美光科技 (MU) 2014 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to Micron Technology's first-quarter 2014 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 to Micron Technology's first-quarter 2014 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 www.Micron.com.

In addition, our website has a file containing the quarterly, operational, and financial information, guidance, non-GAAP information with reconciliation, the slides used during the conference call, and a convert debt and capped call dilution table.

If you have not had an opportunity to review the first-quarter 2014 financial press release, again it is available on our website at www.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 the confirmation code of 15929595.

This replay will run through Thursday, January 14, 2014 at 5:30 PM Mountain Time.

A webcast replay will be available on the Company's website until January 2015.

We encourage you to monitor our website at www.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 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.

Now I'd like to turn the call over to Mark Durcan.

Mark?

Thanks, Kipp.

I would like to start today with an overview of the key developments during the quarter followed by a few strategic and industry thoughts.

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

Before turning to Q&A, we'll close our prepared comments with Mark Adams covering additional details of our operational performance and market conditions.

Fiscal Q1 was our first full quarter with combined Micron and Elpida financials.

Elpida's financial performance met or exceeded the high end of the range for the key estimates we provided in early August.

The early execution of our combined teams has been impressive, and in conjunction with favorable market trends, our financial results were outstanding.

We achieved record quarterly revenue of over $4 billion, improved our gross margin to over -- over 7 percentage points, and delivered very strong earnings performance.

Operating cash flow was $1.5 billion and CapEx was $669 million, resulting in free cash flow of $838 million.

We're focused on a capital allocation strategy to maximize long-term shareholder returns.

With this in mind we recently entered into a series of transactions to restructure our existing convertible debt and address the dilution stemming from those converts, which Ron will describe in more detail later.

We will continue to focus on optimizing our capital structure.

Although we had a head start on planning and technology development, we are still in the relatively early stages of the Elpida integration activities which are going very smoothly.

In particular we're very pleased with the 25-nanometer ramp execution of both Hiroshima and Rexchip fabs, which position us at the leading edge in terms of industry technology.

Our outlook for memory industry conditions remains very favorable.

In terms of DRAM, the fire at Hynix Wuxi fab last fall, coupled with what was a healthy supply-demand situation beforehand, is resulting in significant reductions in inventory across the DRAM supply chain, in particular for the PC and mobile segments.

Our belief is that this tight and further declining inventory situation, coupled with balanced long-term production and demand, should continue to drive healthy market conditions.

We will continue to monitor the market and make the best supply allocation decisions for our long-term margin profile.

We expect to see the DRAM industry wafer production down about 5% in 2014, with total DRAM industry bit supply up in the mid 20% range.

Micron's total DRAM bit production, including Elpida, will be well below the industry for the calendar year at about the midteens year over year, given our DRAM to NAND conversion activity.

Beyond 2014 we expect industry capacity to remain relatively stable.

For Micron, any potential decision to add capacity in DRAM is not just about current profitability levels, which while good, are still below the long-term average that we believe justify the significant investments in R&D and process technology required in the business.

In addition to attractive long-term returns on the existing asset base, we would need to see a fundamental and significant upward shift in bit demand consistently above approximately 40% compared to the current CAGR in the low 30% range before it would make sense for us to bring on additional wafer output.

As such, in the current environment we believe the best strategy for Micron is to continue optimizing existing capacity for improved gross margins.

For NAND, we're projecting industry supply growth in the low 40% range for calendar 2014.

This includes a 10% increase in industry wafer production with the remaining supply growth coming from technology.

Micron's total NAND supply growth was below the industry in 2013, but will be slightly above the industry in 2014 given our DRAM to NAND conversion.

This supply forecast compares to the five year NAND bit demand CAGR in the low to mid 40% range, implying favorable long-term supply and demand balance.

Our emphasis in NAND is on continuing to improve customer enablement and product placement in value-added applications.

We're very pleased with the results for the quarter and the outlook for healthy memory industry dynamics.

We remain focused on optimizing value for our shareholders and worldwide customers in 2014 and beyond, and I'll stop here and turn it over to Ron and Mark before returning for Q&A.

Ron?

Thanks Mark.

Our first quarter of Fiscal 2014 ended on November 28.

To ensure you have easier access to the materials we're covering today, we posted to our website a file containing the financial information I will cover, including GAAP to non-GAAP results, certain key metrics for the first quarter, as well as guidance for the second quarter of fiscal 2014.

For the first quarter we reported net income of $358 million or $0.30 per diluted share on record net sales of $4.042 billion.

These results include the unanticipated costs of the Rambus settlement and debt restructuring.

As a reminder the results for the previous quarter included the $1.5 billion non-operating gain recognized as part of the purchase accounting for the Elpida acquisition.

On a non-GAAP basis, net income for the quarter was $881 million or $0.77 per share.

Non-GAAP adjustments totaled $523 million or $0.47 per share.

Key adjustments included the following: A $233 million charge recognized on the Rambus settlement, which was expensed entirely in the first quarter; $111 million non-cash flow through of Elpida inventory step up related to the acquisition; $92 million in accounting losses recognized on the convertible note transactions, a portion of which resulted from mark-to-market accounting and our improved share price in the last month of the quarter; approximately $17 million of this amount was recorded as interest expense for the make-whole premiums on the notes.

