美光科技 (MU) 2013 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Micron Technology's third 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 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, and I'd like to welcome everyone to Micron Technology's third quarter 2013 financial release conference call.

On the call today 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 third quarter 2013 financial press release, again it is available on her website at micron.com.

Our call will be approximately 60 minutes in length.

There will be an audio replay of the call, accessed by dialing 404-537-3406, with a confirmation code of 91862727.

This replay will run through Wednesday June 26, 2013 at 5.30 p.m.

Mountain time.

A webcast replay will be available on the Company's website until June, 2014.

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.

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 10K and form 10Q.

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

These certain factors can be found in the investor relations section of Micron's website.

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

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

I will now turn the call over too Mr. Mark Durcan.

Mark?

Thanks, Kipp.

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

Then I will turn it over to Ron for a financial summary, and before turning to Q&A, we will close with Mark Adams covering more details of our business units and operations performance and market conditions.

Our third fiscal quarter was highlighted by continued improvement in memory market fundamentals and Micron's financial position.

The DRAM business had significant revenue and margin expansion in the personal assistance segment, which achieved the highest revenue in almost three years.

In NAND, we had another quarter of strong unit growth in the SSD segment, and took advantage of improved market ASPs generally.

We remained focused on making capital and segmentation decisions to optimize margin and free cash flow over time.

As you have noticed in the release, revenue in the quarter was up about 12%, with strong growth in both DRAM and NAND.

Gross margins were also up significantly, from 18% to 24%, highlighted by DRAM, which was up over 16 percentage points for the quarter.

Trade NAND margins improved by about five percentage point, and still represent our highest margin product category, followed by DRAMs then [NOR].

Operating cash flow of $624 million exceeded our disciplined and measured capital expenditures of $235 million.

I previously mentioned that we were taking steps to enable some capacity fungibility between different memory technologies.

We are moving forward with plans to convert a significant majority of our DRAM capacity in Singapore to NAND.

We believe that customer demand and margin opportunity in NAND over the next 12 months, coupled with our highly attenuated capital investment relative to greenfield capacity, make this a sound financial decision.

A measure transition will likely occur over the course of the next year or so, depending on market conditions, as we continue to monitor the demand and margin profile of our various products and segments.

The impact of this conversion will be included in the guidance we provide.

During the quarter, we closed on the previously announced sale of our 200-millimeter image center fab in Avezzano, and took another step to streamline our operations through restructuring our R&D relationship with ST Micro in Agrate, Italy, and also discontinued operations of our LED pilot line in Boise.

We will continue to look for opportunities to improve our operational structure and performance, including the wind-down of some remaining 200-millimeter capacity, as we migrate more products to 300-millimeter.

We've made good progress towards closing acquisition of Elpida, and believe the principal hurdles to closing are mostly resolved.

We've obtained regulatory clearances, bondholder challenges of the planned reorganization in Japan have been denied, and the waiting period for challenges to the recognition motion in the US Bankruptcy Court has expired.

As a result, we are optimistic that closing will occur during our fiscal Q4.

Elpida's financial performance has been strong in recent periods and continues to improve, reflecting a strengthening DRAM market, as well as Elpida's strong mobile DRAM presence and operational improvements.

During last quarter, Micron and Elpida entered into a joint development agreement that has enabled more seamless integration of our technology roadmaps, and we are encouraged by the early productivity of the cooperation.

Following the close, our overall trade memory wafer capacity will increase by about 45% from today's level without impacting industry supply.

This deal will provide significant revenue and margin leverage for Micron, as we are positioned to benefit from low-cost scale, enhanced product and customer breadth, and improved operational efficiency.

We believe conditions remain positive for continued improvement in the memory industry.

We're forecasting DRAM industry supply up in the mid-20% range this year, and low to mid-20%s in calendar 2014.

For NAND, we're forecasting supply up in the mid-30% range this year, followed by the low 40%s in 2014.

We believe this historically slow supply growth, coupled with memory demand growth in mobile and infrastructure-related markets, such as smartphones, storage, and servers creates a favorable balance.

We are well-positioned to capitalize, and look forward to driving profitable growth in coming quarters.

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

Thanks, Mark.

Our third quarter of fiscal 2013 ended on May 30.

Our website has a schedule containing certain key results for the third quarter, as well as guidance for the fourth quarter.

That information is also presented on the following slides.

For the third quarter, we reported net income of $43 million or $0.04 per diluted share, on net sales of $2.3 billion.

These results compare to the previous quarter's net loss of $286 million, or $0.28 per diluted share, on net sales of $2.1 billion.

The consolidated revenue growth and improved operating results reflect the significant improvement in the memory markets, particularly for DRAM products.

The effect of this improvement can also be seen on the equity and net income of equity method investments line shown on the slide, which largely reflects our share of the net loss from Inotera with a two-month lag.

In their two most recent monthly reports, Inotera has reported positive net income, which will be reflected in the next quarter's results for Micron.

Related to Mark's earlier comments on our continuing efforts to optimize our operational footprint, these actions have resulted in restructuring charges.

This quarter we separately presented those charges as a restructure, an asset impairment expense on the face of the income statement.

Expenses and asset impairment charges associated with restructure activities from prior quarters have been reclassified to present the operating results on a consistent basis.

