美光科技 (MU) 2010 Q2 法說會逐字稿

Good afternoon.

I'll be your conference facilitator today.

At this time, I would like to welcome everyone to Micron Technology's second quarter 2010 financial release conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer session period.

(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 second 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 of course Mark Adams Vice President of Worldwide Sales.

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

30 p.m.

Mountain Time.

A webcast replay will be available on the company's website until March 31, 2010.

We encourage you to monitor our website again 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.

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 and 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.

And now I'd like to 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 for the second quarter of fiscal 2010 which ended March 4, 2010.

The Company reported net income of $365 million or $0.39 per diluted share on net sales of just under $2 billion.

Again, each of our convertible notes are included in the diluted share count using the if-converted method as they are each diluted at the current level of income.

Combined with our first quarter, year-to-date net income is $569 million or $0.61 per diluted share on net sales of $3.7 billion.

You may note from the financial summary on the slide that both our aggregate equity method investees, primarily Inotera, and our consolidated ventures, principally TECH Semiconductor were profitable in the second quarter as a result of generally improved market conditions.

In the second quarter, we entered into a new solar joint venture, where we own a 50% interest in the development stage company.

Our initial noncash contribution consisted of manufacturing facilities and equipment, intellectual property and a fully paid lease for Fab 1A at our Boise site.

No gain or loss was recognized on the contribution as our initial contribution was valued at $65 million which was equal to the carrying value of the assets.

We will account for our interest in the venture using the equity method of accounting.

Recall that several new accounting pronouncements were effective for Micron with the beginning of our 2010 fiscal year.

Prior periods results and presentation have been recast to reflect the presentation comparable with the current period.

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

Total sales in the second quarter increased 13% over the first quarter.

Compared to the same quarter of last year, total sales increased 97%, reflective of recent improvements in market conditions in our business and industry, most significantly for DRAM products.

Our joint venture relationships, particularly within Inotera and IM Flash are improving our leverage to take advantage of this upturn.

DRAM revenue increased 24% compared to the first quarter.

This increase resulted primarily from a higher volume of sales of higher gigabit density DDR3 products on advanced process technologies and from a higher volume of sales of DDR2 products from our Inotera venture.

Revenue from sales of NAND Flash products in the second quarter were roughly stable compared to the previous quarter, yet were 32% higher compared to the same quarter in the previous year.

This increase was primarily due to increased bit production of products on our 34 nanometer process technology.

Memory sales in the second quarter include royalties and technology fees of $34 million which is roughly flat compared to the previous quarter.

The total DRAM average selling price increased 7% in the second quarter compared to the first quarter, while total bit shipments increased 17%.

The selling price increase is a product of a 10% increase in selling prices for core DRAM products and a 13% increase in prices for specialty DRAM products.

These increases were partially offset by the continued mix shift toward core products from the relatively higher priced specialty DRAM products.

The greater mix of core DRAM products comes mainly from production of higher density DDR3 products and from increased volumes from Inotera.

DRAM production cost per bit, excluding the effects of the lower cost to market writedowns decreased 7% compared to the first quarter.

Micron's cost for products supplied by Inotera is determined using a margin sharing model, where increasing market selling prices achieved by Micron increases Micron's cost of product from the joint venture.

Consequently, cost per bit increased on Inotera volumes purchased in the quarter while cost per bit on Micron-produced volume declined greater than the 7% average.

Micron's participation in Inotera's net earnings is included on our income statement on the line income from equity method investees.

DRAM cost reductions and bit production in fiscal Q3 are both expected to be relatively flat compared to Q2.

Micron-produced product will again show cost per bit declines while Inotera cost is expected to be flat to up as it varies partially based on market price trends.

In addition, Micron is incurring additional cost per bit from Inotera as it prepares for qualification and initial production ramp of Micron's 50 nanometer stack product which will begin in the third quarter.

Both total NAND and trade NAND selling prices decreased slightly in the second quarter compared to the first.

Total NAND's bits shipped in the second quarter was flat compared to Q1 in part from fewer NAND purchases from third party suppliers in support of our retail channel.

NAND production cost per bit in the second quarter decreased 6% compared to the previous quarter.

NAND's bit cost reductions in the fiscal third quarter are expected to be in the high single-digits range and bit production is forecast to be up mid- to high teens.

SG&A and R&D expenses for the second quarter came in at 5% and 7.5% of revenue respectively.

SG&A expense in the second quarter includes costs associated with our pending acquisition of Numonyx.

As a result of recently effective accounting rules that require such costs to be expensed in the period incurred as opposed to the old rule where they were capitalized as a part of the purchase price.

R&D expense in the second quarter includes a higher level of development costs for our 25 nanometer NAND process as we have accelerated the introduction of this industry-leading technology which is nearing its initial production ramp.

We anticipate SG&A expense in the third quarter of fiscal 2010 to be between $95 million to $105 million and R&D expenses to be in the $140 million to $150 million range.

Other operating income in the second quarter includes a credit of $11 million in receipts from the US government in connection with antitheft dumping tariffs collected from certain of our competitors.