Q1 adjustments also included $50 million in non-cash amortization of debt discounts and other costs.

This primarily consists of the imputed interest on the convertible notes and Elpida installment debt.

$73 million in non-cash taxes related to the Elpida operations in the quarter; and finally, $54 million share anti-dilutive effect of capped calls based on the average stock price during the first quarter of $17.48.

In the second quarter, we expect the following non-GAAP adjustments: Around $30 million flow through of Elpida inventory step up reported as a higher cost of goods sold in Q2.

This should be immaterial in future periods.

Approximately $50 million amortization of debt discounts on the convertible notes and the Elpida installment debt.

We expect the results of the second quarter to also reflect $70 million of losses when we complete the repayment of the 2027 and 2031A convertible notes.

We estimate $15 million to $20 million for the tax effects netted against these items.

Non-cash taxes related to the Elpida acquisition of between $65 million and $75 million.

Also, the anti-dilutive effect of our cap calls will be based on the average share price for the quarter; assuming a $22 share price this would equate to a reduction in diluted shares of 43 million.

Please refer to our convertible debt dilution table, which is included in the earnings call data file posted on our website.

In fiscal Q1, DRAM revenue was up 69% and gross margins were in the low to mid 30% range, an improvement of over 7 percentage points from the prior quarter.

This was primarily a result of two factors.

First, a full quarter of the favorable cost structure of Elpida's operations.

And second, opportunistic shifts to a higher mix of wafer sales in both PC and mobile markets, which generated above-average gross margins despite having below-average ASPs.

Like-for-like PC DRAM ASPs were up double digits in the quarter.

As you know we participated in Inotera's results with our 35% ownership interest.

If you combine our share of Inotera's net income with our reported DRAM gross margins, and add back the inventory step up cost from the Elpida acquisition, DRAM margins would be approximately 7 percentage points higher than reported on a GAAP basis.

I'd also note that the Inotera JV is a highly efficient capital structure.

Including the margin on the sale of Inotera's products and our share of their equity method earnings over the past two quarters, Inotera's currently generating an annualized ROI close to 130% based on our total cash investment to date.

As Mark mentioned, Elpida met and generally exceeded the performance estimates we provided in early August.

In December, Elpida transitioned to a cost-plus model similar to our other fabs across the world.

As a result, Elpida is now part of our total DRAM results and will no longer have separate reportable financials.

DRAM guidance for Q2 is as follows: Production bit growth is approximately flat, quarter-to-date ASP is approximately flat, and cost per bit is down mid-teens.

The key items affecting our DRAM guidance for the second quarter are: less impact going forward of selling through stepped up inventory acquired with Elpida, continued transition of the Fab 7 in Singapore to NAND production, and opportunistically shifting to a higher mix of wafer-based sales in both the PC and mobile markets with higher than average margin and below-average ASP and cost.

Turning now to NAND, on the trade NAND side, revenue was up approximately 10% as we benefited from increased NAND volumes from Fab 7 in Singapore.

Gross margins were in the low to mid 30% range, up slightly quarter over quarter.

Like-for-like market prices were generally flat to slightly down in the quarter, although initial output from Fab 7 is selling in component form at below average margins.

Trade NAND guidance for Q2 is as follows: Production bit growth up high teens, quarter-to-date ASP down high teens, and cost per bit down mid-teens.

The key trends affecting Q2 guidance are: first the continued conversion of Fab 7 to NAND, which achieved wafer output crossover in the first quarter; also considered are lower expected ASPs related to seasonal demand and increased production of high density products initially being sold in component form, which typically have a lower average ASP.

Following fiscal Q2, we expect to see an increased mix of embedded and system sales including SSDs, which should improve our ASP mix.

NOR sales in the first quarter decreased compared to the previous quarter as we continue to see NOR applications, primarily in the wireless space, convert to NAND.

We see this trend continuing through Q2 with NOR revenue in the $100 million to $110 million range.

Longer term we expect to see revenue stability and growth in gross margins with the vast majority of NOR sales in the embedded market, and our planned transition to 300-millimeter production for our new applications.

The Company generated $1.5 billion in operating cash flow in the first quarter.

This operating cash flow includes a deposit from a customer of $250 million associated with a long-term DRAM supply agreement.

This supply agreement provides for current market pricing at the time products are sold.

Subtracting the $669 million capital spending from the $1.5 billion operating cash flow netted $838 million of free cash flow in the first quarter as Mark mentioned.

We ended the quarter with cash and investments of $4.4 billion, up just over $200 million from our year end.

Also in the first quarter the first installment payment of $534 million was made under Elpida's reorganization plan.

The next payment is due in December 2014.

Capital spending for 2014 fiscal year is still expected to be between $2.6 billion and $3.2 billion.

Earlier in the second quarter, we executed a borrowing guaranteed by the Export-Import Bank of the United States.

That netted approximately $435 million with a cash interest rate of 1.26% and no significant financial covenants.