In addition, to simplify the presentation of note-worthy items, and those items that are not representative of the Company's trended economic performance, we are presenting a schedule of net income for the period as reported, reconciled to net income excluding these certain items.

Note that the amounts in the reconciliation do not include all the related income tax effects, as the amounts are generally de minimis, due to our net operating loss carry-forwards and our global tax structure.

The restructure activities over the past two quarters include the following -- approximately $60 million charge that we accrued in the second quarter associated with the estimated loss on the sale of our 200-millimeter imaging fabricating facility in Avezzano, Italy to El Foundry.

This transaction closed in the third quarter.

For the first three quarters of the fiscal year, the imaging business reported approximately $60 million of operating loss in our Micron results on sales of approximately $220 million in addition to the restructure charge.

Going forward, there will be no future revenue or losses from sales of imaging products.

Approximately $26 million in the (technical difficulties) loss on the transfer of certain assets, and approximately 500 employees in Agrate, Italy to STMicroelectronics is also included in the schedule.

And approximately $25 million in the third quarter to write down certain production assets used in the LED technology development, which was terminated in the third quarter.

Other recurring items presented in the reconciliation include the amortization of debt discount and other costs.

This adjustment, which flows into interest expense on our financial statement, is substantially comprised of the imputed interest to value the debt component of our convertible notes at fair value.

This item will be ongoing as long as we have these convertible notes and discounted debt, such as the Elpida installment payments.

Foreign-currency activity, including the impact from our hedging programs, is also included.

The largest impact in this area is from the hedge of the Elpida/Rexchip acquisition, which has been heavily impacted by volatility in the yen exchange rate.

Other items called out in the second quarter include a non-cash loss of $31 million from the early redemption of a portion of our outstanding 2014 convertible notes, and two favorable items in the tax provision, resulting from the resolution of an uncertainty and a tax rate change, both occurring outside the US.

So adjusting for these items, non-GAAP EPS improved from a $0.06 loss in our GAAP results in the second quarter to an income of $0.15 per share in the third quarter.

As we have mentioned previously we may undertake additional restructure activities as we continue to optimize our manufacturing and other operations.

Let's turn now to operating results and outlook.

Note that none of the guidance we are providing today includes any direct effect from the Elpida/Rexchip acquisition.

DRAM revenue in the third quarter increased 23% compared to the previous quarter, as a result of a 16% increase in bit average selling prices and a 6% increase in bit sales.

The increase selling prices for DRAM products was favorably affected by more Inotera volume sold into higher volume segments, along with general improvements in the market.

DRAM bit costs decreased 5% quarter-to-quarter, driven primarily by the higher concentration of lower cost products from Inotera.

The cost of DRAM products purchased from Inotera increased in the third quarter compared to the second quarter, but was still slightly lower than the cost of the rest of the company's DRAM production on a per bit basis.

So guidance for Q4 DRAM is as follows -- using quarter-to-date selling prices and projected product mix for the quarter, ASPs could -- would be up mid- to high single digits compared to the Q3 average.

Projected bit costs are expected to be flat relative to Q3.

Projected production volume is up high single digits.

Key themes influencing this guidance for DRAM are first, four gig DR3 volume continues to ramp in our system, comprising over 0.5 of the DRAM bit sales in the third quarter, and increasing into the fourth quarter.

This transition from two gigabit to four gigabit has had the effect of lowering ASPs and costs, with some margin improvement.

We are seeing a somewhat higher percentage of our total bit production from Inotera with improving product mix, and costs that move directionally with prices.

As a reminder, the cost of products purchased from Inotera is based on a moving average market minus model with a one-month lag, while we account for the change in our equity investment with a two-month lag.

The higher output in the fourth quarter is a result of higher output from Inotera, partially offset by lower output from our Singapore DRAM fab as we transition existing DRAM capacity there to NAND.

This transition will continue through the next year so based also on market conditions.

Turning now to trade NAND.

Bit sales in the third quarter increased 8% compared to the prior quarter, primarily as a result of a higher per bit average selling prices.

We continue to see growth in SSD sales, and we built some with inventory to support strong demand over the coming quarters.

Trade NAND bit costs in the third quarter were relatively flat compared to the second quarter, due to a higher SSD production, and some costs related to the start of NAND production in the Singapore DRAM fab.

So guidance for Q4 trade NAND is as follows.

Using quarter-to-date selling prices, and the projected mix for the quarter, trade NAND ASPs would be down mid-single digits.

Bit costs are expected to be down high single digits, while bit production is expected to be up high single digits.

Key trends affecting it for Q4 guidance are, we expect a higher density product mix in NAND, lowering both the ASP and cost per gigabyte, while increasing volumes.

We'd expect also to sell more NAND into SSDs, with greater capacity per drive, which slightly lowers the average ASP and cost per gigabyte.

We continue the migration to 20-nanometer process technology, resulting in lower costs and increasing bit output into both component and discrete sales and SSDs.

NOR sales were relatively flat comparing the third quarter to the second quarter, in line with our prior guidance.

NOR revenue, which has been fairly stable over the past few quarters, is expected to decrease by about a third in the fourth quarter, as the wireless business accelerates its transition to more NAND-based solutions.

With positive net income, certain stock options and convertible notes start to become dilutive in our financials.

