美光科技 (MU) 2013 Q1 法說會逐字稿

Good afternoon.

My name is Sean, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Micron Technology's first-quarter 2013 financial release conference call.

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

After the speakers' remarks, there will be a question-and-answer 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, everyone, to Micron Technology's first-quarter 2013 financial release conference call.

On the call today, of course, is Mark Durcan, CEO and Director; Mark Adams, President; and Ron Foster, Chief Financial Officer and Vice President of Finance.

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

If you have not had an opportunity to review the first-quarter 2013 financial press release, it is also available, again, on our website at Micron.com.

Our call will be approximately 60 minutes in length.

There will be an audio replay of the call.

You may access that by dialing 404-537-3406 with the confirmation code of 79770323.

This replay will run through Thursday, December 27, 2010 (sic-see press release "2013"), at 5.30 PM Mountain Time.

A webcast replay will be available on the Company's website until December 2013.

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

Please note the following Safe Harbor statement.

(Audio recording) During the course of this meeting, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company and the industry.

We wish to caution you that such statements are predictions, and that actual events or results may differ materially.

We refer you to the documents the Company files on a consolidated basis from time to time with the Securities and Exchange Commission, specifically the Company's most recent Form 10-K and Form 10-Q.

These documents contain and identify important factors that could cause the actual results for the Company on a consolidated basis to differ materially from those contained in our projections or forward-looking statements.

These certain factors can be found in the Investor Relations section of Micron's website.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

We are under no duty to update any of the forward-looking statements after the date of the presentation to conform these statements to actual results.

And now I'll turn the call over to Mr. Mark Durcan.

Mark?

Thanks, Kipp.

I'd like to start today with an overview of the key developments during the quarter, followed by a few strategic and industry updates.

Then I'll turn it over to Ron for a financial summary.

And we'll close with Mark Adams discussing key developments in our business unit and operations, as well as an update on market conditions.

Our first fiscal quarter was somewhat a tumultuous one, as we dealt with shifting market demand and internal operations disruptions.

Mark will discuss some of the market shifts in more detail later.

But at a high level, we continue to see significant growth and opportunity in the products supporting mobile platforms and embedded applications, including, of course, SSDs, and a more muted environment in personal systems.

Our sales volume for both NAND and DRAM was below our initial forecast for the quarter, as we experienced some manufacturing and supply chain challenges.

We are confident these issues have been addressed and will not negatively impact fiscal Q2.

As you will have noted in the release, revenue for the quarter was down about 7% as a result of a 9% decline in DRAM sales and a 4% decline in NAND.

Despite generally declining ASPs, gross margins were up slightly quarter over quarter, with improvements in NAND and NOR partially offset by reductions in DRAM.

NAND market prices were up early in the period and trended downwards towards the end of the quarter, although recently, prices seem to have stabilized.

You may recall that our estimated quarter-to-date ASP, including the forecasted mix for the quarter, was down mid-teens as of our last earnings call.

Prices did stabilize, and in some cases improved later in the quarter.

And this trend has continued into the current quarter.

It will continue to be important to contemplate the effects of Micron's specific product mix as it relates to Micron's ASPs as we move through the year.

During the quarter, we continued our efforts to streamline the business, and focus our team on actions and investments that will either improve our efficiency and cost structure, or our ability to deliver leading-edge, innovative memory solutions.

To this end, we have discontinued most activity under our solid-state lighting program, and are moving this program toward a technology-licensing model.

We continue to look at ways to streamline all our manufacturing operations, including our 8-inch front-end capacity and our back-end operations, particularly as necessary to accommodate any future front-end capacity.

As we mentioned at our Fall Analyst Day, we remain in discussions with our partners in Taiwan regarding changes to our agreements, including those related to Inotera supply and our joint development relationship.

Although there's no assurance when or if a deal will happen, we don't currently believe the outcome will significantly impact our Q2 guidance for bit growth, estimated quarter-to-date ASP, which includes forecasted mix for the quarter, or R&D spending.

Until we finalize terms of any changes to our agreements, I am not able to add any further detail to any potential impact any new agreements may have in the future beyond those statements relative to our fiscal Q2.

We are making and will continue to make the strategic choices to align our business strategy and operating model to deliver an optimum value and return for our shareholders through efficient manufacturing and value-added memory solutions.

Relative to the Elpida acquisition, the Tokyo District Court has submitted Micron's proposed reorganization plan to the Elpida creditors, and they expect to complete the voting phase by the end of February.

In addition, we have entered Phase I review in China, and continue to work towards government approval of all the required countries.

We expect to close sometime in the first half of 2013.

In terms of the memory market, we are cautious in the short term, but optimistic about the evolving industry supply/demand balance.

The industry DRAM supply outlook continues to be favorable.

We don't see any substantial new wafer capacity coming to the market, and the latest process technology transitions are simply going to take longer compared to previous generations.

The other key variable on DRAM supply is industry capacity shifting away from PC to higher growth categories, including mobile and server.

This shift results in fewer bits produced in aggregate, and should eventually result in a more favorable supply/demand balance in PC DRAM as well.

The outlook is also encouraging on the NAND front.

We don't see any significant capacity additions to the market in 2013.

And as with DRAM, process technology migrations are getting stretched out, which has the effect of reducing supply growth compared to prior years, while demand growth remains robust from SSDs, smartphones and tablets.