We are continuing our efforts to optimize our capital structure with a focus on dilution management as well as a long-term debt reduction.

The convertible note transactions I mentioned earlier were executed in response to the significant increase in our share price over the past six months or so, which has driven additional potential share dilution.

The transactions reduced current potential dilution by about 3% to 4% based on a $22 share price and reduced future potential dilution as well.

The net effect of all our debt activities across the quarter was a decrease in debt of $243 million.

We will continue to evaluate additional capital transactions in line with our strategic objectives.

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

Thanks, Ron.

As this is our first quarter with the Elpida operations fully integrated into our results, I thought it might be helpful to discuss how we are structured within our manufacturing network before commenting on our Q1 performance and the current state of the memory market.

We have communicated on past calls that over the last 18 months or so through M&A and redefining strategic joint venture partnerships, we have increased our overall capacity by greater than 90%, all of which was existing industry capacity.

A key focus for us as part of this growth is to ensure operational efficiency in how we manage that capacity.

After the sale of our Italy and Israeli fabs in our fiscal year '13 and with the close of our Elpida acquisition, Micron's volume manufacturing sites are based in three geographic areas: Japan, which is primarily focused on mobile and graphics DRAM; Taiwan, the location of Inotera and Rexchip operations, which is focused on computing, server, and networking DRAM; and Singapore, which is our primary location for high-volume, non-volatile technology with NOR and NAND Flash manufactured there.

Combined with our high-volume production sites, we manufacture some of our specialty and embedded products at our Manassas, Virginia facility, and leverage our Lehi, Utah plant for strategic NAND and emerging non-volatile production.

Our customers appreciate the geographic diversity as it creates a natural hedge against production disruption, and they also value the flexibility from a product sourcing perspective.

On the manufacturing front, our team has done a great job in improving productivity across our network.

We saw some noteworthy cycle time reductions at the sites in Q1 that lead to strong bit growth production far exceeding our guidance.

As our business increasingly diversifies across a growing number of end-market segments, we continue to serve customers with different requirements.

Customers in segments such as automotive, networking, gaming, mobile and storage all place different levels of prioritization in areas like assembly, test, supply, and quality.

This diversification to end markets is driving us to think about each of these businesses almost as independent operations.

A good example of this dynamic is how we view our inventory.

In our server business we have customers who compete for large volume orders and thus rely on Micron's flexibility in reacting to their increasingly volatile demand requirements.

In NAND Flash, we serve consumer, automotive, mobile, and storage customers where a growing number of NAND chips are integrated into packages and full system solutions.

Each of these has their own build cycle and inventory requirements.

Thus as our business evolves, we may strategically choose to build inventory and/or adjust our product mix accordingly.

As Mark commented earlier, we were pleased with our Q1 results highlighted by a strong quarter in DRAM.

Our DRAM gross margins improved over 7 percentage points from Q4.

Three of our four BUs consume DRAM capacity to address their customer segments; DSG, WSG, and ESG.

DSG, which focuses on computing, networking, server, and consumer, including graphics, makes up over 60% of our overall DRAM revenue.

The combination of Micron's legacy mobile business and the former Elpida mobile business comprised roughly 30% of our DRAM revenue, with ESG contributing the remaining segment, serving automotive, industrial, military, and medical customers, often referred to as AIMM.

In my opening comments I noted where specific products are manufactured in volume.

As part of our network design we are set up to ensure maximum flexibility in our network.

For example, in DRAM, we continue to evaluate our computing versus demand -- versus mobile demand profile to optimize profitability when possible.

Even within a segment we are managing our inventory direct output to the most profitable opportunity.

A good example of this is in our mobile DRAM business.

We have customers requiring known good die mobile DRAM components that are sold in wafer form as Ron noted, where the margin profile is more attractive compared to fully assembled modules.

Therefore, we are shifting some of our DRAM capacity in this direction to capture the incremental margin.

A number of our largest OEM customers communicated shortages in DRAM and are looking for more supply in our calendar Q1.

We continue to see strong demand signals from our computing, mobile, networking, and embedded customers, and thus expect a healthy DRAM business throughout the remainder of our second quarter.

On the DRAM technology front, we are ramping our world class 25-nanometer process and we have been pleased with the progress to date.

We will continue to ramp 25-nanometer and will introduce our 20-nanometer technology in the second half of the calendar year.

We were also the first supplier to sample low power DDR4 to our customers and chipset partners.

This allows them to debug their next generation systems and reference platforms with Micron solutions.

Our overall NAND business surpassed the $1 billion mark for the first time, an 8% quarter-on-quarter increase.

Our trade NAND business achieved revenue growth of roughly 10% quarter on quarter, with margins up slightly as bit growth was up 17%, driven primarily from our Fab 7 conversion from DRAM to NAND.

As is the case any time new capacity comes online, we are in the process of qualifying customers on products that use the Fab 7 output.

We thus saw an unusually high percentage of our output sold in component form versus prior quarters.

We anticipate that this dynamic should last three to six more months as we align our Fab 7 output to customer qualification cycles.