These dilutive items added approximately 23 million shares to the denominator in the EPS calculation for the quarter.

Going forward, because of the dilutive effect of the convertible notes and employee stock options as determined using the treasury stock method, the amount of dilution will vary, primarily based on the average traded share price for the period.

For example, the average traded share price for the third quarter was approximately $9.85, which resulted in 23 million shares being added to the denominator of our diluted shares.

Had the share price been $14 average for this last quarter, approximately 105 million shares would have been added to the denominator.

SG&A expense in the third quarter was just below our guided range.

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

R&D expense was $226 million in the third quarter, and is expected to be between $230 million and $240 million in the fourth quarter.

There was no DRAM development cost sharing with Nanya in the third quarter, as the joint development program with Nanya was discontinued earlier in the year.

The level of R&D expense in any given quarter can vary based on the timing of product qualifications and the volume of development wafers processed.

The Company generated $624 million in cash flow from operating activities in the third quarter, as Mark mentioned, reflecting improvement in the operating results compared to the prior quarter.

The third quarter ended with cash and investments, including non-current investments, of just over $2.9 billion.

As Mark summarized, expenditures for property, plant, and equipment in the third quarter were $235 million, and we expect expenditures for the fourth quarter to be between $300 million and $500 million, which will result in fiscal 2013 total spending below the low end of our guided range for the year.

We are deferring some capital spending in the second half of our fiscal year, as we anticipate changes from the Elpida transaction.

We expect to pick up this spending in 2014 as we integrate the two companies.

As previously indicated, we expect the capital intensity of the combined company to be similar to Micron's standalone historical level on a per-wafer basis.

Cash flow from investing activities in the third quarter included the cash payments on currency hedges of approximately $200 million, which includes settlement of the previous hedges associated with the Elpida/Rexchip acquisition.

Similar to the discussion in our conference call last quarter, at an exchange rate of 95 yen per US dollar, the US dollar equivalent price for the Elpida acquisition, including the installment payments to creditors, would be approximately $400 million lower relative to the price when we signed the sponsor agreement last summer.

In addition, at the expiration of the initial hedges earlier in the third quarter, we entered into a series of new hedging transactions to mitigate the effect of currency rate changes on JPY80 billion.

This JPY80 billion is the initial payment of JPY60 billion due at closing, plus the first JPY20 billion installment payment to the creditors in the reorganization process due in December 2014.

The total hedging cost for this structure is capped at approximately $30 million, of which approximately $24 million was accrued in the third quarter.

Post-closing, we currently plan to implement a natural hedging strategy to offset the foreign exchange exposure on the longer dated installment debt by utilizing yen-denominated assets, such as cash.

In May of this year, Nanya made an additional investment in Inotera, which reduced our ownership from approximately 40% to approximately 35%.

Because the price of the shares sold to Nanya was above our carrying value per share, Micron will recognize a nonoperating non-cash gain of approximately $49 million as a result of the transaction.

With a two-month lag in equity accounting for Inotera, this gain will be recognized in operating results in our fourth quarter.

And with that, I will turn it over to Mark Adams for his comments.

Thanks, Ron.

I'm going to provide some more detail on our third quarter operating performance, as well as share some comments about the current state of the memory market.

Our NAND solutions group recorded revenue of $730 million, up 2% when compared to our second quarter.

Total trade NAND gross margins were up five percentage points quarter-over-quarter, reflecting improved ASDs and stronger penetration into enterprise SSDs.

Our branded SSD business was $178 million in Q3, an 11% quarter-over-quarter increase.

When you combine sales of our Micron-branded SSD drives with flash memory we ship to our strategic third-party SSD customers, shipments to the SSD segment represented over 60% of our trade NAND capacity.

We continue to migrate the SSD product family to our 20-nanometer flash memory technology with the announcement of our M500 currently targeted at client and web 2.0 applications.

In addition, we launched the industry's first MLC-based PCIE accelerated drive with the Micron P43 420M initially targeted at database applications.

We have hit bit crossover on our 20-nanometer process technology.

20-nanometer production will continue to expand over the next couple of quarters.

We plan to commence the ramp of our 16-nanometer technology early in calendar year 2014, and anticipate a faster ramp than occurred at the 20-nanometer node, given solid SSD and other socket enablement.

In addition, we are pleased with our progress on 3D NAND development, and we remain focused on driving support for higher end storage applications.

From a pricing perspective, as we shift our SSD portfolio from SLC to higher density MLC, we will see a lower ASP per gigabyte due to density growth per unit, and lower cost associated with the technology.

The effect is a slight downward movement on ASPs, offset by improved costs, with a net positive benefit to our gross margins.

Due to this mix effect, our core-to-date mix adjusted trade NAND ASPs are forecasted down mid-single digits based on core-to-date pricing, with expected continued improvement in margins.

In short, we remain optimistic for a strong second half of the calendar 2013 for flash memory.

Sales for our DRAM solutions group came in at $924 million, up 23% quarter-over-quarter.

The increase in sales were driven by a 16% increase in overall DRAM pricing, coupled with a 6% increase in DRAM shipments when compared to Q2.

Our overall DRAM gross margins came in just above the 24% corporate average, up over 16% from our second quarter.

We achieved outstanding results in all of our premium DRAM segments, with the non-PC business representing about 0.5 of our gigabyte shipments.