Now the balance sheet.

The second quarter generated over $600 million in free cash flow to end the period with $1.9 billion of cash on the balance sheet.

Our strong operational performance in the second quarter generated $804 million in cash from operating activities.

Expenditure for property plant and equipment in the second quarter was $180 million.

Our IM Flash Singapore fab is moving forward with startup activities including placing purchase orders and preparing the facility for tool installations, most of which will commence in fiscal 2011.

You may recall from prior disclosures that $70 million of convertible notes mature on April 1, 2010.

These notes have a conversion price of $11.28 per share.

These are convertible notes we acquired with the Lexar purchase.

During our second quarter, Inotera sold equity securities to its partners and the public in which Micron invested $138 million.

Micron's total ownership interest remained approximately the same at 30%.

With this additional capital and their planned debt offerings, we believe Inotera has the capital necessary to fully execute the conversion to Micron stack process technology.

With respect to our consolidated joint ventures, distributions were made to JV Partners of $84 million in the second quarter which consisted of distributions from IM Flash to Intel, our partner.

With that I'll close here and turn the commentary over to Mark Adams.

Thanks, Ron.

Demand for Micron's memory products remained strong across nearly all of our customer segments in our second quarter.

Year-end bit shipments were up 17% quarter-over-quarter and our NAND trade bit shipments were up 5% over our first quarter.

The latter illustrates the strength of the NAND market where we have historically experienced a seasonally slow demand cycle during this time of year.

Revenue from our personal computing business which includes desktop computers, notebooks and netbooks was up 34% quarter-on-quarter due to a strong ASP environment and an increase in bit shipments.

Corporate PC demand has gained strength in calendar Q1 which, when combined with continued solid growth numbers around our retail, suggest the PC business looks pretty healthy in 2010.

Rounding out our core DRAM market, revenue from our server business was up 22% quarter-on-quarter.

Bit forecast from our server customers have ranged between 80% to 100% growth year-over-year.

Our networking and storage business achieved a 24% revenue increase in our second quarter.

This was primarily due to a quarterly increase in ASP for equipment of 20% reflecting continued strength in our specialty products as well.

Demand from our networking customer-base has strengthened as infrastructure investments continue to drive a need for equipment purchases.

All in all demand for Micron DRAM product remains robust as we remain challenged to support our strategic customers growing demand.

We continued to see a shift in demand in bit shipments towards DDR3 memory in Q2.

Bit shipments of DDR3 product increased approximately 28% quarter-over-quarter.

It's worth noting that this growth is after the previous two quarters posted 40% and 50% quarterly increases respectively.

Even when considering the increased DDR2 output from our Inotera relationship, our DDR3 product mix increased from 40% to 45% of our total core DRAM revenue in Q2.

Despite this market transition to DDR3, DDR2 bit shipments also increased, up 11%.

When you couple the Inotera output with Micron's 200 milliliter capacity that primarily supports our specialty products, we feel Micron is in a unique position to take advantage of our strong opportunities in both the core and specialty DDR2 markets going forward.

From a pricing perspective, the weighted average ASP for all of our DRAM products were up 7% quarter-over-quarter.

We are seeing sustained strong demand for our products and price increasing so far quarter to date versus a weighted average ASP in Q2.

DDR3 pricing remains solid throughout Q2 and we are encouraged with the continuing strength in our DDR2 ASPs as well.

DDR2 spot market pricing is up dramatically from late January on a one gigabit equivalent component.

In fact, the recent spot market pricing has shown that DDR2 is basically reached ASP parity per light density with DDR3 at this point in our Q3.

In total, our aggregated DRAM ASPs are up mid single-digits quarter to date from our Q2 average.

Indications from our OEM contract price negotiations for April, our net prices will remain trending higher.

Demand for Micron's flash memory products remained uncharacteristically strong throughout our second quarter as well.

We continued to ship primarily all of our NAND products based on our industry leading 34 nanometer technology.

In addition, we have begun the qualification process with major OEMs in our Lexar business on our recently announced 25 nanometer flash memory technology.

We anticipate first customer shipped to be later in this current quarter.

We feel the 25 nanometer process technology will further strengthen our cost leadership position in flash memory.

On the M15 front, we began shipping our award winning C300 RealSSD beyond our OEM customer base into our distribution channel during the second quarter.

Initial demand for SSD products is very strong as we are currently on allocation for our channel customers and we sold out on our Crucial.com inventory in its first week of being offered online.

Our retail business had an outstanding second quarter.

The Lexar branded flash memory card and USB products coupled with our Crucial branded SSD and DRAM module solutions have continued to capture impressive share gains globally.

At a time of tight supply in both DRAM and NAND, our retail customers increasingly realized the value that Lexar and Crucial offer as a vertically integrated supplier to meet their critical demand requirements.

Given the price stability in the end-user markets our retail channel continues to positively contribute to Micron's operating performance.

Trade component pricing for NAND memory was relatively flat quarter-on-quarter.