During the quarter, SSDs, including component sales to strategic SSD customers, represented 48% of our trade NAND revenue, with consumer sales coming in at 30%.

We shipped our first 20-nanometer enterprise drive, the M500 DC product, to a large OEM in Q1.

In addition, we are on track for customer qualification of 20-nanometer client drives at major OEMs and channel customers in fiscal Q2, and have plans to begin production of a 16-nanometer client drive in our fiscal third quarter.

Outside of solid state storage, we are seeing increasing NAND penetration into mobile where when packaged behind an eMMC Controller will offer attractive demand growth.

In the embedded business, we are seeing growth for NAND, some of which is a NOR replacement option, and some of which comes from the development of what I would refer to as an industrial solid state application, such as the automotive.

Revenue in the mobile segment represented 12% of our trade NAND while AIMM was in aggregate 10%.

On the technology front, we are on track to ramp our 16-nanometer planar NAND this calendar year, and we continue to make good progress on 3D NAND, which is on track for production samples in late calendar Q1, early Q2.

As we have commented on during prior calls, the NOR business is maturing and we have focused on right sizing our operations to align with the demand profile.

As a result of NOR industry dynamics we view the NOR operations as a cash flow generation business focused on healthy returns.

To that end, our embedded business is driving the majority of our capacity utilization.

The shift to a more embedded mix drove margins up from single digits to about the midteens in Q1, despite ongoing idle fab charges associated with the business.

We began moving NOR production to our 300-millimeter fab in Virginia, which will provide significant cost reductions going forward when coupled with our leading 45-nanometer technology.

We are focused on continuing to widen our cost advantage at NOR and growing our share in the embedded segment.

In closing, we feel positive about the results that our team achieved in Q1, both in top line revenue growth and operating margins, as well as our strong cash flow generation.

We continue to make progress on the integration front of the Elpida operation.

The industry fundamentals remain solid as we're getting strong demand signals from the majority of our end segments, and industry supply in both DRAM and NAND look in balance.

We remain optimistic for a strong Q2 and feel a consolidated memory industry will continue to enable favorable market conditions over the long run.

With that I'll turn it back over to Kipp.

Thanks Mark, and before we take questions from callers, I'd like to turn the call back over to Ron for just one quick clarification.

Thanks, Kipp.

I had one correction I wanted to make sure we got out there before questions and that is in the DRAM Q2 guidance as you can see from the schedule we filed on the website, our cost per bit is projected in the second quarter to be down high-single digits, DRAM cost per bit.

Thanks, Ron and happy to follow-up on that with any questions as well.

But with that we would like to take questions from callers.

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

Thank you.

(Operator Instructions)

Our first question comes from Glen Yeung from Citigroup.

My first question is on the DRAM business, and just trying to understand the shift to more wafer-based sales.

I assume, one, that the more you do, obviously it's going to have a negative impact on revenues.

So, I would just clarify that revenues might be down in the quarter if you move more towards wafer-based sales.

And then the ultimate question is: Is it accretive to earnings?

Because, as you mentioned, gross margins are higher in that business.

Yes, Glen, that's right on.

The actual impact on ASPs is not necessarily favorable, but overall impact on margins is favorable.

Okay, and sorry, just to clarify.

And ultimately you believe it's accretive to earnings -- the combination of that will be better earnings?

That's primarily -- when you think about that, that's the decision on capacity we're trying to make.

Okay, good.

Thanks for that.

The key, Glen, is that both ASP is down and costs are down, and the spread between the two is better than our average, hence the higher gross margin.

There you go.

Okay, thanks.

Second question is: Your thoughts around the Wuxi fab, not in the sense of asking you when you think it will come up, but whenever it does, do you anticipate having to make any changes in the way you're looking at production based on the idea that that eventually comes back into full production?

We don't see any of that today, Glen.

We certainly anticipate that that fab is eventually going to come back into full production.

We see it happening maybe in a more measured way than some have prognosticated, but certainly, with tight industry inventory today and some of the changes we're already making from DRAM towards NAND, we're not expecting any significant shock to the market or the system.

Okay, and last one for me is just on CapEx.

You're on a run rate now which would put you at the low end of your annual CapEx guidance.

Is it your anticipation that CapEx on a quarterly basis will increase?

Yes, our guidance for the year is still intact, as I mentioned, the same range, $2.6 billion to $3.2 billion, so there will be quarterly differences.

I think there's one clarification on CapEx just in general.

As we move into more systems end solutions, some of that CapEx is going to things that don't influence capacity necessarily.

Some of it goes into things around packaging technology and assembly technology that's allowing us to build these systems and solutions.

Good, thank you.

Thank you.

Our next question comes from James Schneider from Goldman Sachs.

Good afternoon.

Thanks for taking my question.

I was wondering if, now that Elpida is finally integrated, you could maybe give us a refresher on the amount of DRAM bits allocated to each of the PC, mobile, server, and other specialty areas, if you would?

Yes, we can do that.

Would you like it on revenue or bit basis?

Bits would be great.

Okay, let's see.

On a DRAM gigabyte basis -- I'm just going to pick some of the bigger categories.