Our server business recorded record shipments, with a total sales of over 260 million gigabit equivalents, driven by increased densities at key OEMs and cloud service providers.

We had a record quarter in our networking business for both revenue and bit shipments.

DRAM bit shipments in networking were up 19% compared to our second quarter, and now represent 16% of our DRAM revenue.

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

Sales of our networking products through distribution are up 139% year-over-year.

We also had a strong quarter in our consumer graphics segment, which continues to be an attractive premium market, in particular looking forward with the upcoming launch of next-generation gaming consoles.

DDR3 volume represented 75% of our overall DRAM production, as DDR2 is addressing more of a legacy market requirement.

We are optimistic we will begin shipment of our 25-nanometer DDR3 technology in early fiscal year 2014, and start sampling our 20-nanometer DDR3 product by the end of calendar year 2013.

We are getting positive market feedback from Micron's DDR4 samples at our key OEM customers.

While DRAM continues to be -- to gain momentum, and we had strong design-in activity with enablers and OEM for Hybrid Memory Cube.

From a market standpoint, US carrier CapEx for LT deployment is strong, and data center networking remains a bright spot for investment by key OEMs.

DRAM pricing continues to be favorable.

We have seen good progress in narrowing the gap between spot market sales and our OEM customers who negotiate contract pricing.

As we mentioned on the last call, the PC segment is a lower percentage of our DRAM business, at about 40% of revenue.

Our specialty business typically lags in market in terms of price movement in either direction, and that's had a limiting effect on our combined DRAM pricing.

As such, the current spot market price increase in pricing, while still positive, has less of an impact on our overall DRAM ASPs.

General inventory stayed tight throughout the quarter.

We currently are on allocation on a number of DRAM products, and have not seen any signs of a let-down in demand heading into the summer months.

The DRAM supply and demand remains in favorable balance, and we think this situation will remain for the second half of calendar year 2013.

Sales by the wireless solutions group were up roughly 30% quarter-over-quarter, as we saw increased demand in both our major OEM customers and the tier two China mobile market.

Supply for mobile DRAM and NAND products remain tight, due to strong demand for tablets and smartphones.

Our low-powered DDR3 16-gigabit product is in the design phase at the top smartphone manufacturers.

Our NAND-based MTPs have gained strong traction in the overall market, with growing share in the China smartphone market.

Our portfolio of EMMC and EMCP products is expanding, with strong presence across all of our customer base.

From a market perspective, we saw improved pricing trends in the tier two China market, and then expanding to our larger OEM customers.

As I have mentioned on prior calls, we are (inaudible) wireless business, but are making progress as we reduced our operating losses by about $25 million when compared to Q2.

We are very excited about the future combined mobile offering of the combined Micron/Elpida Wireless Group, and continue to receive strong support from top mobile customers.

Our embedded solutions group had another record revenue quarter, eclipsing the $300 million mark.

The embedded business maintained strong gross margins in Q3.

We continue to invest in growing our presence within this category.

ESG's automotive segment increased market share, highlighted by our automotive EMMC product portfolio, and setting a record shipment to automotive in the quarter.

We are seeing a rapid transition from NOR to low density NAND in the embedded market.

In fact, our embedded NAND business roughly doubled quarter-over-quarter from Q2 to Q3.

Despite this, we see pockets of solid NOR margins, and are on track for qualification of our 300-millimeter 45-nanometer NOR technology in early calendar 2014.

Overall, demand for ESG products is increasing, and we are optimistic for a strong Q4.

Our Q4 results reflect an improving memory market and good education in key operating areas, if we continue to manage our expense line as reflected by our SG&A and R&D staying in alignment with last quarter's spending and our guidance for Q3.

We continue to drive inventory debt at -- inventory turn performance down, inventory stays flat despite higher cost of goods in the quarter.

We successfully concluded the sale of our Avezzano imaging fab, and are continuing to explore ways to optimize our manufacturing footprint to align with future capacity needs.

Despite the current marketing conditions improving, we have managed also to reduce our overall headcount by 7% compared to second quarter.

As we look to invest in high value [DRAM] memory solutions, we also remain committed to driving maximum efficiency in our operations.

Our management team has been working diligently on integration plans with Elpida.

The teams that work well together, and we are excited about the opportunity for the consolidated business going forward.

After the close of our Elpida transaction, we will have increased our trade memory capacity over 90% compared to early last year, all with existing industry capacity.

Our customers are supportive and encouraged about the prospects of a scaled Micron with Elpida, and are seeking a new level of strategic alignment for advanced memory solutions.

Micron's customers understand memory is evolving to new applications and form factors moving to a more solutions orientation.

We are measured in our approach to capital spending as we transition technology nodes over the next 12 to 18 months.

The markets for both DRAM and NAND remains in good balance, and we are optimistic for a strong Q4.

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

Thanks, Mark.

We will now take questions from callers.

(Caller instructions)

With that, please open up the phone lines.

Thank you.

(Operator Instructions)

Our first question comes from Glen Yeung, Citi.

Just a question about the opportunities, the demand opportunity from gaming.

We've seen those game consoles go from kind of low amount of DRAM to a quite a high number now.

To what extent do you think this is a meaningful demand driver for DRAM in the next few quarters?

