美光科技 (MU) 2011 Q1 法說會逐字稿

Good afternoon.

My name is Huey, and I'll be your conference facilitator today.

At this time I'd like to welcome everyone to Micron Technology's first quarter 2011 financial release conference call.

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

After the call, all lines -- excuse me, after the remarks, there will be a question and answer period.

(Operator Instructions) Thank you.

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

Sir, you may begin your conference.

Thank you very much.

Welcome everybody to Micron Technology's first quarter 2011 financial release conference call.

On the call today is Steve Appleton, Chairman and CEO, Mark Durcan, President and Chief Operating Officer and Mr.

Ron Foster, Chief Financial Officer and Vice President of Finance and also with us today is 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 2011 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 accessed by dialing 706-645-9291 with a confirmation code of 32359725.

This replay will run through Wednesday, December 29, 2010 at 5.30 PM Mountain Time.

A webcast replay will be available on the Company's website until December 2011.

We encourage you to monitor our website at micron.com -- excuse me, 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 or 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 date of the presentation to conform these statements to actual results.

And now I'd like to turn the call over to Mr.

Steve Appleton.

Steve?

Thanks, Kipp.

I'm going to make some opening comments and then I'll turn it over to Ron for some commentary on the financials and then we'll open it up for Q&A for any of us here participating in the call today.

I'll start out with some of the activity we had in our fiscal Q1 and the operations and technologies.

We've had a number of achievements worth noting.

First of all, our NAND 25-nanometer transition is actually going quite well and I think we would characterize it as being ahead of schedule so that now, a majority of our NAND bits are now shipping with Micron's 25-nanometer advanced process.

In addition to that, Inotera is now on 100% Micron's stack technology and they are now just getting back up to starting at full capacity, so we think that we're well on our way to improving both volume and yield there.

Clearly as we noted before, there were some difficulties previously but they are on a pretty good trajectory right now so if you listen to what our commentary about it and you listen to their commentary about it, I think they feel like they are on a pretty good path moving forward.

In addition to that, IMFS started its first wafers utilizing our advanced 25-nanometer process as well, so we're pretty excited about that.

I would note though that we don't think there's going to be any significant output out of the facility until the middle of next year.

Obviously, there will be a start and a qualification to the ramp phase before then, but we are pretty excited that we are on underway there.

Switching over and trying to talk about the markets a little bit, in the DRAM market, our last earnings call, I noted that we had started to see some softening in the PC space for DRAM and that weakness has continued, even though it's primarily done with the DDR3 product.

In fact I noticed the Hynix CEO comments a few days ago acknowledging that this environment I think is going to have an impact on their current quarter.

Clearly, it's having an impact on our current quarter, but I guess what I want to emphasize is I don't think this is the winner of 2007 or 2008 and you might ask why that's the case.

First of all, I really do think that what we're experiencing right now is a demand driven weakness as opposed to a supply-side strip of weakness.

What I mean by that is it's such a sharp turn, I guess starting about a year ago, year and a half ago, and that was driven by the damage that had been done in the DRAM industry and as a result, those of us that were still around and able to produce were a beneficiary of that.

As opposed to the environment where there's a lot of capacity come on line, I don't think that's happened and most of you know that by noting the amount of wafer output that's come on line, and that really we're still in a period or phase I think where maybe a little bit unexpectedly but we're seeing weakness in more commoditized spaces, in particular the PC space.

I also think that we had some technology transitions pile up as people were trying to get converted over to the next generation of technology and that added up maybe to a little more, a few more bits into the market than we thought but it happened at all similar time frame.

And that also I would note that, keep in mind, this is seasonally a slower time of the year for us as well, so I'm not suggesting we're not going to have some weakness.

But we might be in a period of time here where we have a quarter or two or three to six-month period where pricing is in this lower range.

The counter to that of course is CapEx and output for DRAM is going to adjust pretty quickly.

We've already seen a couple coming out of others in the industry around that and what I find interesting is there's no forecast for the CapEx to be down in 2011 from 2010 and keep in mind that the CapEx in 2010 peaked at about half of what the CapEx was in 2007.

So as I said, I think it will adjust pretty quickly, and then another reference point for everybody is that.

As I said although the mainstream commodity DRAM has had some pricing hit and it's $1 per gigabit, it seems to have stabilized and it's obviously still well above the $0.50 per gigabit that we had a couple years ago when the costs were a lot higher.

So obviously it's still down quarter-to-date and we have a period of time here where we have to deal with it, but I think it's also positive that the specialty business is relatively flat and pricing is pretty stable there.

So that's the DRAM front.

Switching over to the NAND, I think some of you probably already know from a lot of the reports in the industry that it appears that we've already hit bottom and prices recovered mildly.

There's some pretty bright spots, SSDs in particular for us have gone well in the smartphones are holding up pretty well and I think that's a benefit to the DRAM as well, although we've got to see what happens when we move through the rest of the season.

We began shipping volume shipments to Tier 1 OEMs for our SSDs and we're going to launch our P400 enterprise product coming up here next month so we feel pretty good about that.