This was compared to the quarter-to-date reference of down 10% we gave on our last call.

Due to seasonality, one might have expected potential for post holiday softening in the NAND market.

This clearly didn't materialize, and NAND quarter-to-date pricing has remained stable.

While there are signs of 3-bit-per-cell NAND from our competitors in the market, we're pleased that pricing for Micron 34 nanometer 2-bits-per-cell high performing flash memory is able to maintain a premium in the markets we serve.

We feel the market will trend to higher density chips and upbeat consumption will continue to grow throughout 2010.

We remain optimistic that market segments such as mobile, consumer electronic devices, such as electronic readers and SSDs will continue to drive demand and that the NAND market will remain in a favorable condition over the course of 2010.

As we head into the second half of our fiscal year, we're encouraged by the strong demand signals across most of our channel segments.

Inventory in our high distribution channels remains lean and we have no reason to believe that this will change in the foreseeable future.

Should remain challenged to meet the upside forecast from our major OEMs in both DRAM and NAND.

And that's what we'll continue to focus on driving our available capacity to customers that deliver the most strategic value for Micron.

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

Thanks, Mark and now we'd like to take questions from callers.

Excuse me.

Just a reminder, if you are using a speaker phone, please pick up the handset when asking a question so we can hear you clearly.

With that, please open the question line.

Thank you, sir.

(Operator Instructions) Our first question in queue comes from Jim Covello with Goldman Sachs.

Your question, please?

Great.

Thanks, so much, guys.

Appreciate it.

Congratulations.

A couple of things, I guess, you know maybe the first thing, relative to the discipline that we've seen so far this cycle in the -- in the memory space which has led to this very, very healthy supply and demand dynamic, one of the things I think that you guys have been rightly focused on has been that the second and third tier DRAM players didn't have the capital to invest.

How do you think about that dynamic changing as the cash flow for the industry improves and there's a little bit more capital availability?

Now, not everybody's going to have the cash flow that you guys generated, but, you know, relatively speaking, better cash flow across the industry?

Hey Jim, this is Steve.

Obviously a little hard to predict what -- what they'll do, but when we do our own competitive analysis, we, in answer to that question, we primarily, I think focus on their debt structures.

And you know, if you look at cash to short-term debt, at least what's on the balance sheet right now, I think you'll find that Samsung of course is in a little different category because they don't break it out in terms for us to measure but I think you'll find that Micron's the only one that has all of it covered 100% with cash on the books right now for any kind of debt that's due in the next 12 months.

The other guys all have challenges around that.

So, I think it's true that, two things that I think Jim, you ought to consider when you think about how this plays out.

One is that they have pretty big debt structures to deal with, as a result of what's happened over the last two, three years.

And then secondly, when you think about where most of them are in their technology migration, in particular, the ones that have, you know, some of the more significant debt structures relative to their capital size, have some pretty big challenges in terms of migration to the next technology node.

So, you know, I still find it interesting that I made this comment on the last conference call that we had, earnings call that we had, that it still remains the fact that there is no new memory fab under construction right now anywhere in the world.

And that is the first time that's ever occurred in my lifetime in this industry and it's still that way obviously several months later.

So when you're thinking about, you know, what can happen moving forward, clearly, you know, as you get into probably later 2011, 2012, it's a little early to tell and it's hard to predict what will happen with capital deployment, but from everything that we see right now, there are a lot bigger issues facing most companies than simply building new fabs.

And it's both a requirement that they first and foremost you will see companies try to advance their technology if they can do it beyond what they have to do in terms of debt repayment.

So, I don't think there's any -- anything in the near term, Jim, that's going to change that equation.

Very helpful, thank you.

And if I could just ask one follow-up.

I know there's been some concern from folks with maybe some of the second and third tier OEMs about despecking DRAM given, you know, given the acceleration in pricing.

Now, I wouldn't imagine that's much of a problem with the larger OEMs, but anything you've seen there, any just broader comments on, kind of outlook on content per box.

Thanks again so much.

Congratulations.

Hey, Jim, it's Mark.

We haven't seen nor are we getting forecasts that would align with that.

We kind of hear from the press and analysts that there might be that potential but we haven't seen it.

And I tell you what, it feels like it would take an awful lot of that to swing back into a supply problem.

Great, thank you.

Thank you, sir.

Our next question in queue comes from Glen Yeung with Citi.

Your question, please?

Actually just to ask a clarification on that last question, which is, as opposed to despecking per se, what's your sense on the rate of bit per box growth in 2010?

Any sense that that may be different than your original expectations a quarter ago?

So you know, it's funny, because we looked back about a year ago, we were asking the same question, was it going to go any higher?

It's going to peak out at about 2.5 gigabytes per system.

It looks like it's going to be about 30%, more or less.

Right now it's in the mid-3s.

So, and you can, you know, if you look at kind of just pick up a Sunday paper and you look at the inserts, there's a lot more 4s and 8s than there used to be.