Our technology development and product portfolio is targeting these key segments as we head into 2013.

And we are confident about our position in the market.

I'll stop here and turn it over to Ron and Mark before returning for Q&A.

Thanks, Mark.

While we are rapidly approaching the end of 2012 calendar year, Micron completed the first quarter of fiscal 2013 on November 29.

On our website, we have provided a schedule, as usual, containing certain key results for the first quarter, as well as certain guidance for the second quarter.

That material is also presented on the few slides that follow.

The first quarter resulted with a net loss of $275 million or $0.27 per diluted share on net sales of $1.834 billion.

These results compared to the fourth quarter of the previous year of a net loss of $243 million or $0.24 per diluted share on net sales of $1.963 billion.

Total sales in the first quarter were 7% lower than the previous quarter, driven primarily by declines in DRAM and NAND.

You will recall that we entered into a series of currency options to mitigate the exposure to changes in the end-denominated purchase price of Elpida prior to the close of that acquisition.

The weaker yen at the end of the first quarter, relative to when we signed the sponsor agreement, would have decreased the US dollar equivalent purchase price if we had closed the transaction at quarter end.

The weaker yen also reduced the fair value of the options we entered into at the time of signing.

The resulting mark-to-market adjustment of the options resulted in a $62 million loss in the first quarter.

Approximately $9 million of this loss was the reversal of a gain recognized in the previous quarter as a result of a strengthening yen across that period.

During the first quarter, with the termination of Transform Solar's operations, the fab facility previously leased to Transform reverted back to Micron.

A $25 million gain was recognized in other operating income associated with the release from that lease obligation.

The $54 million net interest expense includes $29 million of non-cash interest expense from imputed interest on the bifurcated convertible notes that we have outstanding.

Trade NAND bit sales in the first quarter decreased compared to the prior fourth quarter.

As Mark indicated, we experienced some manufacturing challenges in the quarter, which reduced output in Q1.

Trade NAND average selling prices increased approximately 8%, comparing the first quarter to the previous quarter, as we continue to sell more NAND into premium segments with higher ASPs, such as SSD and MCPs.

Estimated Trade NAND selling prices are down high-single digits quarter to date, including the forecasted product mix for the quarter.

Trade NAND cost per bit is expected to be down high-single digits in the second quarter, while Trade NAND bit productions plan to be up low-teens in the second quarter, as our 20-nanometer wafer output doubles compared to Q1.

DRAM revenue in the first quarter decreased 9% compared to the previous quarter, primarily as a result of an 11% decrease in DRAM average selling prices, stemming primarily from weaker PC segment demand relative to the fourth quarter.

Quarter-to-date selling prices, including projected mix impact for the quarter, are down double digits compared to the Q1 average.

We anticipate the Q2 mix will be somewhat heavier to personal systems.

DRAM costs per bit declined approximately 5% quarter to quarter, and we are forecasting bit costs for DRAM in the second quarter to be down low-double digits as we continue to transition to our 4-gig DDR3 product set, which comprised approximately one-third of the DRAM bit sales in the first quarter.

Bit production in the second quarter is expected to be up double digits compared to the first quarter.

NOR sales were relatively flat in the first quarter compared to the fourth quarter, and remained at approximately 12% of total revenue.

NOR revenue in the second quarter is expected to decrease seasonally approximately 10% compared to the first quarter.

We anticipate NOR cost reductions to offset selling price reductions in the second quarter.

SG&A expense in the first quarter was below our guided range as a result of lower cost associated with pending legal matters and lower personnel costs from our variable pay plans.

During the first quarter, certain variable pay plans were suspended, resulting in cost reductions across our global operations.

We expect SG&A expense in the second quarter to be between $135 million and $145 million.

R&D expense was $224 million in the first quarter, and is expected to be between $220 million and $230 million in the second quarter.

The Company generated $236 million in cash flow from operating activities in the first quarter.

The first quarter ended with cash and investments, including non-current investments, of just over $2.8 billion.

Expenditures for property, plant, and equipment in the first quarter were $538 million.

And we still expect total expenditures for the fiscal year to be between $1.6 billion and $1.9 billion, slightly weighted towards the earlier part of the fiscal year.

Now I'll turn it over to Mark Adams for his comments.

Mark?

Thanks, Ron.

Our NAND Solutions Group revenue declined slightly from the fourth quarter.

The slight improvement in operating margin for NSG was primarily due to reduced costs in the first quarter associated with the ramp of products on our 20-nanometer process, and improved product mix.

In addition, our Trade NAND pricing was up 8% for the quarter.

As NAND has historically been somewhat seasonal, we will be watching post-holiday demand signals closely.

We continue to be pleased with our solid-state drive business, as bit shipments were up about 20% quarter on quarter.

In Q1, SSDs represented 17% of our Trade NAND business.

If you include NAND component sales to SSD providers, about 35% of our Trade NAND bits go into solid-state drives.

Our development of enterprise-class SSDs is progressing well.

We completed the qualification with a leading enterprise-networking customer of our P400e drive, with volume shipments scheduled in the first quarter of the calendar-year 2013.

We're also nearing qualification of our next-generation enterprise SATA drive with major server and storage OEM customers, and look for shipments in calendar-year 2013 as well.

Our SLC-based PCIe P320h enterprise high-performance storage drive continues to receive positive reviews from both the press and our top customers.