On the NOR front as you might expect, there's some mild pricing pressure but really for the most part it's been pretty stable.

A couple of things to remind everybody on the call about.

Our CapEx, as we've stated, our range hasn't really changed for the year but remember that this quarter is our big CapEx quarter.

And with respect to why that is, the first thing is that it's directly tied to the timing of getting IMFS underway and so this is the largest period of time we start paying for the equipment.

That's why the CapEx this quarter will be bigger than the other quarter we had in the fiscal year and after this quarter that we're in right now it will start to taper off.

And then In addition to that, Intel is currently not participating with the CapEx and IMFS, but we actually are pretty comfortable with that.

Number one, we already have that in our financial models making the assumption they weren't going to participate and secondly, we could really use the output for servicing our customers, so from that perspective, we're in pretty good shape.

I will tell you though that they have the ability to come in and participate downstream (inaudible) expansion and we're happy if they do and we're also happy if they don't so to speak because we like both sides of that equation.

With respect to how it impacts our financial model, obviously the CapEx -- that being under our umbrella does require more of our own cash but the other thing that I want to point out is in terms of there's two components to the relationship.

One is the output sharing side which is the joint venture and then the other is the development side, and on the development side, there's really no change in that and there won't be any change on that independent of what we do with respect to the sharing of the output.

So I think that their analysis is how much output do they want, which impacts their desire to or the level of sharing with us as we make future investments and additional capacity.

But with respect to the development side of it, in other words the R&D cost sharing, we're completely in line with what we were doing and what we will be doing which is sharing that equally moving forward.

All of this leads me to my final comment which is these strong cycles are exactly why we pursued expanding our product portfolio and it's in times like these where it really starts working to our advantage.

In other words, as we've done a lot of the M&A or a lot of the product expansion over time, this is the environment that we've prepared ourselves for where we get some cycles in one segment or another and yet be able to have the financials of the Company hold up pretty well, in particular in comparison to a lot of those companies that just have a single product.

So with that, I'll turn it over to Ron for some commentary on the financials.

Thanks, Steve.

The Company's first quarter of fiscal 2011 ended December 2.

Similar to last quarter, we're also providing a schedule of certain key results for the first quarter as well estimated metrics for the second quarter and we summarize that material on the following couple of slides.

In last quarter's call that we mentioned we would be reporting on the reorganization of our reportable segments, partially in light of our recent acquisition of Numonyx.

That reorganization is still ongoing and we expect to have it completed and in place for reporting of our second quarter results.

We still anticipate those segments will focus on markets which generally aligned around DRAM, embedded, NAND and wireless solutions.

The results of the first quarter are reported in a manner similar to the past and include the reportable segments of Memory and Numonyx.

There are several items for the quarter that are worthy of further comment.

In recent years, and as demonstrated in our first quarter, the Company has been working to monetize some of our investments in technology through licensing our intellectual property.

Our first quarter results include a gain in other operating income from the $200 million receipt from Samsung for patent cross-license entered into in the quarter.

There is withholding tax on this payment of $33 million which was recognized as additional income tax expense in Q1.

In accordance with the agreement, we anticipate receiving additional payments of $40 million in the second quarter and $35 million in the third quarter, each recorded in other operating income in the respective quarter.

Income tax provision in the second and third quarters will also reflect the applicable withholding taxes on these payments.

To balance the timing of maturities of some of the Company's debt obligations and to reduce the potential dilution from the convertible notes, during the first quarter we repurchased a portion of our outstanding convertible notes and exchanged another portion for new convertible notes.

The exchange retired $175 million of the 1.875% convertible note and replaced them with similar 1.875% convertible notes to mature in 2027.

In the repurchase transactions, a total carrying amount of $232 million was redeemed for $328 million in cash including fees primarily.

As a result of the 4.25% notes being substantially in the money, we recognized a non-operating loss on the exchange and repurchases of $111 million in the first quarter.

This series of transactions also removed the effect of at least 43 million shares from potential dilution in the future.

First quarter revenue from our Memory segment primarily comprised of DRAM and NAND decreased 12% compared to the fourth quarter.

DRAM selling prices as Steve mentioned came under pressure in the first quarter and decreased 23% compared to the previous quarter.

Total idle capacity costs which are charged directly to cost of goods sold were $59 million in the first quarter compared to $40 million in the fourth quarter.

Singapore fab start-up costs in the second quarter are expected to be approximately the same as in Q1.

Sales from the Numonyx segment increased slightly in the first quarter compared to the preceding quarter as a result of increases in selling prices offset by a slight decrease in unit sales volume.

Margins on this business over the past quarter have demonstrated good stability and decreased only slightly compared to the fourth quarter.

As we look forward to the second quarter, we expect to see revenue from the Numonyx business in the low $500 million range which reflects a seasonal decline compared to the first quarter.

We expect the Numonyx gross margin in Q2 to be roughly the same as Q1.

In addition, recall that the Numonyx inventories were written up to their fair values in our acquisition accounting.

This write-up artificially reduced the gross margin on Numonyx product sales by approximately 10 percentage points in Q1.