And so I think contrary to our opinion a year ago what might be in front of us, it's actually the reverse of what was being projected and we don't see anything that's changing that today.

Okay, just a couple of other questions.

One is, what your sense is on, on inventories.

A few of the OEMs have talked about strategic inventory builds.

And I wonder if that's something that you sense out there.

My other question is just any update you have on the Numonyx deal.

I'll take the first piece, the inventory piece.

We're not seeing any of that, and a lot of it has to do with just meeting the current demand in the market today and, I scratch my head when I get asked that question, given that, you know, people would have to believe one thing, that pricing's going up to accumulate inventory today if they think it's going to be higher in the future.

And we're, it's so tight right now that, it's hard to believe anyone's got a lot of extra inventory to ship into that dynamic.

On the Numonyx front, it's going pretty well.

We're clearly working through, you know, integration plans and preparing for a close.

We received regulatory approval in a number of countries and we're still we think on target.

Last time we said I think somewhere in the next 90 to 180 days from when we signed which was in February and we're still on that track so we feel pretty good about it.

And I would just add that the more that we interact with the company, I think the more excited we are about, you know, their technology and their products.

Great, thanks guys.

Thank you, our next question in queue comes from Gary Hsueh with Oppenheimer.

Your question, please.

Hi, this is Wenge Yang for Gary.

Couple of questions, regarding, you know, the DRAM prices moving up pretty fast, and do you see this instrument by the current demand in the PC space?

Or is it driven by the PC OEMs worry about future supply constraints so they are building up inventories?

As a related question, what's your current view on the magnitude of inventories that PC OEMs have right now?

Yes, kind of to restate my earlier comment I don't think there's an inventory build going on.

You know, it's funny, if you look at some of the recent data about retail PC growth year-over-year, it's pretty significant, even if you look at the last three months reported.

Somewhere in the, you know, 33%, all the SI's, 50% -- 57% in December and 27% in January, those are pretty big numbers on the demand side.

And then you add in the corporate growth and starting to get invested back in the PC upgrade model, we don't think there's a lot of inventory build to be honest with you.

We think it's pretty healthy demand.

And again, I guess one could argue that February and March are typically not great demand seasons.

I think we're in an exception period around this industry.

That's pretty helpful.

Just a follow-up on your Singapore fab, giving you are start ramping towards the end of the year, could you provide some color on how do you finance your CapEx for the next year's ramp?

And also for that new fab, are you reconsidering the Intel share for that new fab?

Are you thinking about buying back some of the Intel ownership of that new fab?

Well, this is Steve, with respect to the Intel partnership, we like the partnership, it's gone well, we've continued to coinvest.

Whether or not they decide to, you know, coinvest in future projects, I guess you'll have to ask Intel.

We're making the assumption that we're partners going forward.

We're going to keep moving that business forward.

You asked a question, related to that though, what about the financing of the -- what we would do in terms of the next Singapore fab for NAND.

I will tell you, you know, if you do the math and you look at the results of the company right now, we don't see any issue with respect to being able to finance that CapEx.

I think if your question is trying to get at do we see a need to go to the markets here any time soon, the answer is no, we don't.

We have great cash flow and, you know, right now it looks pretty good for our ability just to deal with it internally.

Okay, thanks.

Thank you.

Our next question in queue comes from John Pitzer with Credit Suisse.

Your question, please?

Yes, guys, thanks for taking my question.

Mark, you talked about the server business being up about 25% sequentially, and I think that's the second quarter in a row it's been up that strong, but still not as strong as the overall PC business.

I guess we in the investment community have been focused on what's turning out to be a pretty strong server cycle.

Given that DRAM bits aren't really growing all that much in the fiscal third quarter, how should we think about your guys' ability to manage mix to maybe higher ASP, higher margin DRAM for the current fiscal quarter?

Well I think one of the limiters to that has been the Inotera conversion to our stack technology, which will open up some more capacity in the server business.

Our growth there is limited on available performing parts for that space and it's still way above what I would say is our annual plan in the segment, halfway through the year.

It's just there's a big growth in servers, it's staggering, really.

And so, as we get the Inotera converted over to stack technology, we'll have more server part yields come out of that and we'll be able to increase our top line revenue and growth and bit shipments into the segment.

So calendar year third quarter is the quarter we could actually see a positive mix shift on the DRAM business?

Yeah, I believe so.

And then, guys, just an update on CapEx for this fiscal year and maybe some guidance for next?

This is Ron, I've previously communicated $850 million to $950 million for the year on CapEx for fiscal year '10.

And, we're still on that path.

The IMFS plan is going to have some amount of facilitization capital invested at the end of the fiscal year.

That was contemplated in that guidance number.

In terms of next year's CapEx guidance, we're still working on the plan of the ramp of IMFS and the exact timing and rate of that ramp.

So don't have an update for FY11.

In general it's -- I expect it to be a little bit higher than fiscal year '10 because of the IMFS ramp, but we'll give you that update once we have a plan pinned down.