On the NAND technology front, we are making steady technical advancements with both our planar and 3-D NAND technologies.

We began sampling our 20-nanometer TLC NAND blast with selected controller companies, and will begin production in calendar Q1.

We saw a slowdown in our 20-nanometer ramp related to the manufacturing issues described earlier, but we still expect production crossover in three to six months.

MLC represented about 80% to 85% of our wafer production in Q1, with SLC and TLC essentially splitting the remainder.

Sales for our DRAM Solutions Group in the first quarter reflect slight growth in bit sales volumes, eclipsed by declines in selling prices, particularly in the personal systems segment.

Despite the lower revenue in the quarter, our operating income line was roughly flat due to lower R&D costs for product qualifications, as certain products reached production status in the fourth quarter and are now ramping.

While we look for demand drivers such as Ultrathin and Light Notebooks, and Windows 8, to stimulate demand in the desktop notebook segment, we continue our focus on specialty markets, such as server, networking, graphics and consumer devices.

The networking segment represents about 25% of our DSG revenue.

We had another strong quarter, and made progress to expand beyond the traditional large OEM businesses to smaller customers and distributors in the sale of our networking portfolio.

A growing portion of the market is shifting from DDR2 to DDR3-based systems.

And we also continue to see early traction for our RL DRAM 3 and Hybrid Memory Cube.

We continue to see very strong demand signals from our server customers.

2013 server bit growth year on year is forecasted to grow over 40%, and we remain confident we will drive growth in the category.

From a product perspective, we added a major new technology to our portfolio, with non-volatile DIMM targeting mission-critical and memory database applications.

Overall, we are positioned well for long-term success in the server segment.

On the DRAM operations front, we project to hit bit crossover on 30-nanometer in Q2.

We are conscious that, as an industry, there are increasing shrink challenges to ramp 20- and 30-nanometer nodes, as seen as well by our competitors.

We are currently forecasting Micron's 20-nanometer transition late in calendar-year 2013.

PC OEM DRAM pricing stabilized in the second half of our Q1, and is up high-single to low-double digits so far in December.

While it is too early to signal a sustainable trend in terms of improved pricing, we will monitor the tightening supply situation in the market, as well as the seasonality effect on demand.

Channel inventory seemed to have returned to normalized level of three to four weeks, down from where we [entered] the quarter.

Sales by the Wireless Solutions Group improved seasonality in the first quarter.

New configurations of NAND DRAM multi-chip packages showed strength in the China mobile market, while new DRAM product introductions began to ramp as well.

While we continue to be challenged on the bottom line for WSG, we remain bullish about our long-term opportunities in wireless.

Mobile DRAM shipments increased significantly, as we are leveraging the ramp of our 30-nanometer base 4-gigabit low-power DDR2 device in both the entry-level and high-end smartphone category.

We also had strong growth in NAND shipments, most noticeably in the low-end smartphone market, which has seen a transition from standalone NAND to eMCP-based solutions, with e-MMC NAND combined with low-power DRAM.

Wireless NOR shipments grew double digits, and gross margins were up nicely in the quarter as a result of cost improvements.

Our broad product portfolio combining DRAM, NAND and NOR puts us in a great position to capture a larger share of the wireless market as we move forward, with the focus on growth in DRAM and NAND in particular.

The addition of Elpida's mobile DRAM portfolio will only accelerate this effort.

Our Embedded Solutions Group had a record quarter in terms of gross profit and operating income, driven by the ramp of 45-nanometer parallel NOR, and continued strength in the automotive and industrial segments.

We delivered the first customer samples of 45-nanometer serial NOR, and began engineering wafers for 300-millimeter embedded NOR products.

One of the particular areas of strength has been the growth of our embedded e-MMC product portfolio.

We ramped volume production of automotive products, and expanded densities offerings of the industrial lineup.

We continue to invest in infrastructure and headcount resources to accelerate our embedded growth.

In the past year, we opened up engineering systems labs in Munich and Shanghai for joint development and validation, continuing our focus on providing customer-centric solutions, in many cases sitting right next to customer design teams.

We have advanced our NOR technology leadership with our 45-nanometer 300-millimeter production, and we'll continue to leverage this position to generate profitable growth.

Price in the embedded space remained stable, and we were able to drive our cost leadership position to improving margins.

While we continued to face adverse conditions during our first quarter, we are making progress on a number of fronts.

As I mentioned at our Analyst Day conference in October, we are exclusively focused on being the leader in the memory market.

Our cash position remains strong, as we continue to be operating cash flow positive in Q1.

Our inventory remains in check, down from $2 billion within the last nine months.

And we are focused on improving our cost efficiency.

Our premium businesses, such as specialty DRAM, SSDs and Embedded Solutions continue to represent growth opportunities for Micron.

Our management team continues to work on integration plans as we prepare for the close of our Elpida transaction.

We remain optimistic that the reduced capital spending, with no new memory fabs on the horizon, will lead us to better memory supply and demand dynamics.

Our customers have been extremely supportive of the acquisition and Micron's overall strategy.

We believe end markets such as mobile, server, networking, enterprise, and embedded will continue to drive strong demand for our products.

With that, I will hand it back over to Kipp.

Thank you, Mark.

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

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

Thank you.

(Operator Instructions)

Kevin Cassidy, Stifel Nicolaus.