We expect this effect to be somewhat lower the second quarter and have a long tail after that.

Operating expenses in the first quarter were $325 million.

The level of SG&A spending was relatively consistent with the prior quarter.

Q2 SG&A expenses are expected to be in the $140 million to $150 million range.

R&D expense decreased in the first quarter compared to the previous quarter primarily due to lower levels of development spending on 50-nanometer and 42-nanometer DRAM products as additional products move out of development and into commercial volume production.

R&D expense for the quarter benefited from credits of approximately $50 million from joint development programs consistent with the fourth quarter.

R&D expense is expected to increase in the second quarter to $195 million to $205 million range primarily due to increased labor costs and higher volume of pre-qualification wafers processed.

The Company generated $732 million in cash flow from operating activities in the first quarter, while a decrease compared to the prior quarter is significantly outpaced spending on capital expenditures of $570 million during the quarter.

We also used $635 million to repay debt including the $328 million in convertible notes I mentioned earlier and $200 million in repayment of debt that originated with Micron's acquisition of its Inotera shares.

The balance was due to normal debt amortization in the quarter.

The cash and equivalent balance at the end of the first quarter was $2.7 billion including $337 million classified as restricted cash.

Now I'll close and turn it back to Kipp.

Thanks, Ron and with that we would like to take questions from callers .

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, we would like to open it up to

Thank you, sir.

(Operator Instructions) Our first questioner in queue comes from Shawn Webster with Macquarie.

Please go ahead.

Yes, thank you very much.

In terms of the [Numonyx] business can I reconcile some of the data you provided?

You said it was high teens for you in fiscal Q1 but it would fall into the low $500 million range?

Is the percent that you're quoting there in that foil, is that a percent of the memory and revenue only?

Or how should we calibrate that because I get more like a $500 million number for Q1.

So revenue for Numonyx in Q1 was about $573 million.

Okay.

Great.

Thank you very much.

And then in terms of your full year production, the DRAM production sequentially in Q1 looked like it came a little light relative to my estimates.

Can you talk about what's happening there and what might have driven the production there and can you give us your outlook for your full year either your fiscal year or calendar year production expectations for NAND and DRAM?

Sure, Shawn.

This is Kipp.

When we give you the production numbers we generally measure it when it hits finished goods and just timing wise, we had a bubble sit in WIP which is where we saw the inventory increase so what you'd expect to hear from us is that the bit growth guidance into Q2 is going to be unusually large which it is.

We'll be in the high teens to low 20s sequential bit growth as that WIP moves on through inventory.

And Shawn, we've stayed away from a year-over-year number for now because as you know we have a lot of moving parts so for now we're going to stay with quarter to quarter.

Okay, and then in terms of the OpEx trends coming up a little bit in Q2, is there anything lumpy that happens over the course of Q3 or Q4 or a period where the OpEx might come down because it gets reclassified?

In terms of general OpEx trends, Shawn, our view is that we target to be in a range on average in up cycles and down cycles around 15% of revenue for total OpEx and if you look at that, we're about in that range today.

We just, a few months ago as you know brought Numonyx in which actually had an OpEx structure higher than the Micron and higher than 15% and we're in the process of integrating that into the Company right now.

So what I think you'd see going on right now is some investments to get that integration done and as we go through the next couple of quarters, we'll begin seeing benefits of the full integration of those activities and certainly plan to stay on our 15% OpEx model over time.

Okay, and then maybe if I could squeeze one final one in?

In terms of your customers shipment expectations going into Q1, what's your gauge in terms of will your shipments be better than seasonal, relative to normal seasonality, there's been a lot of discussion out elsewhere in the PC food chain that there's an expectation for notebook demand for example, to be better than expected on the component side.

And would just like to hear your perspective on it, thank you.

I think the overall feeling going into our fiscal second quarter is about seasonal pace.

We think that the PC business channel inventory is actually better than I would expect given the pricing environment.

We think people are managing their inventories tighter coming out of a couple tough years in 2008 and 2009 so we think the inventory in the channel is better and thus the potential for recovery in the PC space is there.

We haven't quite seen signs of it just yet but we think it's a much tighter food chain than it was a couple years back.

The wireless environment, mobile phones, smartphones particularly remains pretty healthy going into the holidays and all expectations are that will continue to be pretty good.

Steve mentioned in his opening comments that SSDs in general were pretty positive for Micron.

I think that's a reflection of the maturity of that market beyond just client and the potential growth in 2011 overall for enterprise drive so we think overall, the demand drivers are there in place.

How it manifests itself in our second quarter due to the seasonality is somewhat hard to predict today but we are cautiously optimistic.

Thank you.

Thank you, sir.

Our next question in queue is Daniel Berenbaum with Auriga USA.

Yes, hi guys.

Thanks for taking my question.

On the projected cost reductions, just looking at what appears you're guiding, on the NAND side, it seems you're guiding down mid to high single digits.

That seems a little bit light compared to what I would have expected for ramping -- I've seen Singapore in ramping 25-nanometer, can you talk a little bit about what are the gives and takes there and what we should expect for NAND cost reduction over the course of the next couple quarters?