Personal systems were -- Q1 was about 40%, mobile was in the mid-30% range, server was in the mid-teens, and then the rest would be captured in networking and AIMM.

Great, that's very helpful.

And then maybe as a follow-up, I believe, and I may have not heard this right, that you talked about the Singapore fab reaching wafer capacity transition in the transition from DRAM to NAND.

Did I hear that correctly?

And then, can you talk about when that might be fully transitioned at this point?

That's right.

We were over 50% in the quarter completed, and the timing is still potentially variable, but I would look for that to complete out in the first half of the calendar year.

And then just last one quickly for me --

Sorry, assuming no changes, and as you know, we've always maintained the flexibility to make changes pending market conditions.

But as we sit today, we anticipate completing that out in an orderly fashion.

Understand.

And then last one for me would be: Just in terms of the OpEx profile from here, I think you came in maybe a little bit under some of your targets.

Can you maybe talk about, going forward, where there is opportunities either on the SG&A line or the R&D line to bring those down a little bit?

I think there's some opportunity there over time.

We came in a little under.

Primarily, I think in this current quarter, we had some reduced legal expenses that were contributors to that.

But on a go-forward basis, our focus on the R&D line right now is to make sure we're making all of the investments we need to support the Business, both from technology transition perspective, as well as from a system level solution enablement perspective.

And so, we're not looking to drive that down in a big hurry.

On the SG&A front, I'll let Ron comment.

Yes, in terms of overall, as Mark mentioned, we hit some timing differences quarter to quarter in terms of trends.

For example, our legal costs vary.

You see our guidance in Q2 is a little bit up from Q1.

And also we have wafer qual cost timings that shift around and varied a little bit, and Q1 came in lower, and Q2 is probably more on a trend line, just in terms of the near-term views.

In terms of forward-looking cost structure, I think if you look at it as a percent of revenue, the way we're currently performing, we've talked about OpEx being in the 15% range.

And I think we can structurally run well below that going forward.

And given current market conditions, and SG&A would be commensurately lower as well.

So, on an absolute dollar standpoint, I wouldn't expect to see significant changes, but I do think as a percent of revenue, we can trend in the range we're running now.

That's helpful.

Thanks so much.

Thank you.

Our next question comes from Mehdi Hosseini from SIG.

Yes, thanks for taking my question, too.

Starting with NAND, would you be able to elaborate the percentage of revenue of bits coming from the embedded segment of the market?

I can do that for you.

In Q1 -- we don't -- I'm not going to be able to do that for you.

We don't track them quite like that --

Change of mind?

Well, we just don't track them quite like that.

Sure.

But because you said, in Q2, you're going to see a mix moving more towards embedded, I'm just trying to get a better assessment of how that is going to impact the mix and the margin profile.

Yes, let me maybe approach it like I did on the DRAM side.

I'll hit some big buckets for you, and again, we don't necessarily include them embedded.

So, there will be embedded applications within some of these different categories.

But with that being said, Q1 SSDs will be around 50%.

The consumer, which includes channel and CPG for us, is around 30%.

Mobile will be in the mid-teens.

And then, again, networking, storage, and AIMM will make up the balance.

Got it.

So, when I look at your NAND ASP and cost guide, it seems like margins are going to come down.

ASP declined more than the cost declined.

Is this trend going to reverse into the Q2 because of the mix changing, or is it more of the ASP decline going to change?

How should we think about the mix versus ASP versus cost into Q2?

I think, in general, we feel that we will improve our mix relative to the market after Q2.

We're going obviously through a transition, and I mentioned in my earlier comments about the output out of Fab 7, trying to align that to customer quals, and it's probably another three- to six-month dynamic ongoing.

The other part that's worthy of note is that there's a natural ASP degradation if you're shifting from SSDs to components; it might not be as much of a margin hit as much as ASP going down because the bill of material's lower and all that.

So, you've got the Fab 7 dynamic and just the mix dynamic that contribute to what assumes to be a decline in ASPs.

Got it.

If I may just add one more question from a big picture.

In the Analyst day in August you talked about being more aggressive on acquisitions, especially as you focus more on the system level storage.

Can you give us an idea or any kind of flavor as where you are, and help us understand or elaborate what kind of acquisition targets you're looking at?

Well, I think there's obviously, as we've built out our Organization, we're doing a lot of that organically.

We'll continue to look at inorganic opportunities, but we're certainly not in a position to go forecasting what, when, where, or how any of that might happen.

Is it more controller, is it more software, or is it more just offered acquiring talents is what I'm asking?

Well, we're acquiring talent across the spectrum to support those system level solutions.

So, you'll note, in last quarter, we brought in some more senior leadership in the controller area with Brian Angell.

We also brought in Tom Snodgrass in the system level storage solutions area.

And we'll continue to bring in people up and down the Organization, whether they're software folks, firmware folks, or hardware folks to support those efforts.

Thank you.

Thank you.

Our next question comes from Vijay Rakesh from Sterne, Agee.

When you look at your end markets within PC and smartphones, there's a lot of weakness.

And it looks like you guys had very good margins and with supply (inaudible).

