentially zero to very little of any of that available to even companies like Micron, and fortunately we don't have to go down that route.

But if these companies are trying to go out and get funds with which to upgrade their technology, that market is closed, and as you know, the other ones are pretty difficult for a number of them.

So the only -- the whole lead-time discussion is kind of moot if they don't have money to go out and actually pay for the equipment.

Mark?

On the netbook conversion to DDR3, I think by virtue of the tight supply of DDR3, that will be a lagging platform, if you will.

And the other side of that is you've got price point issues around that.

You also have application usage that might not warrant it where you've seen the push on DDR3 in notebooks and desktops as well as servers.

So is it a bit of constraint issue as well as just the raw application being used for the netbook today, vis-a-vis the price point.

Thanks, very helpful.

Your next question is from the line of Manish Goyal with CREF Investments.

Hi.

A couple of questions.

If DRAM prices were to stay where they are today, in the (inaudible) quarter what will be the sequential increase in average DRAM prices for the quarter?

We see prices up 5% quarter to date, Manish.

And earlier in the call you said in Q1, the demand looks better than seasonal (inaudible).

There was a comment that much of the capacity that was taken offline earlier in 2009 is back online, and you are seeing spot prices drift lower.

If the demand is so good, why do you see spot market price drift lower?

What is your take on that?

I'll answer a part of that and then Mark can answer the other part if he actually heard it.

First of all, we didn't say that all the capacity was back online.

I said that the capacity that was capable of coming back online was back online.

Sure, sure.

The interesting part about that, a large part of that, obviously particularly in Taiwan, is on the older technology.

So it came back online, but it didn't come back online in a more advanced technology, which has historically been the case.

It's come back online with lower technology because of the lack of ability to buy the equipment to upgrade.

Mark.

To your question about the activity in the spot market, what you really have is two classes of product here.

You can imagine when that capacity you referred to was offline if you're a major OEM customer, you're looking at your supply base, and you're a little bit concerned about the ability for someone that tier 2 supplier node be able to service your demand.

So what you now have is that additional capacity coming online but not with homes because OEMs can't toggle back and forth as quick.

So what you have is two tiers of OEM pricing.

You've got your OEM contract pricing and then you've got the spot market, low-grade tier 2, DDR2 product coming back on the market, which probably can't warrant the margin nor the volume support.

So for companies like Micron, specifically Micron who is being asked by our customers to increase our share of major OEMs, the demand is very robust.

The fact that there might be some available spot market material is just a byproduct of that additional demand coming back on with no real homes.

Thank you so much.

You bet, thank you.

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

If you would 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 uncertainties and actual results may differ materially.

For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC, including the Company's most recent 10-Q and 10-K.

Thank you.

Thank you.

This concludes today's Micron technologies first quarter 2010 financial release conference call.

You may now disconnect.