Yes, hi, Dan.

This is Mark.

I think we -- as Steve alluded to we're very happy with the way the 25-nanometer ramp is going and we're into that full swing.

What we playing off against that now is the ramping of a new fab which as you know generally brings costs in advance of bid output so there's somewhat of a mitigating effect there as we move through the next couple quarters, ramping IMFS.

But generally speaking, pretty comfortable with the NAND trajectory and the 20-nanometer that will come into play in the summer as well.

So then how long does it take to ramp the fab until we start to see higher cost reduction, higher than the mid to high single digits, the cost reduction you're talking about for next quarter?

Yes, I think we've got a couple quarters, Dan as we load the fab, and then when you get to about three quarters off and you start seeing benefits of that operation, so I'd look at a couple of quarters of relatively muted cost reduction on the NAND side and then seeing benefits as we get into the second half of the calendar year.

Okay, and then just shifting over to royalty revenue.

What was royalty revenue in the quarter and how should we, obviously with the exception of the large Samsung payment, what was ongoing royalty revenue and how should we expect that to play out over the next couple quarters?

Dan, this is Ron.

Royalty revenue was about $9 million in the quarter.

Recall the conversation on the last earnings call, we've converted predominantly to a R&D cost sharing model so we have a significant amount of our payments going in as credits to R&D which is about $50 million in the quarter.

There's now about $9 million on the revenue line.

Going forward in Q2, I would expect that to move up some, even on the revenue line as a result of Inotera ramping and the stack technology being put into place and we'll continue the R&D credits as we go through the quarters.

Okay, thanks and Ron, just one other question on taxes.

It looks like you guided $20 million to $30 million taxes.

Do you think about that in terms of the tax rate or is this just a flat dollar value you're going to have to pay to a certain jurisdiction and how should we think about that moving forward over the next couple years?

Well, it's the latter for now.

The $30 million range is the mid to higher end here for the next couple quarters because the Samsung effect, getting those payments from Samsung where we get a withholding tax on those payments from Samsung in the next couple of quarters.

The tax structure of the Company right now since we are in a net operating loss use position in the United States is that we are paying foreign jurisdiction taxes which are going to normalize to probably a $20 million range post the Samsung payments would be the way to think about it.

And that will be in place until we get our NOLs used up.

And then how much more is Samsung paying you next quarter and is it done next quarter?

$40 million in Q2 is our assumption and $35 million in Q3.

Okay, great.

Thanks very much.

Sure.

Thank you.

Our next questioner in queue is Glen Yeung with Citi.

Please go ahead.

Thanks a lot.

My apologies for this but I didn't catch the numbers.

Did you give the amount the Samsung payment was in the November quarter?

Yes, it was $200 million gross payment in this Q1 fiscal quarter we're reporting and there was a $33 million withholding tax that's in our income tax line which is the reason our income taxes are higher.

Okay, thanks, just wanted to clarify that and then Steve, maybe for you.

You mentioned that in the commodity DRAM space you feel that it's more of a demand driven scenario today.

If we think about the course of calendar 2010 when prices were high at the beginning of the year, I believe (inaudible) suggest bid per box has fallen to a lower number.

Is your sense that, that number can rise, bids per box can rise as we move into the Sandy Bridge environment or is there no need for the customers to do that?

Yes.

First of all, I think it was obviously climbing in the first part of the year and the effect that it had was there was a shortage of supply as I mentioned already from lack of expansion going on in the industry combined with higher demand scenario.

And that led to much higher pricing and as you already noted, there's some despecking that goes on as they try to adjust their models and I actually think that, that will probably start reverse itself very soon if it's not already, it's hard to tell of course, on a granular basis from week to week, but if you look at the most of the information that's out there and if we look at the feedback we've had from our customer base that, that content per box is going to start going back up.

And does Sandy Bridge contributing that or is it just a function of [proprietors] irrespective of where we are on the process?

I didn't hear it.

Can you say that last part again?

I didn't hear the question.

Sorry, did Sandy Bridge contribute to that at all or it doesn't matter, its just gotten so low it's time to start ticking it back up?

No, I think that helps as well.

Okay, and the other question I had, if I look at your CapEx run rate right now as we add back equipment you're just under $600 million for the year and you say this -- sorry for the quarter and you say this is your big core relative to other quarters in the year.

It would seem that you're running towards the low end of your projected annual CapEx budget.

Is that a fair assessment?

No.

What I meant was the quarter that we're currently in, so the quarter that we're currently in, not the one you were referencing which is the one we just reported so the quarter we're currently in is going to be our biggest CapEx quarter for the year.

So I think we're still in the range.

Okay.

Fair enough.

And then I guess the last question I have is when you look out into the February quarter and I understand it's hard to get a feel for where you think pricing is going, but what's your sense about your ability to stay cash flow positive given so many of these things not happening?

You won't have the benefit of a big Samsung payment, you will have higher CapEx spend and pricing at least in DRAM is likely to be down further on an average basis.

