美光科技 (MU) 2015 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Micron Technology's first-quarter 2015 financial release conference call.

(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, Karen, and welcome to Micron Technology's first-quarter 2015 financial release conference call.

On the call today is Mr 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.

In addition, our website has a file containing the quarterly operational and financial information and guidance, non-GAAP information with reconciliation, slides used during the conference call, and a convertible 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 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 48295415.

This replay will run through Tuesday, January 13 at 11:30 PM Mountain Time.

A webcast replay will be available on the Company's website until January 2016.

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.

You can also follow us on Twitter at MicronTech.

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 these forward-looking statements after the date of the presentation, to conform these statements to actual results.

I will now turn the call over to Mr. Mark Durcan, CEO.

Mark?

Thanks, Kipp.

We had another strong quarter benefiting from continued favorable market conditions and solid execution from the team.

We set a new record for quarterly revenue of $4.6 billion.

GAAP net income was $1 billion.

Free cash flow was $923 million, based on record operating cash flow of $1.6 billion, less CapEx of $669 million.

The investments we're making in the business are putting us in position to continue generating strong cash flow.

We expect continued favorable market conditions for 2015, led by constrained supply in DRAM and solid demand for both DRAM and NAND.

Demand growth in our business continues to be driven by our customers' rapidly increasing memory content, to enable them to enhance the performance of their products, as opposed to strictly unit growth of NAND systems.

The resulting demand outlook remains very encouraging.

A few good examples of this growth include mobile DRAM, server DRAM, and solid state drives, all of which are expected to increase memory content per system by 30% to 50% in 2015.

As just mentioned, the outlook for DRAM supply remains tight.

We continue to expect industry bit growth in the low to mid-20% range in 2015, with the development of advanced process technology proven to be disruptive to wafer production.

Our belief is that even with steps taken to address the otherwise declining gross wafer production in DRAM, the net wafer output in the industry will stay relatively steady, or decline slightly going forward, leading to a relative stability of bit supply growth, even beyond 2015.

As we have said for some time, compared to DRAM, we expect the NAND market to have more volatility, although very attractive over the long-term.

We are projecting industry supply growth in the high 30% to mid-40% range for 2015, with a significant portion of the range based on deployment of TLC, our triple-level cell memory.

TLC has a compelling cost and price point, although there is some variability in terms of the adoption rate for systems requiring higher performance, including certain mobile and SSD applications.

We're often asked about the impact of 3D NAND on the industry supply.

We don't believe 3D NAND will significantly change the current supply growth rate in the industry, given the trade off of more bits per wafer offset by fewer wafers produced per fab, and the capital costs associated with either planar conversion or green field additions.

The key comply variable over the long-term is the extent to which demand and economic returns dictate the need to add incremental 3-D capacity.

Micron's approach remains steadfast, to focus on returns as opposed to growth or scale, when we evaluate this market.

We're entering an interesting year in our business, deploying evolutionary but increasingly challenging process technology in our fabs, while also moving more revolutionary technology closer to commercialization.

We're very pleased with our recent progress on DRAM.

25 nanometer deployment has been relatively smooth and 20 nanometer enablement is well underway, with many milestones being hit early.

The extra R&D resources we have brought to bear, and the alignment of manufacturing and R&D resources at Hiroshima are clearly bearing fruit.

I'll come back to how this deployment is impacting our short-term bit growth outlook in a minute.

We also remain very comfortable with the status of our 3D NAND technology development, which of course is occurring in collaboration with our JV partner, Intel.

3D NAND enables cost and performance optimization beyond the capabilities of planar NAND, with enhanced product performance across a broad portfolio of applications and significant cost per bit reductions over time.

We commenced early 3D samples in calendar Q4 of 2014, and expect volume commercial production in the second half of calendar year 2015.

Given the confidence in our technology, we recently announced plans to add additional clean room space in Singapore to enable a ramp of 3D NAND, as well as other emerging memory technologies.

This addition effectively doubles the existing fab 10 clean room space, and once completed, will create additional economies of scale for our nonvolatile memory operations in Singapore.

The CapEx for this project is estimated to be about $4 billion, spent over a number of years, with tool installs and production expected to begin in calendar 2016 and calendar 2017 respectively.

We expect to reserve a portion of this capacity for Intel under our supply agreement.

Note our FY15 CapEx guidance of $3.6 billion to $4 billion is unchanged, as spending this year on new clean room is primarily for design and early construction work.

Our Q2 revenue guidance is $4.1 billion to $4.3 billion.

Keep in mind, we will be moving back to a normal 13-week quarter in Q2 from the 14-week quarter we just completed.

In addition to the 13- to 14-week comparison, DRAM production is expected to be down sequentially, as we prepare fabs for advanced technology deployment, including 20 nanometer and subsequent 1X and 1Y nodes, which we have on our road map.

These nodes are increasingly challenging, which is a good things in terms of industry supply outlook, but can be a short-term headwind in terms of bit shipments.

This production lull is occurring in a normally seasonally slower demand period.

We continue to focus on product excellence, customer service, margins and returns, rather than simply shipping additional bits into the market.

To give an update on our longer-term bit growth, we now expect our DRAM production to come in below the market for calendar year 2015.

There are several factors leading to below-market growth this year.