I think it is -- Glen, this is Mark Adams.

I think it is all pretty positive for us.

When we look at the gaming sector, and compared to other segments, it is still a pretty positive segment for us.

Looking at the densities, on average about eight gigabytes, it's all pretty favorable.

Of course, going into the holiday season, we're pretty excited.

Can I ask another question about cost, then.

Just thinking about, I recognize Inotera costs are below yours, and over time it's a bit of a drag on the net cost of the two companies, but is there a point at which the cost come together, and at that point do we then kind of revert back to more normal cost declines in DRAM?

Glen, this is Mark Durcan.

It is not likely to happen in the short term, and that is primarily because there is a pretty significant difference in the mix that runs at Inotera today versus the mix that runs other places.

So you look at Micron DRAM today, it's -- there's a lot of networking, server, consumer, gaming products that aren't necessarily found at Inotera that typically drive pretty good ASPs, but also maybe not advancing to the leading edge node as quickly.

So that -- we are not particularly concerned that the cost profiles don't marry up.

The other thing to keep in mind, obviously, is that going forward Inotera costs to Micron are going to talk with the end markets, and those are going to move over time.

As we bring Elpida into the fold, we will have wholly-owned DRAM capacity that will be much more leading edge and cost-efficient to service some of those more high-volume markets.

Perfect, thanks very much.

Joe Moore, Morgan Stanley.

You said that NAND is the most profitable category, but it doesn't look like they're far apart, if you look at DSG being a little higher than NSG, and I know that doesn't map exactly to the chips.

They're pretty close, and now you've got DRAM prices going up and NAND going down.

Going forward, how do you think about the relative profitability of the two, and how do y9u think about moving capacity over to NAND?

Is it possible that DRAM will be more profitable?

I think the clarification I would like to make is that the pricing trend you identified in NAND I should clarify is really driven by a shift in a mix from SLC and MLC and some other operations.

Now, we think it's gross margin positive, and we think the relative profitability is about the same.

Let me jump in here.

The -- we're not going to be moving capacity around on a high frequency basis.

The changes we are making are over the long haul, and as we look at the market going forward for NAND, there is just insatiable demand.

It looks like there is pretty strong demand growth out there into the future, and that is why we are making the adjustments.

Okay, great.

Thank you.

And then at the beginning of the quarter you had talked about NAND bits being up sequentially and they ended up flat, and pricing being down and it ended up quite a bit higher.

What was the change over the course of the quarter versus when you gave guidance?

Sure.

Ron had mentioned in his comments that the nature of the SSD business will provide some variance in terms of inventory levels and how we stage products for our strategic customers around SSDs, and when you get to a category that, as I mentioned in my comments, are up around 60% of our trade NAND capacity, that will have a effect on the timing of the shipments.

Great.

Thank you very much.

James Schneider, Goldman Sachs.

Good afternoon.

Thanks for taking my question.

I was wondering if you could talk about the DRAM capacity situation for a second.

Many of your competitors have talked about transitioning from PC DRAM to mobile.

I wondering if you still see that continuing in the industry at large for the foreseeable future, or if you see that reaching equilibrium at some point soon?

Well, we still are pretty positive on that trend, James.

It is Mark Adams again.

We still are pretty [positive] and watching it, but at this point we don't see a shift away from that trend.

Okay, fair enough.

And then just as a follow-up, then on the NAND side in terms of capacity.

There has been quite a bit of controversy about how much capacity is going to get added this year on the NAND side.

Can you maybe give us your feeling about roughly your estimate of how many wafer starts get added in NAND by the end of 2013?

Well, I think we all read the same thing in the press and hear from similar things from various suppliers that are out there talking these numbers.

So, I mean, I can't tell you that I have better insight than that, but I think some of the numbers that have been previously reported, were potentially jumping the gun on what Micron might do.

So you should factor that into any thinking you have as to what is happening with NAND supply.

And obviously, as I've just told you, we are going to watch what is going on the marketplace and meter that in a measured way, given supply and demand.

I don't -- I'm not aware of any big new fabs coming in the NAND arena, other than the one that Samsung actually has under construction in Xiang, and I would anticipate that having a significant impact in the marketplace in 2014.

That's very helpful.

Thanks so much.

Vijay Rakesh, Sterne, Agee.

On your gross margins, it look like it came up very nicely on the quarter.

Just looking out, given the improving profitable (inaudible) in NAND and the historically you guys have hit 30% back in the 2010 timeframe, how do you see that going out?

Hey, Vijay.

As you know from following us for a long time, we just stay away steadfastly from trying to predict gross margins.

We are going to let you guys do that.

Would you like to ask a follow-up question, or should we move on?

On Inotera, I was wondering, it looks like you guys invested in profitability in the last two months.

How do you see that contribution going forward?

Vijay, this is Ron.

If you look at the Inotera structure, as I mentioned in my comments, we are on an ASP minus arrangement structure, and it's a moving average formula.

So as Mark already commented, there will be a tendency for the cost to move with the market pricing.

What it gives us is stability of a major segment of our DRAM capacity with pretty good margin structure, but you are not -- you are going to see the costs move with the price moves in the market, the ASP the market in general.

Got it.

Thanks.

Mark Newman, Sanford & Bernstein.

Could you give a brief update on the technology side?