Hi, yes, thanks for taking my question.

I wonder if you could go into a little more detail on the manufacturing problem and how comfortable you are that the problem is fixed going into the second quarter?

Yes, Kevin, this is Mark.

I don't want to get into too much detail.

But I think I could characterize it as really nothing out of the ordinary in terms of the root cause.

A combination of different events in front-end, back-end manufacturing, some internal, some external.

I think in concert with some knock-on effects that the disruptions created in our overall supply chain, really just led to an inability to get all the product out.

Relative to are we convinced that the problems are behind us?

Absolutely, relative to those particular issues.

I'm not here to promise you will never have a manufacturing disruption again.

But I think what we encountered this quarter was really sort of a perfect storm in terms of the timing of the number of different events that cumulatively created the issue.

Okay, great.

And maybe just to understand, too, you said in the second quarter you're expecting heavier personal systems on the DRAM side.

Is that normal seasonality?

It seems like that would normally be a weak quarter.

Or is servers just that much worse?

Kevin, this is Ron.

The effect here is basically as we were looking at the quarter, we had an opportunity to pick up some additional wafers from Inotera.

And our conclusion was that that would marginally improve our gross margin dollars, our gross profit dollars, if you will.

And so we decided to take that increment.

And that is incrementing our PC bits, and affected our guidance in terms of what we gave you.

Okay.

So it's not the end markets that are shifting at all?

It's just --

No.

It was a mix of just the opportunities we saw in front of us and ability to pick up some wafers that added a few more dollars to cash balance.

Okay, thank you.

And I'd like to make one announcement, too.

On the guidance sheet, for those of you that are looking at it, you may have an error in the R&D column that lists R&D for the quarter was $1.8 billion.

The actual number, as Ron was reporting, was $224 million or so.

You will get a corrected version of that sent out within the minutes here, but the corrected R&D number for fiscal Q1 was $224 million.

So with that, we'd like to go back to questions.

Monika Garg, Pacific Crest.

Hi, thanks for taking my question.

First question on the DRAM side.

So Mark Adams talked about PC DRAM pricing stabilizing during the second half, and actually up low-double-digit in December.

But you are guiding DRAM pricing down quarter-to-date, low-double-digits.

Just trying to reconcile the two.

Basically the effect you are seeing has to do with just the overall mix in where the bits are going.

So the PC bits, which tend to be on the lower side of our pricing that we attained, they'll be there will be more of those PC bits.

And thus the overall mix effect will drag that pricing downward.

Okay, thank you.

And recently we have been seeing in the media that Nanya [laundry] buying PC DRAM chips from Inotera, and we also guided that you are mindful of that capacity.

So given that Inotera is a JV between Micron and Nanya, could this lead to increased expenses to run Inotera's operations from Micron?

You know, I think we've said all we can say relative to any potential or hypothetical deal we might reach.

We've told you that we are having discussions with our partners.

And we've told you how that has -- what we can, relative to how that impacts our Q2 guidance.

And I think the bottom line is that the bits we are currently forecasting are what we believe will happen in Q2.

And obviously we'll do a deal if we think it makes sense for Micron.

Just a last one on the NAND side.

Could you talk about NAND bit supply growth for both Micron, and where do you think NAND [beshy] bit supply growth could be for calendar 2013?

I could start with the industry part and then we'll let Mark jump in with the Micron part.

But we're looking at a calendar 2013, based on public information, of probably somewhere between 35% and 45%.

Betsy Van Hees, Wedbush Securities.

Good afternoon, and thanks for taking my question.

I was wondering if we could go back to the production issues that you had.

So you said you had front-end and back-end, but how were yields with your 20-nanometer?

There were no issues there?

Are things still tracking in line with your expectations?

Relative to 30-nanometer, generally speaking, we made fantastic progress on yields as we moved through the quarter, and anticipate a continued trend as we move into -- as move through fiscal Q2.

Relative to 20-nanometer, that's actually an insignificant piece of our output today.

Okay.

Then can you walk us as we look at 30-nanometer to 20-nanometer transition, how that's going to look?

Yes.

It will be a transition really starting late in calendar '13.

And you could expect that transition then to continue through calendar 2014.

Okay, great.

It's generally on track with what we would forecast, and timing in line with what we believe the rest of the industry will be.

And then you guys mentioned that on the Wired Solutions Group, you are challenged on the operating profit there.

And I was wondering if you could help us understand how things are going to get better in that marketplace when we're seeing sort of a shift to more NAND solutions versus NOR Flash solutions?

Betsy, this is Mark Adams.

Yes, the --

First of all, correct me on my, if I (multiple speakers)

Yes, sorry.

The prior comments that Mark mentioned, I think were relative to DRAM.

Is that what you are asking, Betsy, around the DRAM 20-nanometer?

Well, yes, and then I was also asking about the Wireless Solutions Group.

Okay, good.

So just -- on the wireless solutions side, there's a couple of factors that are playing into the opportunity for us.

One is the -- as I mentioned in my earlier comments, our 30-nanometer LPDDR 34-gigabit part has put us in a very competitive position today.

And that is ramping, and in volumes, so we can go out and expand our offering there.

Secondly, the maturity of our e-MMC product portfolio is opening doors for new sockets as well there.