And then guys, my last question, just with the migration to 25 nanometer on the NAND flash front, does that close the gap on gross margins between NAND and DRAM or can you help me quantity how big that gap is and how that might trend through the balance of the year?

First of all, in terms of gross margins on DRAMs --

I guess, take a look at it ex the Intel which you sell at cost.

Yes, so if you look at base trade NAND and core DRAM, the margins are pretty similar today.

So that's, I guess that's the point of comparison.

We're doing really well on the NAND side of the business with the 35 nanometer in full production and 25 nanometer out in front of us, which will give us the bit growth I commented on in the third quarter in NAND and the technology has really giving us leverage on the financial side already at 35.

So in general, we're pretty close to parity between the two.

Ron, just as a follow-up on my last question, could you actually see NAND, trade NAND gross margins higher than DRAM in the fiscal third quarter?

Well, that's going to -- we'll have to know what the pricing is in order to run that calculation.

And we're not trying to -- we got out of the business of forecasting pricing a long time ago.

But Steve, it sounds like you have more cost-downs in the fiscal third quarter for NAND than you do for DRAM, is that fair?

Yes, I think that's a fair statement.

25 nanometer will be significant, although it'll be ramping in the third quarter, and so it'll be -- it will be mainly post third quarter in terms of the big effect on cost down.

Great, thanks guys.

Thank you, sir.

Our next question in queue comes from Daniel Berenbaum with Auriga USA.

Please go ahead.

Hi, good afternoon, thanks for taking my question.

Can we just revisit the guidance on DRAM?

I thought I heard no cost reduction and basically flat bit growth.

So, just first of all, is that correct?

And I want to talk about some of the mechanics there and then expectations for full year.

Yes, Daniel, you got it right.

So, okay, so flat bit growth, flat cost reduction and I, I guess I'm struggling to understand a little bit the mechanics of flat bit growth.

Are you taking capacity offline at Inotera due to the conversion?

Yes, well we have a couple things going on.

One is, probably more than a couple, two or three.

First of all, on our specialty products, remember that we're not driving on cost reductions per bit on those products, because they're at higher margin, more customized and they tend not to migrate on the process technology as fast.

So, that's part of our business.

You wouldn't expect to see something there.

And we're giving you obviously an average figure for the quarter.

Secondly, Inotera is in fact in transition and we are currently utilizing bits out of that facility in two different ways.

One, as we've already stated before, it's primarily entrenched product and it's on an older technology and then secondly, they are underutilizing the facility in order to be able to prepare for the transition to the Micron Technology.

So, even though we'll have cost per bit reduction internally in Micron's core DRAM business, it's being counter-affected by what's going on elsewhere.

And that's obviously a temporary effect, but that's what we're going to experience for this quarter.

We're on a margin pricing model as I mentioned earlier in my comments.

And it's a function of how the pricing is moving in the marketplace.

As I commented, that affected us in Q2 in the margin sharing formula that comes through our cost of sales and the trajectory would indicate similar effects in Q3 and then we get our share of the net income from Inotera on the equity method investment line of our P&L.

So you would expect that number to become more positive next quarter?

Yes, and following as they ramp up their technology.

Okay, and then just last question, back just on the bit growth and cost reduction, so flat for next quarter, but then how do you see the rest of the calendar year playing out?

I mean, should we expect sort of flat bit growth and flat cost reduction for a couple of quarters or do you resume, you know, some normal trajectory and can you give us an idea what that is?

We won't extend it out for the year, other than if you go back to the analyst meeting, we did put a chart up that said if you go from calendar Q4 of '09 to calendar Q4 of 2011, we're going to be down about 180%.

But I can tell you the cost reductions accelerate throughout this calendar year as the shrink comes on play.

So they wouldn't -- maybe just help me out with the math.

If I was to peanut butter that 180% across, you know, all the rest of the calendars through the end of the year what kind of quarterly run rate would that get me?

You can certainly try that, but I guarantee it won't be linear.

Okay.

Understanding that it won't be linear, but in my imaginary world, if it was, what would that number be?

I think you can do the math quicker than I can on this call.

Okay.

All right, thanks.

Thank you, our next question in queue comes from Tim Luke with Barclays Capital.

Your line is open.

Thanks so much.

Just to clarify then, could you just give us the bit growth assumption again on the NAND side in the coming quarter and if we were to, to go from here on in in the quarter, what would your assumptions be for ASPs with respect to both DRAM and then NAND as of now?

Sure, I'll take the first part of that and turn then it back over to Mark Adams.

We guided that NAND production bit growth should be up mid- to high teens.

And cost reductions down high single-digits.

And on the ASP forecast we typically don't go look out to the future, we will give you a quarter-to-date update.

On the DRAM side, I commented earlier, it's mid-single-digits over our weighted average cost from last quarter.

On the NAND side, it's basically flat quarter-over-quarter to where we are in the quarter to date.

Okay.

Steve, I was wondering if you might have any commentary on how you're seeing the industry bit growth in the DRAM side begin to shape up as you move through the year.