You mentioned 3D NAND progress is pretty good.

If you've got any further update on that?

And I would like to understand a little bit more about, on the NAND side, what you are doing in terms of, or what you have, in terms of controller and system expertise, and you mentioned that quite a few of your -- you're selling -- your SSD sales were up quite a bit.

I think you said 11% increase to $178 million.

I would like to get a sense of your controller expertise, and how that is helping you, and how you're kind of working on that to improve it.

Thanks.

Okay, So this is Mark Durcan.

Let me jump in on the technology question first, and then I will let Mark address the controller from a more software capability (inaudible) question.

From a non-volatile advanced memory perspective, we feel like we are very, very well-positioned relative to those we compete against, not only in the NAND arena, but also in some of the emerging memory spaces.

Let me address NAND first.

Mark commented earlier in the call on the 16-nanometer rollout.

There's been a lot of different terminologies out there about 2X, 2Y, 1X, 1Y.

I don't know how that maps to somebody else's nomenclature, but I don't think there's anybody else out there with 16-nanometer 0.5 pitch product, and I'm pretty confident that that is going to be the smallest cell size [planar] NAND in the marketplace here over the next couple of quarters.

Feel pretty good about how we are positioned on planar NAND.

Moving to 3D NAND, we're very happy with the progress we're making on 3D NAND programs.

We believe everyone is taking a slightly different approach, and obviously we like our approach the best, but we don't have complete visibility into what everyone else is doing.

I would say that you are going to see samples in the marketplace from a number of different competitors over the next few quarters, but you're not going to see any significant production occurring until the second half of 2014.

You're really won't see anything that has any impact on the marketplace probably until the 2015 timeframe.

I'm not saying that because I think I'm behind anybody else, I'm just trying to give you a sense of what the impact a on the marketplace might be.

Now, relative to some of the other emerging technologies that are out there, whether they are storage class memories or pure NAND replacements, et cetera, we have a number of different programs going with a number of different partners, as well as some purely internal ones, and we really like the way we positioned our Company in terms of being able to work on anything that we think is fruitful and do it in a cost-effective way as possible with the partnerships we've created.

So if you are thinking about who's going to be positioned for any memory technology transitions that are coming down the pike, we feel very good about how we've position the Company.

Mark, you want to talk about controls?

Sure, I think I've mentioned in the past couple of calls, our strategy on controller development around SSDs and around NAND solutions in general has kind of philosophically been we are going to partner externally for entry-level client type devices, consumer devices, and for some the higher value-add differentiated products, we are going to invest in our own [core] controller development.

And that is pretty much played out, at least to date.

For example, I referenced a PCIE accelerator drive earlier it in my comments, and that is a controller that Micron developed in-house with our own controller team, as well is firmware organization.

Over the long run, I think you'll see us add to those efforts and teams as we see more opportunities for differentiated solutions on the high-end of the storage market.

In addition to that, we see pretty good value in doing so, more around firmware and on EMMC solutions for both the embedded and mobile market.

But again, the way to think about it is kind of your differentiated higher-end value-add solutions, we are going to try to do in-house with our controller and firmware teams, and on the entry-level solutions, be more along the lines of a third-party partnerships, maybe with their controller and our firmware or totally outsourced.

Okay, thank you very much.

That is very helpful.

John Pitzer, Credit Suisse.

Good afternoon, guys.

Thanks for letting me ask the question.

Apologize if I missed it.

Did you guys talk about industry supply growth expected over the next 12 months, and your ability to outgrow that, given the Elpida acquisition?

Sure, John.

We are looking at DRAM in the low to mid-20% range for this year, and then low 20% range for 2014.

As you pointed out with the Elpida acquisition, we will probably be above that.

On the NAND side, we are looking at mid-30%s for this year, and probably low 40%s for next year.

Again, we will probably be slightly ahead, depending on the pace at which Mark decides to move the text fab.

And then maybe a question for Mark Durcan.

Mark, just given that when you look at the DRAM side of the equation for the first time in perhaps over a decade, we seem to have some pretty good demand drivers out there, whether it is the gaming console in the back half of the year, or the fact that as you move to multi-core chips and handsets you're just seeing DRAM density go up.

At what point would it make sense to actually grow that DRAM asset base more quickly, just given how strong the demand signals are, and what would you need to see to really take a meaningful step-up in your capital spending plans?

Well, as we look at those kind of decisions, it's a multiyear investment payback decision, right?

So we have to be sure that we don't see any significant oversupply being created as a result of that activity in the horizon over which we are going to recoup the capital expenditures.

So we are going to be pretty careful about adding additional DRAM capacity as opposed to optimizing the existing capacity we have.

Now, we've talked about fungibility between the various types of the capacity, and these transitions we are making currently moving from DRAM to NAND are reversible.

We typically choose to do that as we transition a technology node, that is the most cost-effective time to do it.

So we could see some of that actually reverse at some point in the future, if necessary.

We also do have some clean room space available so we can probably react a little bit more quickly than some of our competitors if we decided we wanted to move in that direction, but we don't have any plans at all to do that.

We are going to have a little bit of digestion here with Elpida and optimizing that operation, and we are going to also be pretty focused on realigning our balance sheet where we would like it to be for the long haul, and then taking obviously a pretty close look at capital spending before we engage in any.