Do you expect to see that operating stability and discipline continue into 2014, even after Wuxi comes on?

We do.

We think that the overall PC market feels like it's stabilizing a bit.

At least from our customers' perspective, demand is pretty robust, as I mentioned earlier, quarter to date.

And we think that the balancing between that and -- not just the smartphone segment.

We've got pretty good inroads into what I would say is the utility smartphone business that -- our customer breadth there is allowing us to diversify away.

And so, we're not so heavily concentrated in the smartphone segment itself, and so we don't necessarily feel that we're overly exposed to that dynamic you're referring to, post Wuxi coming back on.

We feel pretty comfortable where we're at on the customer engagement model and what the customers are asking from Micron from a capacity standpoint.

Got it.

And then, can you talk about cost synergy opportunities within test and packaging?

And I also wanted to get your thoughts on the yen.

How are you looking at that side from there, and any hedging there.

Yes, on the packaging side, Elpida certainly had their own approach to packaging, and so, as we look at Micron going forward, we've kind of drawing up our own strategies in terms of internal/external approach -- a hybrid approach to how we're serving our product needs.

A good way of thinking about this, or rather a simple way of thinking about it is: For some of the higher touch, higher value-add products and applications, more of that will be done in house.

And as we evaluate future opportunities, some of our more commoditized low-end business PC, mobile application where they don't require a lot of touch and development will probably use some outside third-party help to get that done.

And Vijay, on the yen and hedging question, I'll just make a couple of comments to see if I hit your point, and ask for clarification if you want to go somewhere else with it.

We use natural hedges in our Japan and Taiwan largely to protect our balance sheet, along with some yen-based forward contracts to protect us on our yen.

And our largest exposure, as you probably know, relates to our JPY140 billion of creditor payments scheduled out over the next few years in Japan.

So, we use those hedging approaches -- largely natural hedges, but some forward contracts to cover that.

Another data point I might just mention is on the operating cost structure, a JPY1 change in the yen/dollar rate will affect our operating cost quarterly in the neighborhood of $5 million to $7 million, just as a reference.

Got it.

Thanks.

That sounds good.

Good numbers.

Thanks.

Thank you.

Our next question comes from Mark Newman from Bernstein.

Yes, thanks for taking my question, and good numbers today.

My question is really on the NAND DRAM mix.

So, looking at the gross margins currently, I think both NAND and DRAM are in the -- somewhere in the low- to mid-30% gross margin.

But currently, with your ramp that you talked about in Singapore, the conversion of DRAM to NAND, this is causing some -- a little bit of problem on the ASP side.

And gross margin for NAND looks like -- at least what you're saying for ASP quarter to date, it seems to be down quite a bit.

So, with that in mind, it looks like the NAND gross margin is going to be quite a bit below DRAM in the coming quarter, fiscal Q2, and perhaps beyond.

So, in that case, I'm wondering, like, how you think about that.

You commented -- I think Mark Durcan, you commented that you may have some flexibility for how you looked at things.

And I'm wondering if you could talk a little bit more about that, considering the fact that the extra production that's coming out of the Singapore fab is causing pricing and margin to come down to a NAND segment, and if you would consider to perhaps delay that conversion to ease that situation, considering that DRAM is doing so well these days.

Thanks, Mark.

It's a good question, and one which obviously we think a lot about.

I think the key here is: We want to be careful we don't optimize the short term at the expense of the long term.

And we'll continue to look at what the exact right balance is.

But we think in terms of this -- some of our challenges right now relative to NAND as we bring this new capacity online are more short-term oriented relative to enabling the customer sockets and getting the product placed in the right place, as opposed to a long-term supply/demand phenomena.

And when we look at the long-term dynamics for NAND, we still think that's going to be pretty robust.

And so, we'll obviously keep a close eye on it, and we do have flexibility, but as I mentioned earlier, our trajectory today is to continue to move towards closing that out in an orderly fashion over the next year.

And just to add to that, Mark, as I think you numerically observed, but to be clear, the current margins are pretty darn close to the same.

Q2, we might have a little bit of shift related to mix, as Mark Adams commented about, et cetera, but that's a short-term phenomenon, so there's not a huge difference between the two right now.

Got it.

So, basically, your goal is -- or you believe that this mix issue is a short-term issue, and you believe that within three to six months, as you said, you're going to be able to transition this extra production in Singapore towards more higher-margin solution products, and therefore, the margin should then catch up back to the -- more similar to DRAM kind of back to the mid-30%s or even higher gross margins.

So, do you think, in other words, this is more of a short-term issue?

We do.

When you think about coming online with a Fab 7 or any time you bring on new capacity out of a fab, your customer qualification process is somewhat timely around their own products.

And so, as we go through that, our early output tends to go into more commodity homes in the short term.

And as Ron just noted, it hadn't dramatically hit our margin in Q1.

And so, we are in the process of qualifying major OEMs on this output, and we think the time frame is roughly three to six months that will get us back to a more stable margin profile that we can drive the right capacity into the right sockets.

Great, that's very helpful.

And I just have one further follow-up.

You mentioned 3D NAND schedule samples for late Q1 and Q2.