It would seem that having had an industry number in the 40% to 50% range, given the strength in pricing, that you're seeing some of the players begin to edge that upwards, how do you think that plays out?

And you have seen some of the major players begin to elevate their CapEx, obviously that's more of a 2011 in terms of impact, how do you see that playing out?

Well, I think the way to look at it in general is, technology transitions which is really what everybody's focused on to date, primarily technology transitions.

That's been able to generate somewhere in the 40% range of bit growth per year.

Sometimes it's a little bit lower, sometimes it's a little bit higher.

And that's what we're all focused on.

Now some may, some occurrences are happening, whereby as an example, we're going from, you know, a 70 nanometer trench product to a 50 nanometer DRAM stack technology and the acceleration might be higher in some instances, around certain, certain facilities, so if you look at some of the industry supply data, Gartner, et cetera, you'll notice that they're along the lines of what you just said, that they're all kind of running in the 40%, 50% range.

And that's probably about where it's going to be.

In order to get beyond that, you have to have New Silicon.

And we just don't see New Silicon at the moment really being much in play anywhere.

How about the CapEx increases touted by some of the larger players, in terms of how you see that playing out next year?

Yeah, you know, I've been around this industry long enough I've seen a lot of cost CapEx forecasts that have either been cut in half or don't materialize at all, so I wouldn't -- I don't know how to interpret, you know, and aggregate all these CapEx forecasts that some of these companies have.

I will tell you that, it's already been noted by others that the, you know, the equipment industry also has its own challenges in terms of, you know, these big fluctuations in CapEx requirements.

And so there's somewhat of a mitigating effect.

No matter what anybody wants to do, going through time as a result of, you know, all these things.

Right.

Perhaps just the run or thoughts of anyone just for the coming quarter, how should we think about the revenue contributions from Numonyx?

When should we start putting in what range of additional revenue from your addition?

Well, I don't think, you know, in the quarter that we're currently in, which is obviously our third fiscal quarter, unlikely there'll be much if any impact there.

There might be some, I mean we're hopeful we'll get it close, but the way to think about it then is it would have an impact in our fourth quarter if we're able to close it before then and we've already released what their product quarterly revenue was.

That's still as a good number as we have.

I think you should think about that being added to Micron's revenue number for the fourth quarter, assuming that we're able to close in that timeframe.

Okay, and maybe just going forward for the year, you kept both R&D and SG&A operating expenses pretty in line with where the street models have been.

How should we think about that as we go through into the August period and beyond?

Are there any other factors we should be aware of given the higher, you know higher demand and also higher pricing?

Well, we think our model's pretty leveraged as we said before.

We liked where we were given that we had facilities that were capable of being optimized.

And essentially we're making investments that we need to make in order to move the technology forward.

Remember that once we have Numonyx, obviously we'll have additional R&D dollars that will flow through there because they have an R&D budget they work on as well and the same for SG&A.

Clearly over time, you know, we will sort -- you know, be able to sort through that and optimize the model, but you know, so I think the way to think of it is, you know, we may on the margin, have some incremental SG&A and R&D and, you know, as an example, you know, as the company continues to perform better, we'll continue to have some additional SG&A just from our incentive comp programs and, you know, things that we have to do there.

So, but there's nothing large on the horizon, I think, if that's what you're trying to get at.

We don't know of any dramatic changes from what we have in the models today.

Congratulations.

Thanks very much.

Thank you, sir.

Our next question in queue comes from Vijay Rakesh with ThinkEquity.

Please go ahead with your question.

Yes.

Hi guys.

Just a couple of questions here.

So you mentioned flat bit growth and flat costs the end of next quarter but, you know, if the market's picking up with server and, you know, obviously your capacity at Inotera seems to be coming off, wouldn't you see some you know, DRAM pricing stack the servers quite a bit more?

Is that -- go ahead.

Yes, I guess, you know, I think your thought process is similar to others.

We would have expected, as we said in the last quarter, to have, you know, we're basically through the seasonality period.

And, you know, the US economy as you know it is kind of doing okay, but not fantastic.

I think we've seen strength in some segments we didn't expect to see.

But, you know, the reality is, the worldwide economic recovery and strong engine, you know, we just don't think it's happened yet.

And we've come through a reasonably strong seasonal period that didn't really turn out to be all that slow and you know, we're in a period now where at least historically there's been a momentum build up through the Christmas season.

So I'll leave all the speculation and price forecasting to others, but if you look at the economic fundamentals at the moment, I can understand why, you know, people are thinking like that.

And how was DRAM pricing trended so far on a blended basis to the quarter?

In the current quarter?

Yes, quarter to date, it's up, in the mid-single-digits and as I mentioned in my comments earlier, DDR3 remains pretty healthy.

And, we've been pleasantly surprised by a very strong DDR2 market, which I mentioned with at bit parity to the spot market versus DDR3 today.

On the NAND side, obviously you guys were pretty (inaudible) NAND last year, late last year.

How much of the output today is on [grey bush] and NAND and what's your mix on 3 bit?