And then, Mark, maybe if I could sneak one in just on that balance sheet.

Given that the model is now generating significant free cash flow and you're starting to see some dilution from the converts, I'm curious as how we should think about fixing the balance sheet, over what time frame, what kind of looks interesting, and is there anything you can do to help keep the share count down?

Yes, let me keep that at a high level, and then maybe Ron's got a few additional comments.

Obviously we've done a little bit of convert repurchase here over the last few quarters.

We will have more [aspect] to do that obviously, as we deleverage the balance sheet and have available cash to do so.

We will have to trade that off against the other options of how we return value to the shareholders, but that's something we will be looking at.

Ron?

Sure.

On the share count side, John, we've got, in terms of our convertible debt instruments, we've actually targeted those to be light as possible on the equity.

A lot of them created to be pretty debt-like, but yet still leverage the volatility of our stock in the pricing of the instrument.

So we are using the treasury stock method on all of our dilution calculations, and basically that slows the rate of dilution, is why I gave you an example of how it will actually work as you flow that through the divisor on the EPS calculation.

And going forward, obviously we have been careful, and continue to be careful, about equity position, but the dilution effects will play through stock prices, but maybe I can just give you a quick formula so you get an idea how it works, and we can certainly give you more information offline if you want.

If you take the average share price of the stock in the period we are reporting, and subtract out the strike price on the instrument, and our strike prices tend to be in the $8, $9 range on pricing on the stock.

So you take that average price minus the strike price, divided by the average market price.

So you get a percentage, multiply it times your share count on that instrument, that gives you the dilution effect.

So it is a muted dilution effect, unless you really get high up in the stock price.

And that is how that works, and why we constructed them that way.

In addition we also have exercised cap calls on virtually every one of our instruments, and we've got several hundred million dollars, for example, at a $14 strike price that will come into the benefit of cap calls raising that strike price up.

That's an economic benefit, but obviously it could accrue to us in cash, and we can repurchase shares or whatever.

Mathematically we get the economic benefit, and we decide what we want to do with it.

So we have done cap calls as well as the -- that treasury stock method to make it minimized.

Helpful, Ron.

Thank you.

Monika Garg, Pacific Crest Securities.

First question is, I'm trying to understand.

I'm comparing the NAND cost declines in 2012 quarterly over 2013.

So in 2012 you had a very nice NAND cost declines.

In Q1 2012, it's minus 16%, then minus 18% in Q2, [949] in Q3, but if I compare that to 2013, Q1 was cost was up 2%, the second quarter was minus 5%, and third quarter is again plus 1%.

We understand that the benefits of (inaudible) declining, but just trying to understand what else could be the reason.

Yes, Monika, a big variable in all of this obviously is mix.

There is lots of flavors of NAND.

There's SLC NAND, MLC NAND, TLC NAND, and that pendulum has kind of swung a couple of times as we've moved through different technology node generations and different applications that the NAND [node] is going into.

So if you go back in the timeframe you are alluding to, there was a fairly significant swing into the MLC, and even at Micron some relatively small amount of TLC, which drives a significant bit cost reduction.

As we've moved through more recent quarters, we've actually seen a slow down in some of the technology transitions driven by more highly reliable and non- changing bits going into high reliability SSDs, as well as the 20-nanometer conversion that I alluded to earlier, Mark alluded to actually, driving potentially higher ramp cost initially as that went in, and then going a little bit slower at the [25]-nanometer node than it did at the 34-nanometer node.

So a lot of different things that play into that, but generally speaking, we feel like we are doing what we need to do in the NAND business.

Then the last question was on the mobile DRAM side.

We have seen PC DRAM pricing significantly up quarter-over-quarter.

Could you talk about the trends in the mobile DRAM pricing, especially given that some publicly available data shows that (inaudible) mobile DRAM pricing was actually down quarter-over-quarter?

I'll let Mark address the specifics of more recent moves in the marketplace, but what I would say relative to PC and mobile DRAM pricing dynamic is that obviously there is a pretty significant price advantage for mobile DRAM earlier in the year, and as more bits have converted from PC DRAM to mobile DRAM to meet that rapidly growing demand, we have seen PC DRAM start to catch up.

Eventually, these things are likely, if the market is efficient, for us to equallibrate at an ASP that is about different -- about equivalent to the difference in cost so the gross margins are neutralized between the two.

And that is probably where it will oscillate around here over the next couple of quarters as demand and supply, people consuming the bits and people producing the bits work out that equilibrium.

I would also say that is sort of the process we went through on the NAND.

The discussion we just had, as we think about as SLC, MLC, TLC, 20-nanometer, 34-nanometer, what we are doing is we're optimizing gross margin, and whether it's mobile to PC DRAM, or MLC to SLC to 20-nanometer, 34-nanometer, 25-nanometer, we're just optimizing gross margin based on customer demand.

Thank you so much.

Hans Mosesmann, Raymond James.

This is Brian Peterson in for Hans.

Just a quick question on the NAND side.

You indicated that gross margins were up five points sequentially, but looking at the operating margins they were actually down.

And I know that consolidated OpEx numbers were in line, so little bit lower than you were expecting.

So could you just give some color on the disconnect there?

Yes, I think the difference is that NAND goes into a number of different business units at Micron.