So between the combination of those two, not only do we get back in the game from a cost perspective, but we have a broader product portfolio to bring to market and actually deliver on.

And then, Ron, my last question.

I apologize if you mentioned this.

But when we're looking at the estimates for SG&A, I see it's going up to $135 million to $145 million.

And is that just FICA and things like that that were causing your SG&A to go up?

Well, a couple of things.

One is that we had -- we are getting back to normal trend-line if you look at our history, in terms of SG&A.

We had a lower legal expenses in the first quarter.

And also we've got some integration costs as we're looking forward to the acquisition, that we've got in that estimate as well.

Okay, thanks so much.

And happy holidays, everybody.

Stephen Chin, UBS.

Hi, guys.

Thanks for taking my question.

Couple questions on the inventory front.

I heard the comments on DRAM channel inventory looking better.

But with the anticipated sales of -- or increased sales of PC DRAM for fiscal 2Q, do you think that channel inventory will increase again in the current quarter?

Or do you think there's enough sell-through of bits that that will stay under control?

I think -- we do think though those are bits that would normally go to the PC market indirectly or directly, so we think it's net neutral.

Okay.

And on the NAND side.

Just given that last year, about this time last year, I think, your solid-state drive business also saw some inventory build-up.

What kind of trends are you seeing there right now in terms of the business?

I think if you go back a year ago, we were coming out of an artificially higher demand curve due to the hard drive situation in Thailand prior to the holidays.

I think that effect is gone, and we're pretty bullish.

We're trying to grow our SSD business and the demand signals from our customers are in parallel aligned with that.

So we're pretty bullish going into our second quarter on SSDs.

Got it.

And then just last question is, in terms of the manufacturing issues in Q1 and how that may have impacted your ability to ship product.

Was there any business that was left on the table in Q1 that you will be able to make up in Q2?

Thanks.

There's a very small amount of growth in bit inventory that was offset with cost of good reductions.

And when you look at inventory numbers, they're relatively flat.

So some of that will come through.

But it's not significant relative to the overall quarter.

Great, thanks.

James Schneider, Goldman Sachs.

Good afternoon, and thanks for taking my question.

I was wondering if you could comment a little bit more on the move in DRAM spot pricing we've seen.

In your view, is that purely due to some of your competitors taking PC DRAM supply off line?

And then, what kind of impact have you seen in your specialty DRAM businesses on the server and mobile side?

Is some of that capacity moving over to those places, which is causing the pricing pressure?

Or have you seen stabilization there?

Overall, I think that the PC DRAM pricing has to do with the overall supply picture and the overall industry, when you look at the market.

So I think that the supply side -- and we referenced kind of what's out in the public on production, and investment in capacity and technology transitions.

We think that it's been relatively conservative in terms of overall supply growth.

So the PC number, we think, is just kind of a natural evolution of the last 12 to 18 months of that behavior.

I think your follow-on comments, do some of those bids make it into our specialty businesses?

And while we can't predict that that won't happen in the future, we haven't seen it as much.

Because it's not as a matter of just redirecting that capacity.

There are technical specifications that go along with it, whether it be performance or temperature requirements, and those types of things, that that capacity doesn't automatically become perishable or transferable to other segments.

So we haven't seen tremendous pressure.

Now having said that, I'll make one qualification to that.

We have seen kind of a newer segment in servers come up that is a little bit more of a commoditized server for the data center application, the cloud data center application, where it's been more of a higher unit -- more of kind of a industry standard architecture that doesn't have those specifications.

We view that as net-net positive because those bits are better than the PC bits, and they are additive to our core server business.

Thanks, that's helpful.

And then maybe as a follow-on, any updates for us on how you see the DRAM industry bit supply in calendar 2013?

Yes, right now it shapes up to be somewhere, Jim, between 20% and 30%.

Got it, that's helpful.

And then finally for me, on the Wireless Group operating profit.

Can you comment on maybe the difference between the reported operating profit and the actual cash flow out of that group?

And maybe highlight any actions you might take to kind of improve that profitability level going forward?

James, this is Ron.

When you look at cash flow, the Wireless Group versus the reported result, the main difference is depreciation and amortization, which affects all of our main business units, if that's the question you're asking.

So it's a contributor to the operating cash flow based upon the depreciation component that's COGS.

I'm not sure if that's the question you're asking, though.

Yes, I was just wondering if there's any acquisition related one-timers that would be above and beyond the pure equipment depreciation effect.

No.

Not material.

Okay, thanks very much.

David Wong, Wells Fargo.

Thank you.

Could you remind us if the Elpida deal closes on the terms you expect and timeframe you expect, what your cash requirements might be to support this transaction?

And given the current revenue and income statement dynamics, will you need to raise any extra cash or do you have what you need on the balance sheet at the moment?

In terms of the actual purchase price, at close, it's about $750 million in cash that we have to come up with.

And you can see the cash balance on our financial statement.

We're obviously opportunistically looking at financing situations.

The market is pretty good right now.

But as we said before, we tend to look at ones that are covenant-free and focus more on capital leases, which is a normal course of business kind of activity, as our primary focus.

But we'll continue to look at opportunities also to spread our debt exposure over time.

Our repayment schedule as well.

But it's opportunistic based upon market availability.

Okay, great.

And my other question is, you were saying that you expect your DRAM mix to be somewhat heavier towards personal systems.