So the NAND output today on 3 bit is relatively new, it's less than 5%.

The, you know, the 34 nanometer NAND as a percent of total has peaked and is now starting down as we ramp our 25 nanometer NAND.

And it really is, has been essentially 100% other than, other than legacy demand for mobile devices, specialty devices SLT type products.

All right.

Last question, Rambus, any -- want to add any color on that?

Anything coming up there?

Well that trial has been delayed again.

And we just, I just don't have any sense as to when that will occur now.

Okay, thanks a lot.

Sure.

Thank you.

Our next question in queue comes from Shawn Webster with McGuire Capital.

Your question, please?

Yes.

Thanks for taking my question.

You guys talked about what the shipments were in your February quarter and what your outlook for production was.

Can your share with us what your DRAM production and NAND production did sequentially in your February quarter?

Sure can, we did, DRAM bit production in Q2 up low double-digits.

And NAND was down slightly.

Okay, thank you.

And how about total wafer production, sequentially, for February?

Fairly flat.

Okay.

And then, what are your OEM customers telling you to expect in terms of seasonality as we go into calendar Q2 and calendar Q3 and versus normal for the industry?

Relative to overall demand -- what's the question?

Bit demand expectations going into calendar Q2 and calendar Q3 that you're hearing from your OEM customers right now.

So I think depending on the segment, my answer kind of fields differently, but overall on a quarterly basis, we're seeing kind of DRAM bit growth up in the, you know, low to mid-double-digit percentage, 10% to 15%, in that range.

On the NAND side, little bit more elasticity towards the holiday season, but still low double-digits up to maybe as high as 20% depending on again the segments we serve.

And that's for calendar Q2 and calendar Q3?

That's quarterly bit growth.

That's right.

Okay, and then you guys have already commented a bit on the inventories.

In the past you've given some color on week -- so channel inventory, is there any data you can share with us on that now?

Yes.

The best -- I mean, we have not seen any build in our channel inventory.

As a matter of fact, you know, we left -- we left our last quarter probably lower than the prior quarter.

I don't have the numbers right in front of me, but we're right around on average three weeks, and I think we're slightly below that in the channel coming out of the quarter.

Okay.

Three weeks, what's a normal level for you guys?

It's in that three week period.

It's right about that and coming out of the holidays we remain pretty lean in the channel.

That's why -- that's what led to my earlier comment about inventory build being tough to imagine right now.

Okay, just to clarify, you said it's three weeks and, but normal levels would be what again?

Still in that three to four week, you know, so it's a little bit lower than where we are today.

Okay, thank you very much.

Our next question in queue comes from David Wong with Wells Fargo.

Your line is open.

Thank you very much.

Are you seeing any effect from the new server chip launches from Intel and AMD affecting server memory demand?

David, if I understood your question right, you were asking if we've seen any impact from the new microprocessors out of AMD, is that correct?

Intel and AMD, yes, are these affecting your server memory demand?

Really can't discern between the two.

Most of our guidance on bit growth incorporates all of those changes that we're seeing in the mix from our customers, so no, no particular commentary on, on a given microprocessor set.

Okay, and internally at Micron and also your estimate for DRAM companies in the industry, what were the weeks of inventory?

We don't have an estimate for the other DRAM companies in the industry.

What was your question, David?

Micron, what were your weeks of inventory end of the quarter at Micron?

Well markdowns, as I just said it was, I assume you mean the channel, weeks of inventory in the channel?

No, I mean at Micron.

Our turns are running about five.

We run about five turns.

Okay, thanks.

Thank you.

Our next question in queue comes from Daniel Amir with Lazard Capital.

Please go ahead.

Hi, this is Lauren Stoller in for Daniel.

Thanks for taking my question.

So as bits continue to increase from Inotera should we expect to see royalties increase as well?

Hello?

This is Ron, today we collect royalties on the legacy technology 68 and 50 nanometer technologies.

We have that continuing to come through in payments from our, our partner, Inotera and Nanya.

Going forward, the arrangement is that there are payments that will come on the stack technology nodes going forward, on a scale that we've mentioned in the past.

And we are evaluating with our partner how to deal with the structure of those royalty payments due to changes in Taiwanese tax law.

We expect the economics will be the same, but we're working on a structure that's more amenable from a tax standpoint.

But the way to think about it is there'll be a flow coming from stack technology over time.

Okay and that flow could be seen in royalties or in the form of the net income that you were talking about earlier?

It'll come in on the P&L, the landscape could be different, depending on what we do relative to the law changes.

Okay, and then what's the timeline for that?

Timeline, when the production starts, we'll have to have that structure resolved and Nanya is actually starting up in their production of the stack technologies now so some of that's just beginning to happen.

Okay, great.

And then, if I understand correctly, I understand that your costs are going to be relatively flat on the DRAM side because of all the moving parts.

But, as bits continue to increase from Nanya and Inotera will costs go up?

Might we see a situation like that?

So there's a couple of effects in the guidance on DRAM.