So the numbers you're referring to are NSG numbers, but obviously there's NAND that goes into ESG that in many cases carries a pretty significant premium.

There is also NAND going into mobile products and MCPs, and sometimes it's tough to even figure out exactly what the gross margin is in those products, but that can be either higher or lower.

So it's a BU affect versus a NAND technology effect.

Okay.

And just lastly, on the supply side for NAND, I thought that the previous forecast was in the mid-30%s, and it looks like you are talking about low 40%s now.

So just to clarify, is that a little bit of an increase, and what is driving that there?

Actually, I gave you both years.

For 2013, we are now think it's a little bit lower than our last call.

So we are now in the mid-30%s with the rest of the market, and it's for 2014 were looking at low 40%s.

Okay, thanks, Kipp.

Doug Freedman, RBC Capital Market.

If you could talk a little bit about, you just mentioned you are looking at moving DRAM to NAND, and what can we expect that to have an impact on your bit output growth, and in which quarter should we expect that?

It is all included, Doug, in the guides that we give you.

And we -- if you go back to the last quarter conference call, we did mention we were starting to prep with that so it would have an impact of lowering our DRAM bit growth in Q3.

But it's in our guide as we gave it to you.

So the transition will be completed by the end of the fourth quarter that you've just guided?

No, not at all.

Over probably the next four quarters or so, with adjustments for market.

Okay, I guess what I'm trying to get at is the transition, I imagine it has some sort of a negative impact on your total potential production output.

What type of a handicap are you operating under as you migrate DRAM to NAND?

It's that piece is pretty transitional, and you've seen some of impact, as Ron alluded to earlier on, had an impact on both probably DRAM and NAND costs in the quarter that just finished, and that will probably continue for another quarter, and then we will be through the overall manufacturing impact, but the actual transition (inaudible) will run four-quarter period from right now.

Okay.

The reason there, Doug, is you have to create some white space to get the tools in, and then once you reach sort of an equilibrium, you're not suffering anymore downside.

Okay.

In the past we did get some -- a filing when you did some of your debt restructuring with some numbers around Elpida.

Can you give us an update on their financial performance?

Doug, this is Ron.

Mark already made a comment in his script about Elpida, and the strength of performance, and moving in line with the DRAM business.

We don't have information at this time that is available to update beyond what he already said.

All right.

If I could then, just a follow-up on the inventory.

You made a comment that your NAND inventory was up in the SSD segment, but yet y9ur overall inventory at the Company was only up $11 million.

Does that mean that DRAM was actually down to offset the NAND that you built?

The comment I made was just around some SSD and the whip pipeline, and obviously there's a whole lot of moving parts in the broad mix of our portfolio.

So I wouldn't draw that conclusion between DRAM and NAND.

It is just moving parts in total.

We are continuing to manage cycle times in our inventory, and trying to improve all of those activities quarter by quarter.

So some of that affect helps as well.

And I guess I will leave you alone after one last one, if you could.

What are you seeing the inventory in the marketplace, given the fact that pricing has been rising in both NAND and DRAM?

Can you give us an update on what you're seeing in the marketplace inventories?

Thank you.

Sure, Doug.

It is Mark Adams.

Overall inventory looks pretty tight right now on both NAND and DRAM.

We -- sometimes when we head into the summer, you see a little lull on the buying behavior our customers.

Quite honestly at this point in our quarter, we have not seen that, and the demand signals seem pretty strong.

There is rumors about accumulation and all that stuff, but we have not felt that at this point.

Great, thank you so much.

Ryan Goodman, CLSA.

One of your peers recently discussed how some of the remaining empty clean room space was going to have to end up being used up to enable the one wide transitions in NAND.

I was curious if you're seeing a similar dynamic to that, and how we should be thinking about, like in this in IMFS, how much open clean room space there is, and how much of that you will have to use to get to 16 nanometers?

Yes.

Well, 16-nanometers for us is a very easy capital and equipment transition because it's a planar node to a planar node, and you'll recall that we made the transition to a different kind of planar, but a planar NAND cell when we move to moved to 20-nanometers.

If you look at Micron's 20-nanometer storage element, it is very different than the other folks, it's a high K dielectric, and the cell itself is planar.

So that technology extends for us, and it is a relatively easy transition.

Don't think in terms of big cleaning requirements for us to move to 16 nanometer.

Now, what you -- what is true for all of us I think, or likely to be true for all of us, is moving to 3D is going to consume significant amount of incremental clean room capacity to maintain the same wafer output.

But the productivity of that transition is very, very high.

So it make sense to go ahead and do that.

Now, relative to that question for Micron in our fab in Singapore, our wholly-owned nan fab in Singapore, we have a lot of clean room space there and we can get well done a transition to 3D nan without having to add any incremental clean room space.

Okay, great.

And then just a different area.

Hynix and Rambus recently came out with a settlement announcement.

So I think it is just down to you as the remaining participation in litigation with Rambus.

Is there any update on that in terms of timing or expectations or anything you can help us with there?

There is an appeal that is on file now that I believe is heard again in about a year.

Okay, thank you.

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

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

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

These particular forward-looking statements, and all other statements that may have been made on 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 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 10Q and 10Ks.

Thank you for joining us.

Thank you.

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

You may all disconnect.