Can you clarify: You're talking about 2014?

(multiple speakers)

That's right.

I'm sorry about that.

When I made the comment earlier, we're still on track and optimistic that late Q1 and early Q2 for production samples for 2014.

For 3D.

And any more comment on how you think 3D NAND -- how that will shape out in the future in terms of potential mix, when production may ramp up, what the kind of product categories would be, with more higher end enterprise versus lower end, lower cost.

Any kind of comments you can help us in how to think about that?

Well, I can tell you a little bit about how we see it.

We think -- from 3D volume perspective, we think it will be across a broad spectrum of application usage.

We are looking to obviously enable it in the high end, and use it to our advantage to drive enterprise.

But the way we've architected our products is going to allow us to cover a full breadth.

We think volume is probably back half of 2015 for 3D, and thus we think that where we are in our development we're on track to do that.

I see.

So, you think using broad set of segments, not specifically high end or not specifically low end?

You think it -- (multiple speakers)

Well, the way we -- our design will allow us to focus on a couple key markets that we view as high value for the sockets, but we're not limited to where we can take this over the long term.

Great, thanks very much, and congratulations.

Thanks.

Thank you.

Our next question comes from David Wong from Wells Fargo.

Do you have some idea what gross margin would have been if the inventory for Elpida had not been written up in the November quarter?

Yes, there was a reconciliation page, and basically the stepped-up inventory was $111 million.

Okay, great, thanks.

You bet.

Thank you.

Our next question comes from Monika Garg from Pacific Crest.

Thanks for taking my question.

Just a follow-up question on the 3D NAND.

Could you maybe talk about if and when you target 3D NAND, will you look at the cost structure?

Is it below your (inaudible) NAND cost structure at that time, or depending upon the applications, maybe some applications need higher endurance, so you may ramp 3D NAND just for that application to begin with.

Maybe if you could just talk about your strategy on the 3D NAND side?

So, let me try and characterize.

Obviously, early on, as with any new technology, we're going to pick a couple applications first, as Mark Adams mentioned a moment ago.

Our technology -- I think as you look at different suppliers in the marketplace, different suppliers are taking different approaches to 3D NAND technology.

Some of them, as I think you're implying, Monika, have limited performance on certain planes or parameters.

Micron's technology, we believe, is more generally applicable to the full swath of applications currently being serviced by planar NAND, and so, we expect over time we will roll our 3D NAND across the spectrum.

And yes, of course, we believe it will be significantly -- over time, it will be significantly more cost effective than planar NAND, given the scaling that goes on with 3D NAND.

And then, if I heard it correctly, you said the volume ramp is in the later half of 2015?

Well, yes, it's tough to pin down because we have to say what we mean by volume and all of the details associated with that.

But yes, we believe it's a 2015 phenomena for production ramp on 3D NAND, and significant in the marketplace probably more so in the second half than the first half.

Okay.

Just a last question on the current pricing trends in the NAND market, at least what we see on the channel side seems NAND pricing is slightly weak.

Maybe could you talk about pricing trends in different segments in the NAND market?

Well, actually, the way you've asked the question is the way we look at it.

There are some parts of the NAND business that have remained very strong and robust, and there are some that have shown some of the weakness you're talking about.

Some of that, by the way, is pretty natural out of the holidays, but it's not as severe as prior years necessarily.

We also see some people who are exposed in the NAND business in the mobile market getting a little more aggressive with that capacity and the low-end client business.

Quite frankly, we're not going to play that game.

So, in addition to moving the components to other application segments, we don't necessarily want to sell our business just to compete from market share perspective where other people are trying to grab share on pricing.

So, independent of the Fab 7 dynamic I mentioned earlier, overall it's not a bad NAND business, it's just there's pockets of weakness coming out of the holiday, and with some softness where people are exposed.

Thank you so much.

That's all for me.

Thank you.

Our next question comes from John Pitzer from Credit Suisse.

Good afternoon, guys.

Congratulations on the good results.

Guys, just relative to the November quarter, I think you said there was a $250-million benefit for pre-pay of DRAM from a customer.

I'm kind of curious: When does that product ship?

And I guess, given that we're all worried about Wuxi coming back online and DRAM pricing going lower, what's the motivation behind the customer actually coming into a contract at today's pricing?

Well, as we commented on earlier, the way we plan our Business is basically with a full Wuxi fab capacity in the market.

And as Mark Durcan commented on earlier, we've got kind of a bit of a shifting dynamic with certainly Wuxi coming on at some point.

We don't know when that is, but some point in the future, but offset partially by our continued Fab 7 conversion.

So, if you put that all together and balance with the industry output of about mid-20% range of DRAM bit growth for the year, we think that's in line.

We don't think that's going to drive a significant oversupply in the market.

And we think the customers see that, too.

And so, as customers look for that 2014 sourcing, as they think about kind of when Wuxi may or may not come online, they are trying to lock up capacity and commitments to be able to make it through as best they can see through calendar 2014 and beyond.

Mark, that's helpful.

When does the product ship?

We don't normally get into details, but it's kind of over a longer period.