Do you feel like you're on the cusp of that or can you get a sense one way or the other whether you'll be negative or positive free cash flow?

Well, first of all, operating cash flow, we're obviously going to be positive.

In fact, we remain positive even at the worst of times in the last downturn.

In terms of free cash flow, clearly that's a combination of operating cash flow with CapEx and debt retirement and as Ron noted earlier in the call, we had significant debt retirement this quarter as well which is why the cash balance is what it is.

And we just haven't made any decisions yet as to what we do on that front as to what we did last quarter around debt retirement.

And one of the [steps] we go through a period of time, but so operating cash flow I don't think has any question for us remaining positive.

Free cash flow will just depend on what we do for a combination of those things in the quarter.

Okay, thanks.

Thank you.

Our next questioner in queue is Doug Freedman with Gleacher & Company.

Please go ahead.

Thanks for taking my question.

Can you give us some clarity on what you're doing as far as how much of your product is going into -- is being sold under contract versus spot [practically] and what you think that outlook will be next quarter?

So in the quarter we just reported, that ratio of contract to spot was lower than normal given the product transitions and some of the qualification process we're going through both on the DRAM and NAND side of our business.

And on a going forward basis, we obviously feel that will improve even in Q2 and so we feel that our OEM contract business as a percentage of our overall will go back up to normal levels.

Historically, those levels are somewhere in the 70%, 75% contract and 20% to 25% spot and then you've got our retail business that consumes that type of product as well.

Okay, can you also comment on the NOR side of the business?

Some of your competitors commented that ASPs were down pretty materially heading into the fourth calendar quarter.

Did you see the same thing and does that have any impact on you or are you able to keep up cost reductions on that side of the business as well?

Well I think there's two things that work in our favor.

I think in terms of the overall product breadth in NOR, we saw some of that towards the low density segment of the business but in the higher density NOR as well as some of the specialty applications embedded NOR, pricing remain pretty favorable.

And you also have to remember our technology, we've got a pretty solid road map on the 65-nanometer node both in some of the legacy applications and some new technology will be shipping in Q1 2011 that keeps us in a pretty good position, healthy position cost wise.

So I think what you're suggesting is true, on the low end, low density NOR, there's been some healthy competition and eroding some price but I think we're in a pretty good position vis-a-vis the competition there.

If I could Steve one question for you.

If you look at the marketplace and the conditions that you're seeing, you commented that you don't think you're heading into the nuclear winter, I think is some of the terms you used that you saw a couple years back.

What conditions would have to occur for you to trigger some change in your CapEx budget?

Well, I'm not sure what you're trying to reference.

I think the most significant condition of course is lack of cash flow.

Although as I said I think operating cash flow wise we're in pretty good shape.

There's very little, well there's nothing we'll do to change it in the quarter we're in right now.

We essentially already committed to the ramp that's happening,et cetera What you're really referencing is what would we do towards the second half of the year or the latter part of calendar 2011 to change our thought process around CapEx.

We haven't -- we really kept our committment to IMFS to this $16,000 to $17,000 if you will run rate per week and so I think the real question is what has to happen for us to go beyond that because we're committed to running.

We know that's the efficient level it needs to beet cetera and that's the vast majority of our CapEx.

We have some in the DRAM but not that much so it's really what has to happen first to go beyond that and obviously we have to have a fairly healthy (inaudible).

We already have in our financial model the assumption we're going to contribute that capital ourselves and frankly, we don't really see a whole lot of need to go out and do something different than our current path in order to be able to do that.

Obviously we'll do normal equipment financing we would do over time that we've done in the past, but we don't have any current plans to do anything else and we think we're in pretty good shape.

Now, maybe to expand a little bit on your question, around what has to happen for the industry to I think change course from what's happened the last few months, again, it's worth pointing out that the majority of our competition is not in very good shape financially with their balance sheet.

And so you've already seen some announcements where some are trying to push out their debt repayment structure, some are going to try to cut their CapEx, some announced they are going to try to cut production, et cetera.

I think that's all reflective of the fact that others and ourselves and maybe one other you could argue, maybe a second other that we're the only ones that are really in pretty good financial shape and have a pretty good balance sheet because as good as the DRAM market was in the last 12 months, it was just okay for a lot of them.

And it certainly didn't give them any ability to withstand any great downturn in the market again so that's why I think what we're experiencing right now is relatively temporary that there's pretty quick reactions going on.

And again, I pointed this out when I did the NASDAQ Conference in London a few weeks ago, if you look at where all of the CapEx dollars have gone, they've all gone into upgrading the technology.

There's just so few dollars that have gone into silicon and the drama reason a that it's all gone into upgrading technology and frankly, a lot of those plans probably got to get delayed given where the market is right now because they just aren't generating the cash.

From our perspective, we have a core set, we're in great shape financially to pursue that course and so that's why I mentioned earlier on that the real question for us is what has to happen for us to change that course and clearly, we're going to have to have a better market environment but from where we're at today, I think we're pretty set.

Great.

I'm going to slip one more in.

How much of your capacity of DRAM is [fundable] and can move over and start producing NAND and is it possible to do that?