So are you seeing a pick-up in demand on personal systems?

I assume you mean PCs by that.

Or is there some other dynamic that pushes down your demand for your specialty DRAM?

Yes, the comment was, in terms of additional DRAM bits related to the fact that we actually have more availability of bit supply.

And so we have more to move into the market.

It's not a demand-driven factor.

It's basically supply we have available.

Okay, great, thanks so much.

Ryan Goodman, CLSA.

Hey, thanks for taking my questions.

A bit of a follow-up to that last one on the decision to take some of those additional wafers out of Elpida and go into the PC market.

How do you balance the risk of potential impact of pricing versus the opportunities there?

I mean, like, maybe you could talk about some of the opportunities you see by geography or by segment within the market that will help lead to that decision?

This is Ron.

I will take the first part and maybe Mark or Mark wants to comment on sort of market opportunities.

This is a short-term kind of thing that happens periodically, just happened to be a bit larger this quarter where they are available wafers from Inotera.

And we have an election to actually pick them up or not pick them up.

And it's a straightforward economic analysis based upon current market conditions and known potential we have with our market pricing, and contractual arrangements with our customers.

So we make the decision based on a cash evaluation.

And we made a decision to take some in this case.

In addition to that, if you -- you know, the comments made in our opening discussion around PC OEM pricing, I think the market and the supply base reflects an adjustment of what CT capacity looks like.

And so while the overall PC segment doesn't look like a significant growth category, if it's flat, the supply base to that has already kind of contemplated that.

And we believe that the supply and demand curve is in better shape, as reflected by the OEM contract price increases in December.

Okay, great, thank you.

And then just another question, this one on the NAND side of things.

Specifically on client SSDs.

I know one of your competitors appears to be making a stronger push into 3-bit lately and even has a 3-bit SSD out there.

And at the same time, we're seeing another competitor kind of move in the opposite direction and pushing a little more 2-bit and going more into smartphones and 2-bit SSDs.

So I'm curious -- I know in a recent conference you had mentioned the possibility of a 3-bit SSD.

But maybe you could just provide some color on the strategy there going forward.

Sure.

A lot of it depends on the customer and the application you are selling to.

You know, we see over time the client SSD business as it continues to scale.

And its growth is encouraging.

We see kind of the value of different product offerings within client.

When you're selling to a major OEM customer, a 3-bit solution won't quite do it.

If you are selling to a white box emerging market segment that might accept lower than that type of performance, you might be able to get there.

The other side is, the maturity of controller development being able to handle 3-bit will continue to improve.

And so, do we think in the future that 3-bit per cell SSDs will be viable?

Yes.

Do we think the market is there today?

Probably not.

And that's why we continue to focus on high-performance client SSD drives.

Okay, great.

Just one quick follow-up, too, on the manufacturing issues.

Did that only affect NAND volume?

Or was there an impact to DRAM volume as well?

It hit both sides.

Okay, great, thanks a lot.

Daniel Amir, Lazard Capital.

Thanks a lot.

A couple questions here.

First of all, as we look at your product mix in both DRAM and NAND, I mean, that's been changing here in the past few quarters.

How should we be looking at that in the next -- in this fiscal year '13?

I mean, what -- should we see your SSD bits growing to potentially 50% of your total NAND?

Or is it kind of mid-30s right now?

Is that where it should stand?

And the same question, you know, relative to specialty DRAM and PC DRAM.

I think it's fair to say we don't think 30% is the ceiling on SSD bits, both part of our portfolio and our SSD pure-play customers.

So I don't think we're satisfied, nor do we think that's the top.

We think there's more opportunity.

And in fact, that's kind of what we're driving a lot of our go-to market and development resources.

And in terms of trying to pin down for you what percent of our business is going to be NAND and DRAM, we're going to try and keep that to ourselves for now.

Okay.

And then in terms of your wireless side.

I mean, you focused a lot on your Analyst Day and since then as well, in focusing on finding ways to penetrate more of the handset market.

What can you give us in terms of updates, in terms of your product portfolio and your traction that you are getting as you turn around this wireless segment in terms of getting more content in the smartphone space?

Well, I think I've got to revert back to my earlier comments.

We were out of two key portions of the business as far as growth opportunities within wireless.

One being low-power DRAM solutions.

Which hit us both on the standalone sale of that product, as well as the NCP.

As well as our e-MMC offering.

And both those product development efforts have progressed really well.

And we haven't lacked access to the market.

I think we looked at -- in one case, a cost position, which we weren't driving too hard to sell that volume in that space.

And another capability that our e-MMC offering wasn't as mature as all of our customers would have liked it.

So we can kind of say today that we have confidence that our products are competitive and able to gain that share of market that we want.

Okay.

And just final question on your NOR business.

I mean, there's been some news lately that your plans for the fab in Israel -- what can you update us on the strategy of your NOR business?

I mean, in terms of the road map here?

I think that, again, we mentioned a little bit earlier, we continue to invest in NOR from a technology perspective.

We are a leader right now with our 45-nanometer 300-millimeter product, which gives us a pretty good cost advantage in that business.

It showed up in the embedded space.

And to some extent it will help us and also enable us in the lower-end wireless sockets.

You made reference to manufacturing rumors that are in the press, and so on and so forth.

What I would say to that is that we still remain very, very committed to NOR.

It's a good part of our business and enabling technology for us.