The intent was to secure output over a long cycle, not in a specific quarter, for example.

Great, that's helpful.

And guys, in the prepared comments, I think you mentioned that you shipped an SSD enterprise drive this November quarter.

Was that sample, or was that actually true shipment or revenue?

And I'm just kind of curious: How do we think about the enterprise SSD as a percent of overall SSD mix?

Any targets you can share with us for this fiscal year?

And how should we think about the gross margin differential between enterprise SSD and consumer SSD?

Thank you.

Well, let me answer your first question.

It was a sample on the M500 DC product that was based on our 20-nanometer technology.

As we look at it, as I mentioned in terms of the NAND behavior, in terms of our ASPs and market, on the higher density and the enterprise market, obviously we would like to drive as much of our capacity to that segment.

Where customers who have got exposure into the high-end smartphone business have capacity, what we're seeing is some aggressive pricing in the client business.

And we're going to take a look at that versus our retail business, which is doing pretty well, and versus our component business and versus other application segments, so we don't necessarily want to go head to head and try to compete purely on price in the client business.

And if you look at our client business on its own merit, our average densities in client are much higher than the market because we're trying to keep that above what I would say the trading client business, which, again, if you've got a lot of capacity in the high-end smartphone business that's exposed, you might be a little more aggressive in the client business.

Perfect, guys, thanks, and congratulations again.

Thanks, John.

Thank you.

Our next question comes from Steven Fox from Cross Research.

Thanks, good afternoon.

Just a couple of quick clarifications for me.

On the yen for the current quarter, can you just give us a sense of what you're assuming and how much of a benefit it is quarter over quarter to expenses?

And then, secondly, in terms of just looking at the Elpida cash margins, I don't know, maybe I missed it, but are you being specific about where they exactly were in the quarter?

And then, lastly, can you just talk about -- I think you said you're still early on in getting Elpida integration integrated fully.

Can you sort of talk about what else is coming maybe between now and the end of the calendar year?

Sure, Steven.

With regard to the yen, if you're talking about our forward view, Q1 to Q2, we're not assuming, and we don't typically assume, any exchange rate changes in our outlooks as we give guidance going forward, if that's what you were looking for?

Yes, so, it's a benefit quarter over quarter, is that correct?

Like versus what you just reported?

Yes.

Okay, and so just assume -- (multiple speakers)

In terms of your question on Elpida cash margins, we're not going to give any more detail on Elpida specifically, other than, as we mentioned, we met or, in general, exceeded our projections we gave in August, and that was a pretty good outcome in terms of blowing that through our Business and getting it combined with overall Micron.

Great, and then just on the road map for Elpida integration, please?

Sure.

I don't think there's anything alarming to the process.

I think what the comments on integration are that the teams coming together are working pretty well.

Of course, we've got kind of the 25-nanometer ramp ongoing, as well as -- I talked about second half of the year, 20-nanometer product in the market.

So, as it relates to the focus of the teams and just the timeliness of the integration efforts, with the engineering teams coming together, the marketing organization is coming together.

Looking at market segment optimization with that team as part of Micron has actually been very helpful for us because of the dynamic between the mobile and computing bit optimization we talked about from an ASP and wafer out perspective.

So, a lot of normal stuff in integration we feel pretty positive about.

And I think the customers see the breadth and the opportunity for flexibility in our portfolio, whether it be in the mobile portfolio or the pure computing portfolio.

Thanks, Mark.

I think we have time for one more caller.

Thank you.

Our next question comes from Kevin Cassidy from Stifel Nicolaus.

This is Dean Grumlose calling in for Kevin.

Thanks very much for squeezing me in here.

You bet, Dean.

My question is: Can you provide a little extra color on the relative performance and demand in the server segment?

We often talk about PC and mobile, but how strong has that segment been from a demand perspective, and what do you see going forward?

I'm sorry, this is Mark Adams.

We continue to be very bullish on the server market, really primarily for two reasons, one of which is the application driving it, the data center cloud computing dynamic, coupled with as much DRAM as they can put in the servers they are putting in.

So, the bit growth in servers last year continues to play into this year's numbers, and we're seeing significant bit growth in the 50% to 60% range in the server market.

So, we feel pretty good about that business.

It's been very stable, and we've been capturing more share quarter over quarter for five to six quarters, and setting gigabit (inaudible) in the server market records.

As a quick follow-up: On the Inotera cost-plus arrangement, does it matter at all which segment the device is for, or what else can you provide as insight to how that works?

So, Dean, this is Ron.

In terms of the Inotera structure, we don't get into a lot of details on it, but as I think we've commented, it's an averaging pricing mechanism looking at past three months on a moving average basis.

So, there is a lagged effect as it flows through.

And then, in general, we neutralize differences in mix so that we have the complete flexibility to move whatever products where we want in our system, so it doesn't have a difference fundamentally in our pricing or transfer pricing as a result of mix.

Okay, that's very helpful.

Thank you so much.

Thanks, Dean.

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 10-K and 10-Qs.

Thank you.

Thank you.

This concludes today's Micron Technology's first-quarter 2014 financial release conference call.

You may all now disconnect.