One is that our cost per bit on the Micron bits is continuing to decline as it did in the second quarter and we expect that to decline in the third quarter.

In terms of the Inotera production, there's two factors.

One is that they're in the process of converting to our 50 nanometer stack technology.

So as Steve mentioned earlier, there's some impact in terms of start-up costs and that sort of thing that will affect us in the relatively short-term third quarter mainly, and then they'll ramp into production and be driving that cost down exiting third quarter, fourth and onward.

The other piece is that, as I commented in my prepared remarks, we have a margin-sharing arrangement with Inotera.

And so, when Micron is making significant profits due to high margin, that is shared through a pricing formula with Inotera.

That raises our cost per bit of Inotera production.

It actually affected us some in Q2 and I expect it will affect us some in Q3.

But bear in mind that we have a minority interest share which shows on our P&L in the net income in a different location.

So we get the benefit of Inotera's profitability on our share also in our P&L, it just shows up in the equity method investment line and not coming through our margin line.

Okay.

And then can we take your inventory comments to cover both DRAM and NAND?

The inventory -- Micron inventory?

No, sorry, inventory in the channel.

Yes, very much so today.

They're -- both the NAND and DRAM are currently at the same levels.

Okay, great, thank you.

Thank you, our next question in queue comes from Kevin Cassidy with Thomas Weisel.

Please go ahead.

Thanks for taking my question.

I guess maybe along the same lines of NAND you mentioned your SSDs are on allocation, I wonder if you could tell us a little more details of what's happening there.

Is it because of supply being short or is there some other bottleneck?

I think it's that coupled with the launch of a product line that's gotten a lot of notoriety in the press.

We launched a product at CES this year and as I mentioned we, in our last quarter, Q2, began shipping some OEM customers and we opened some of our allocation out to the channel and our online website Crucial.com and the results were phenomenal and we are a little bit capacity constrained on available NAND for that product line.

So (inaudible) has been very pleased with the results.

At this point, we'd like some more supply.

Can you give us a relative feel of how many units are shipping?

We typically don't do that just from competitive reasons.

Okay, and I guess, are there any other puts and takes?

How much did you undership by?

Again, those are hard ones to quantify when you don't know where you would have hit the ceiling on demand.

We were pretty tight.

Crucial.com has one data point sold out within two business days of the allocation we gave it.

Okay.

Maybe it's one other question, do you have an idea of when you might be able to catch up to the demand?

Not, not, not a good picture today.

I think, you know, we're certainly increasing production, but don't have a good sense at least through the quarter yet.

Okay, thanks for taking my questions.

Thank you.

Our next question in queue comes from Hans Mosesmann with Raymond James.

Your line is open.

Thanks, I just have one real quick one.

DDR2, what's driving the ASD move up to DDR3 prices?

Is it that OEMs that can't get the DDR3 are going back to DDR2 and using older microprocessors?

Yes, and they really -- our guess is kind of the supply and demand equation is kind of playing out right in front of us.

You know, if you go back and look at DRAM exchange in late January, a one gigabit DDR2 component was under $2 and as recently as yesterday, it was, is up over $3 in the spot market.

So, it really is available parts in the industry and, people, you know, trying to get as much as they can, at least a product out the door.

Thank you.

Thank you.

Our next question in queue comes from Bob Gujavarty with Deutsche Bank.

Please go ahead.

Thanks for squeezing me in.

Last quarter you kind of ranked profitability by specialty DRAM, commodity DRAM and NAND.

Could you do that again for this quarter?

Sure, it's getting easier.

The highest gross margin product continues to be specialty DRAM.

As Ron mentioned earlier, basically our core DRAM and trade NAND is right on top of each other in number two spots.

Okay.

Great.

And a little clarification on the NAND ASPs, when you commented it was flat, does that include trade as well as what you sell to Intel at cost or was there a big divergence between the two?

The comment was that both NAND trade and total NAND ASPs were actually flat.

In terms of change quarter-to-quarter.

Bear in mind that the Intel NAND is at cost, so it's roughly going to be consistent.

So the trade numbers and the total numbers moved in parity with each other.

Okay.

Great.

And also when you threw out the CapEx numbers for this year, $850 million and $950 million and also intimated for next year, that's a gross number; it doesn't include any potential partner contributions, correct?

It doesn't, that's correct, it's the total CapEx for all of our consolidated operations.

So it doesn't include partner contributions for our Intel/Micron joint venture activities.

That's a high number.

I mean any contribution would reduce the net number?

Yes, it would reduce -- that's exactly right.

It would reduce our net cash requirements, but it shows up, it doesn't show up in the CapEx number, it would show up as a contribution from partners in our cash flow.

Great, thanks a lot, appreciate it.

Thanks Bob and with that, we would like to thank everyone for participating on the call today.

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

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

These particular forward-looking statements and all other statements that may have been made on this call that aren't historical facts are subject to a number of risks and uncertainties and actual results may differ materially.

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

Thank you.

Thank you.

This concludes today's Micron Technology second quarter 2010 financial release conference call.

You may now all disconnect.