Both embedded and wireless, and some other segments as well, including PC bios applications and consumer applications.

Okay, thanks a lot.

Glen Yeung, Citigroup.

Thank you.

Do you guys have a forecast for us what CapEx could be next quarter?

This is Ron.

As I mentioned, we're still projecting $1.6 billion to $1.9 billion for the year.

We had about $538 million in the first quarter, and we said we're going to be loaded a bit heavier to the first half.

So --

It's tough for us to get too specific, Glen, because exact timing on acceptance of tools can move.

And that can swing that number pretty dramatically quarter-to-quarter, even though the same trend line is in place.

Yes, that's right.

Fair enough.

Just with respect to that, the difference between the $1.6 billion and $1.9 billion, maybe you could just remind us what would lead you to one end or the other end of that range?

Well, it's a number of variables.

One of them would be timing, as Mark mentioned, at year-end.

Right?

As how things play through.

But it's hard for us to call it much closer than that as we go in the first part of a year.

And of course, we're always adjusting our proposed product mix and our spend associated with that, as we see markets evolve.

Understood.

I think in the NAND commentary, it was mentioned that you're watching holiday demand signals to sort of get a sense as to how you think NAND will progress from here.

I know it's a little early for that, but maybe just your initial thoughts on how you see demand trends at the moment from the NAND perspective?

Well, I mean, I think quarter-to-date, we feel things are pretty stable.

But it's not unusual for some softness and just out of the holiday period, especially given some of the consumer product-driven platforms that NAND consumes, or is consuming NAND.

So it was only a hedge that we like to just kind of follow that and track it to make sure that NAND keeps at the current pace.

(multiple speakers) Sorry, Glen.

I would go a little beyond that.

I'd say that generally we are relatively optimistic about the future demand for NAND.

We see a lot of growth and applications that are consuming NAND, including the SSDs that have been alluded to a couple times already here today.

What we don't know about it is, what's the macroeconomic environment going to look like.

So, you know, we're kind of like everyone else here waiting to find out how that plays out.

Yes.

It's [half under developed] this time.

Just last one, I understand why more PC DRAM is more of a supply issue on your part.

But just to be clear about what your visibility is on demand from servers.

Is that business looking as you expect it to look -- any better or any worse?

Yes, I think we're, yes, pretty happy with servers.

And line of sight is that it looks pretty stable and growth [wearington] the bit side for sure.

And then, the unit's tracking pretty well.

So overall, very favorable.

Alright, thanks a lot

Stephen Fox, Cross Research.

Thanks, good afternoon.

First, just a question on the SSD market.

Your own sales of SSDs, and cash if you want to throw that in, you obviously have a lot of momentum there exiting the quarter.

On the client and enterprise side, are you looking for some seasonality in Q1, especially on enterprise ahead of some of your new qualifications?

And then within that, over the next couple of quarters, are there any competitive dynamics we should keep in mind relative to especially the enterprise side, that may be helping or hurting you guys?

And then I had a quick follow-up.

You know, I think I mentioned some of our qualifications success in my comments, and as an indication that we think the -- our enterprise business will grow.

Your reference to seasonality -- I wasn't quite clear what you are asking.

But we don't -- given the earlier stage of enterprise versus the overall SSD business [we think that] that it's growth-oriented.

And we think our business will continue to grow.

Well, I guess I was referring to, like, client demand for SSDs in the first quarter -- the first calendar quarter, actually.

Even in that category, we think is still pretty high demand.

We don't really think it's up into the right, right now, given the lower penetration of client SSDs, even in Q1.

And competitively, do you feel like there's anything going on where you're taking more of an advantage, where there is channel near-term or product category that we should be thinking about?

Well, I think I'll break it out into two pieces.

On the client side, there certainly have been some client players who have had some financial challenges that might impact our ability to actually go out and capture more share.

But overall, we like our position in client.

We think it's very strong.

You know, on the enterprise side, it's a little bit more of a design win and engagement model.

So when you pick up something, it tends to be pretty large volume as they roll that out, as your customer rolls it out.

But the only thing I would say is that we're pretty pleased.

Our NAND team is pretty pleased with the PCIe products that we've come to market with.

And that seems to be a high-growth category even within enterprise.

So we're pretty bullish on those segments.

One's more of a competitive ability to go out and then deliver volume on the client side, and some of the differentiated products in our enterprise solution.

Thanks.

And just really quickly -- I apologize if I missed this.

But in terms of pricing you're talking about on the NAND side.

There were no mix issues that are affecting either the outlook or what we saw in the quarter?

I might not be clear on that one.

No.

We would guide you to think that there are always mix issues going on.

For example, as Mark just described, we think SSD probably grows for us next quarter.

So that's an uplift, for example, over some markets.

So every quarter we're dealing with mix-related product movements, both in DRAM and NAND.

Okay.

And if you look at the guidance we gave you in terms of forward NAND pricing for the second quarter, I would say a significant chunk of that is we're looking at NAND mix, mainly higher density products going into the channel, for example.

And more of our 20-nanometer business related to that higher density.

So it is significantly mix-effected.

Great, that's very helpful.

Thanks again.

And note the cost per bit is going down correspondingly.

Yes, thanks.

Alex Gauna, JMP Securities.

Good afternoon, everybody.

Thanks for taking my question.

I was wondering.