I believe some of your factories were set up in such a manner.

I don't know where you stand today.

We do have a fab that's currently running both NAND and DRAM and that's the primary prerequisite I guess to be able to do that.

Having said that though, the flexibility we have to move that back and forth is relatively limited and wouldn't anticipate seeing any significant moves in terms of moving large amounts of capacity one way or the other.

Yes, I think the other thing to add on top of that is that's most relevant in an environment where you are static in terms of your bit growth because then you're trading off one for the other.

But in our case we have a scenario where we have Inotera ramping on Micron's technology and we have a scenario where we have a new facility coming up on NAND so the need or the -- if you really wanted to make adjustments there you would just dial one or two of those efforts.

You wouldn't really switch a whole lot in one of the current fabs in terms of making adjustments there.

The reality is it also doesn't take a lot of adjustment to affect where you want your bits to go because any of us would have that flexibility typically only do it within one facility because on the margin you need most of your product for whatever your customer base is that exists.

Great.

Thanks for all of the color.

Thank you, sir.

Our next question is Uche Orji with UBS.

Please go ahead.

Can you hear me?

Pardon me, Mr.

Orji, your line is open.

Yes, can you hear me?

Thank you.

Yes, sir.

Let me just ask you a couple of questions.

On the inventory, you made some comments about inventory on the PC DRAM side being actually okay.

Any way we can quantify that in terms of weeks in terms of DRAM and then on your inventory, we had an increase in the quarter.

How much of this was from Inotera DRAM and should we model inventory to grow especially as IMFS test wafers volumes start to grow through the next couple of quarters?

I'll take the first part and as it relates to the PC DRAM question, we have seen some increase in inventory but it's been relatively mild.

As I said earlier given the pricing activity we've seen over the last quarter.

What I mean by that is we're seeing inventory in the three to five week range in the PC space up from what's normally in the two to three week range, so given the pricing activity, you might suggest there be deeper inventory concerns and we're just not seeing that.

What we're seeing is a channel that's probably got a good memory from the last few years during the downturn and they are managing their inventories tighter and we thus see that inventories are okay.

They aren't bad right now given the market conditions.

I'll hand it over to Ron to answer the second question.

Yes, Uche.

In terms of the inventory as it was mentioned the first quarter we had a build up in WIP inventory largely related to technology transitions and customer quals and we expect that will flow out as we go through forward the next quarter.

So I wouldn't read anything significant into the inventory levels in Q1 and the transition into Q2 in terms of the overall volumes, we just see this as normal movement of our technology transitions.

And let me just ask you another question on COGS.

I'm not sure, maybe I missed it when you said it but can you just help me understand the IMFS start-up costs impact on COGS in the first quarter and also what the impact would be beyond the second quarter?

Hi, this is Ron again.

In terms of IMFS start-up costs, we have about I think about $44 million of start-up costs in the first quarter related to IMFS, and in general, it's going to be about the same level in the second quarter.

We are not -- we're just starting up, as Steve mentioned, wafer starts.

We don't have any product quals at this point so don't see a big ramp in the cost but they will continue in the start-up or idle category if you will and we're segmenting those out for the purpose of your understanding and that will go on probably until about the third fiscal quarter when we began to get some volume into fall status and can move some of that over to production so that's the time frame I'd consider.

Sure, that's helpful and just my last question.

In terms of SSD, you talked about demand being okay.

Any sense as to how you expect the demand drivers for NAND to play out through the rest of this year?

Of course, we all know what's happening on tablets but on the SSD front any color would be helpful and also, Intel not participating at this stage, if and when they decide to participate, now -- I know these questions are for Intel, not you, but I'm just trying to understand how that arrangement is left at (inaudible).

What are the things -- how should we -- is there any way for us to model at this point or should we just model everything from IMFS on to Micron and when Intel participates we would just have branch the model out?

How we should think about that?

So on the SSD question, as you mentioned, tablets have taken on a pretty healthy projected output on the NAND side and that number is somewhere in the 10% of overall NAND capacity and this year we'll go to tablets in 2011 in that range.

On the SSD side, you've got basically two dynamics playing out here.

One in terms of overall client SSDs which have lower density and then you have the launch of the enterprise segment even though its had its start in 2010, it's really the volume shipment in the enterprise segment will occur in 2011, and we see that being still around that same range as tablets.

We think the tablet phenomenon has been pretty amazing in terms of the acceleration.

I think SSDs would be fair to be similar in that same 10% range of the overall industry capacity and we still think, I think that the client side will dominate that in terms of the overall consumption and that the enterprise will continue to be in more of an early stage adopter model and then 2012 will be where the enterprise will accelerate and in terms of our overall growth.

On the IMFS, IMFS question around the joint venture with Intel, first of all I don't want to presume to speak for Intel but let me make a couple of comments from my perspective around it.

Number one, is that both of us are very happy with the operating entity.

Now it's evidenced by the remaining industry and production on advanced technology and so forth, so it's not an issue around the execution of the entity.

I think it's -- that if I could probably characterize it in its simplistic terms, Intel is very interested some markets that involve NAND.

Micron is interested all markets that involve NAND, and therein lies the different perspective on how much NAND we want from the operating entity.

I think that they still view it as very strategic just like we do but they're interested certain parts of the application of NAND and we're interested basically all of the applications and so it's not one of, it's not an issue of do we want to participate in output coming from the joint venture.

It's really an issue of how much volume do you want from the joint venture and how much is strategic to us in the markets that we're interested and therein lies the difference and so again, you mentioned it earlier which is you have to ask intel and for their thoughts on this.

I'm just giving you my perspective, I'm not presuming to speak on their behalf but I think that's where each Company is continually trying to determine what they want from the operating entity.

The great thing about the way the joint venture is structured is that we have the flexibility for both of us to achieve what we want.

If they like their level of output, then they can keep that level of output as the technology advances of course increasing it somewhat from the technology but neither one of us is driven to have to put additional capacity in place for output that we may not have strategic use of.

So we can move forward with them in creating additional output for our strategic use that they don't want to participate in and that's okay, because the model is flexible enough to allow us to do either one.

So I don't think you should read more into it and then it's really an issue of each Company just trying to determine what our strategic level of output is that we want from the joint operating entity and that's the process we're going through.

Thank you very much.

Thanks.

Thank you, sir.

Our next questioner in queue is Tim Luke with Barclays Capital.

Please go ahead.

Thanks so much.

I was wondering if you could give some color on what is pressuring in your view the NOR market, why is that being weak particularly at the low end.

Thanks.

I think some of that lower end NOR is tied to the PC sector in general and I think some of it has to do with some additional capacity that's come on line in terms of competitors, more from some of the low end players in the market and it is the low density segment of the market.

So it's tied to more of the commodity type of the business but quite frankly as I said earlier I think we're pretty well positioned on the higher density components as well as the specialty applications we've developed the business upon and Numonyx has established themselves in, in the past.

Separately, Steve, could you give us your sense of what's going to happen over the next several months in terms of capacity announcements?

Is it your expectation the current conditions are going to precipitate the curtailing of capacity by some of the less strong players or do you not think that we should expect particularly meaningful amounts?

I actually think we're already seeing some of it.

You've seen some companies already announce delayed capacity expansions, or by the way, a delay of some technology transitions because they just don't have access to capital to do it.

So as I said, I think this will adjust pretty quickly.

And I can't predict nor would I try any macroeconomic challenges that the worldwide experiences in the next quarter or two but short of something negative, I think that the industry will be in balance pretty quickly in this sector.

Remember, a large part of the memory business including a large part of the DRAM business is actually still fine today.

It's pretty good and pretty stable.

When you say that, when you say quickly, what do you mean?

When would you expect balance to be achieved after what you plan now?

Well, I think we have to get through a seasonally slow period which is probably in the next 30 to 60 days and then we'll know a lot more.

Again, we don't try to predict what's going to happen in supply over demand and I'm just giving you a perspective that says between what Mark Adams has already described and then what you already know around some of the markets and despecking that occurred and combine that with a seasonally slow period anyways.

Everybody knows within the next 15 to 30 days, people don't buy a whole lot for a variety of reasons.

We have to get through this period of time, and the other thing to note is to remember that of Micron's total revenue business, about a 25% of it goes into that segment and the rest of it is going somewhere else.

Maybe just lastly, could you just remind us perhaps of the order of the profitability of the core units, is it fairly similar to what it was last quarter?

Yes, we put it out on to see on the website.

We posted it, but as you might expect, the specialty DRAM was number one and then came NAND and following number three by NOR, but remember, the NOR has some accounting going on within the margin that makes it artificial because of the way we had to book it, we did the Numonyx transaction.

And then you would get to where you characterize as the mainstream core DRAM, predominantly DDR3, a lot of course which goes into the PC market today.

Thank you and good luck.

Yes.

Thank you.

Thank you.

Our next questioner in queue is Kate Kotlarsky with Goldman Sachs.

Hi.

Thank you so much for taking the question.

This might be a difficult one to answer but I was hoping given what the business makes us today, if you could give us some color as to what your revenue breakeven is today maybe and what it might look like as we exit next year assuming there's not a meaningful change in mix from a unit perspective?

Kate this is Kipp.

I think we're going to stay away from trying to predict the profitability levels of different products a year from now.

Could you tell us what the breakeven point is today?

No, we're not really interested providing that because that would give you a good look at exactly where the gross margins are on by product basis and we don't report that way.

Okay, and then maybe just one other question on the NAND side.

I know obviously, NAND is faring quite a bit better today versus DRAM and I think if we do really see a meaningful growth in tablets that a lot of people are expecting next year, we could be in a situation where NAND is pretty tight.

Do you think it's possible, and I know Apple has done that historically that they use their balance sheet and try to secure or prepay some of the vendors to secure incremental NAND supply maybe in the first half of next year?

Well, if you look at the historical practice, you'll know from what the companies have reported and done that essentially if you looked at the five NAND producers and of the five NAND producers by the way that's Samsung, Micron, Intel, Toshiba and Hinex.