You talked a lot about the server market here.

I understand how your bit growth might be strong, given some of the moves in servers.

But there have been a lot of mixed indications in terms of infrastructure data center demand.

Can you maybe help us parse what's happening to you in terms of bit density growth, and maybe what you think the underlying growth rate of that market is right now?

And how that turns in Q1?

Alex, I think the bit growth -- we've been pretty confident.

We still think that's a pretty good growth platform for us in servers.

When you look at overall server unit growth, it's still mid-to high-single-digits.

But when you look at the bit growth, I think we're somewhere around 45% or 50% bit growth year-on-year in servers.

And so I think the dynamic I was alluding to earlier is, you've got kind of your traditional server players in those type of enterprise applications.

And then you've got this cloud data center model, where there are people who are actually building out these networks, that are actually rolling their own servers or going through ODM models.

And so their product requirements because of the way the networks are structured, the requirements for the server aren't the same.

It is a sub-segment of server growth that is a little bit more commoditized.

Okay, that's very helpful, thank you.

I was wondering if I could ask a similar question with regard to PCs right now.

With all the transitions towards convertibles and tablets, can you give us a sense of maybe what average density per PC is doing right now?

And then your assumptions on how some of these moved to more atom-based systems or tablets systems might affect DRAM growth in the PC segment going forward in 2013?

I'll take the first part of that and maybe Mark and Mark can jump in on the impacts of architecture.

But basically in 2012 over 2011, we're going to PC notebook growth rates around 20%, and flat to down units depending on which third-party you're looking at.

Next year, third-party data suggests units up probably 1%, 2%, 3%, 4%, with bit growth somewhere in the 10% to maybe 12% to 14% range.

Obviously, some of that dependent on ASP.

And Mark or Mark, would you guys like to talk a little bit how architectures might change content growth?

Well, I think that in one sense, depending on the architecture and the operating system efficiency, that can certainly have a swing factor one way or the other.

Meaning that the density could go down or up, depending on application focus and usage model.

But the other side of that is, when you get to these type of designs, they tend to be more customized and less commoditized.

And so they end up being kind of customer-to-customer design wins, which can protect us from a little bit of the commodity nature.

Okay.

One last one, if I could.

Your CapEx guidance for next year, I am assuming that does not include Elpida demands.

Can you maybe bound what you might need to put on top of that in order to keep Elpida current?

And then how those assets might even help you going forward, coming to maybe bringing down CapEx spend?

Alex, we have not released those numbers yet.

We will update you when we can.

Okay, thanks.

Shawn Webster, Macquarie.

Yes, thanks a lot.

Going back to the supply chain disruption, it was kind of -- the explanation was a little bit vague.

Is there -- are you able to parse it out between, like, what --was it a supplier of components or other materials?

Or was there a problem in your own factories or something further down the food chain?

Yes, you know, I don't want to get too specific, Shawn.

But there were a number of separate events which accumulated to give us the net effect we had.

Some were internal, some were at sub cons in the back-end.

Okay.

And then on the pricing guidance down for the current quarter.

If we exclude mix or assume stable mix, is pricing still down?

You can probably -- well, first of all, Shawn, you're going to have to be more specific about what designs.

But if you look at the spot market, I think Mark covered this in his comments.

Pricing generally from the end of our quarter to today is up on a line item-by-line item basis.

Okay.

And then on the Nanya restructuring that's still under negotiation, and I understand you don't want to talk a lot about the details yet.

But can you tell us what their contribution to your R&D has been the last couple quarters, today?

It's roughly $20 million to $25 million.

Okay.

And then I guess, finally, are you getting any feedback from your PC OEM customers in terms of overall demand outlook for PCs, either in Q1 or Q2?

Or what catalyst could be, if Service Pack 1 will be a catalyst, and maybe what their overall views on PC growth is next year?

I think their PC growth projection is in line with what Kipp alluded to earlier.

I think, in the traditional desktop notebook segment, I think they view the PC growth to be flat, plus or minus 1% or 2%.

But again, I think the market has adjusted that.

That's already in the market, both on the PC OEM inventory side, as well as the supply side.

Okay, thank you very much.

I think we have time for one more question.

Harlan Sur, JPMorgan.

Great, thanks for taking my question.

Are the manufacturing issues impacting your NAND business in Q1?

I know you can't go into a whole lot of detail.

But my question is, did these disruptions result in wafer scrappage?

Or was it just a slowdown in output, relative to your higher expectations?

It's a combination of those.

Okay.

And then, it also seems like -- you may have answered this question.

But it also seems like you pushed out bit production costs over -- so your 30-nanometer DRAM ramp by about a quarter.

I guess, were you also seeing the same manufacturing challenges as you ramped this process?

Or were these a different set of issues, you know, relative to your NAND technology?

Any color there would be great.

So we had impacts on DRAM and NAND.

I would say that our 30-nanometer technology trajectory and ramp has actually seen dramatic improvements as we move through the quarter.

So while it was impact on the DRAM side relative to the 30-nanometer output, it was not related to, overall, the technology ramp.

We are very pleased with the way that is going.

Great, thank you.

Alright.

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 the call that are not historical facts are subject to a number of risks and uncertainties.

And actual results may differ materially.

For information on 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.

This concludes today's Micron Technology first quarter 2013 financial release conference call.

You may now disconnect.