And now you've clearly got SanDisk as part of Toshiba and Micron and Intel together so you can take that for what it's worth.

Four of the five announced they had done essentially contracts with Apple for NAND supply and that's all been out there and known, and today, those contracts I think are in various states, so it's hard to know exactly what they will or won't try to do.

But I think that it's just worthwhile noting that it's not just the -- I think that the NAND supply next year will be impacted by not just the tablets but I will not underestimate the demand profile coming from the enterprise space in SSDs and of course, whatever traction we get in the client space as well, so I can't speak for Apple.

They are probably the best ones to ask about what they are out trying to do but I do think as you know, the NAND environment could be fairly tight next year depending on how these other applications come on line.

Thanks very much.

Thank you.

Our next questioner in queue is John Pitzer with Credit Suisse.

Please go ahead.

Hi guys.

Thanks for taking my question.

The first question I have is with the issues at Inotera mostly in the rear view mirror now, can you help me understand how the cost curve there trended into the November quarter and what we should think about for cost downs in the February quarter?

John, this is Ron.

To make sure I understood your question, you wanted to understand how the Inotera costs flow through in the current quarter we reported --

Just how cost is coming down now that they're up and running on your process and reramping to full utilization.

How do we think about --

I see.

What would cost be from that point of the equation?

Yes, obviously there's a significant impact with ramping production on our new stack technology and the volume is expected to come up significantly from Q1 to Q2 and that will obviously drive cost down along with the yield improvements that we're expecting to see as we go forward in the second, third quarter, et cetera.

So that will definitely help us on the cost side.

As we mentioned before there's also a profit-sharing model which partly is a function of the pricing ASPs in the marketplace and the margin generated between the participants in Inotera, which can move that around some but the cost driver which is a significant portion will be significantly reduced in our cost as we go forward quarter by quarter.

I would just say, John I might add it is on your guidance sheet there and we're saying down mid 20s in total, so that might help you gauge a little bit of how Inotera is doing.

Correct me if I'm wrong but my understanding was Inotera ramp on your process, there was the opportunity of mixing up some commodity PC into more of the server market.

Curious if you can tell me that's what you think is going to happen, just in general how would you qualify the server DRAM market right now?

Yes, I think that's right.

Essentially as they come up under a technology there's qualification periods that are required for the entire customer base.

The shorter qualification periods are what you would expect them to be which are more commoditized markets and lower qualification periods are associated with a differentiated set of markets.

Initially the product is primarily directed at more commoditized markets but clearly as we get the qualifications completed, a higher percentage of that product will move to the more differentiated markets, some of what you already referenced, server and so forth.

It just takes time for that to happen.

When you look back on the November quarter was there a significant difference in server pricing declines versus PCs?

The server pricing stayed pretty stable for us in our Q1 that we just reported and the business remains pretty healthy going into our Q2 and versus our commodity desktop we expect that to be pretty favorable going forward.

And guys just my last question real quick.

Steve, you alluded to the fiscal February quarter being a big CapEx quarter.

Do you care to give us a ballpark figure as we try to build out our cash flow models?

It's really tough to predict the exact timing of capital payments as those tools go in based on installation, factory acceptance, et cetera.

So we have a big ramp like that the number can swing pretty dramatically as the quarter (inaudible) so probably better not take a stab at that exactly.

Okay, guys.

Thank you.

Thank you.

Our next questioner in queue is Atif Malik with Morgan Stanley.

Can you comment on your market share in the specialty DRAM market?

I assume Samsung is 50% of the market but how about your market share in that market?

Yes, we normally guide to about 25% to 30% share in the specialty DRAM business.

A lot of that has to do with some of the innovation we do around solutions in that sector and we've been a long time player in the specialty market so we anticipate that will remain pretty solid for us going forward.

Okay, and then on the NAND side, is the target for the sink a more ramp still 60,000 wafer starts per month for calendar year-end for next year?

That's correct.

Okay, and assuming Intel does not move forward from here, out of that from the middle of next year, I'm assuming you have ten to 15 [gigahertz] per month, how much of that will be Micron?

Well, first of all let me recharacterize just slightly what you said Intel will not be moving forward with us in the next year.

That is specific to IMFS.

IMFS, we both continue to invest as they generate cash and advance the technology, et cetera.

So specifically with what the reference Intel participated to IMFS, they have participated already some in the past so it's not 100%.

Again, it depends on what they do moving forward from where we are because we have a continuum of capital calls, but I think that reasonably what you should expect is that assuming they decide not to move forward from where they are today or they partially move forward from where they are today, it's probably going to be in the 80/20 range, 85/15 range.

That's what I meant, your contribution from IMFS could be 80% to 85% by next year end assuming that Intel does not participate in IMFS?

That's correct.

Okay thanks.

And with that, it looks like we're out of time.

I'm sorry for everybody we didn't get to on the call but I would like to thank everyone for participating 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 are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially.

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

Thank you, sir.

Again, ladies and gentlemen, this does conclude today's Micron Technology's first quarter 2011 financial release conference call.

You may now disconnect.