These include product disruption for technology upgrades just mentioned, 20 nanometer technology, which is being deployed in calendar year 2015 reduces wafer outs about 15% to 20% for a given square foot of clean room space, compared to 30 nanometer.

Although we are taking steps to minimize the impact, our wafers produced will decline year-over-year.

By the way, I should note, we do have clean room space available to replace or potentially add net DRAM capacity if and when it makes sense from an ROIC standpoint, but at this time, we are not planning to make that investment.

Finally, product mix optimization is a factor, which continues to grow in importance relative to pure bit metrics.

As we diversify and optimize our business, ASP per bit, cost per bit, and bit growth are all increasingly a function of these decisions.

Of course, the goal is to provide the most value-added products to our customers within the constrained supply.

By way of example, this year, we are shifting production from DDR3 to DDR4, and continue to grow other value-added specialty DRAM products in the mix.

Turning to bit supply and our NAND business, Q2 was marked by a significant shift in the mix towards the mobile segment.

Mobile NAND is characterized by higher ASPs, higher cost per bit, and lower bit output per wafer, compared to our portfolio average.

These mix effects are included in the more detailed guidance Ron and Mark will provide in a minute.

This shift in mobile, or to mobile, is a part of the reason our NAND bit growth will also be below the market for calendar year 2015.

Of course, we were somewhat above the NAND market growth rate in 2014, following the conversion of our Singapore DRAM fab to NAND.

Additionally, as I mentioned, we will begin manufacturing our 3D NAND in the second half of the year, and expect what we believe is industry-leading 3D technology to have a significant and positive impact over time.

Before I wrap up, I'd like to take a minute to discuss our partnership and supply agreement with Inotera.

The supply agreement has a three-year term, renewable on an annual basis.

As with any agreement, dynamics can evolve over time, and changes are sometimes required to ensure fair economics between all parties.

At this point, we're in discussion with our partners regarding the terms for renewing the agreement, and we will provide an update, when appropriate.

I want to congratulate the team at Micron for a very strong quarter.

We have a tremendous opportunity to continue delivering for our customers and shareholders, and we're looking forward to an exciting and productive year in 2015.

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

Thanks, Mark.

The first quarter of FY15 ended on December 4. We posted to our website a file containing the financial information I will cover, including GAAP and non-GAAP results, certain key metrics for the first quarter of FY15, as well as guidance for the second quarter.

Our FY15 contains an extra week, as Mark mentioned, to synchronize our 52 or 53 week fiscal calendar with the August year-end.

By policy, the extra week falls in our first fiscal quarter, so first-quarter FY15 contains 14 weeks, while the rest of the quarters will contain the customary 13 weeks.

The results for the first quarter include net income of $1.003 billion, or $0.84 per share on net sales of $4.573 billion.

Gross margin came in at 36%, up about 3 points compared to the previous quarter.

Part of this improvement is coming from higher costs in the fourth quarter, related to the Tessera license and last time sale of legacy phase change memory products that we mentioned on our last call.

Our reported income from equity method investments for the first quarter was $124 million, substantially all of which is attributable to Inotera.

On a non-GAAP basis, net income for the first quarter was approximately $1.1 billion or $0.97 per share.

Non-GAAP adjustments resulted in a net increased income of $135 million or $0.13 per share and included the following: The amortization of debt discount and other costs of $38 million, includes imputed interest on our convertible notes, and the discount on the MMJ installment debt.

The loss on restructure of debt of $30 million related primarily to the repurchase and conversion of convertible notes in the first quarter.

The $21 million loss from changes in currency exchange rates, particularly for the yen, arose from the variances in the forecasted balances of non-USD assets and liabilities, that resulted in an over-hedged position in the quarter.

Non-cash tax expense from the MMJ and MMT operations was $38 million.

Finally, there was a 27 million share anti-dilutive effect of capped calls, based on the average stock price during the first quarter of $32.35.

In the second quarter of FY15, we expect the following significant non-GAAP adjustments: Approximately $35 million for amortization of debt discounts and convertible notes, and MMJ installment debt.

Non-cash taxes related to the Elpida acquisition are expected to be approximately $30 million in the second quarter.

Also, the anti-dilutive effect of our capped calls will be based on the average share price for the quarter.

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

Let's turn now to our results by technology and guidance for the second quarter.

DRAM revenue increased 9% compared to the fourth quarter, primarily due to an increase in bit sales volume and stable average selling prices.

DRAM gross margin improved a couple percentage points into the low 40% range.

DRAM gross margins for the second quarter, using quarter to date ASP and projected mix for the quarter should be down slightly compared to Q1, based on bit production down high single to low double digits, ASPs flat to down low single digits, and cost per bit relatively flat.

The key items affecting our DRAM guidance for the second quarter are continued favorable DRAM market conditions, with like-for-like pricing generally stable to down slightly in most DRAM market segments.

Mark Adams will expand on this in his comments.

Lower levels of production, primarily due to the normal 13-week period in Q2 and equipment upgrades, in preparation for the next generation process technology, as Mark Durkin mentioned earlier.

On the trade NAND side, revenue increased 14% in the first quarter, with a 20% increase in bit sales volume, partially offset by a 6% decrease in average selling price.

Trade NAND gross margin was down slightly to the mid-20% range, as cost reductions per bit partially offset decreases in selling prices.

Trade NAND gross margins for the second quarter, using quarter to date ASP and projected mix for the quarter, are expected to be down low to mid-single digits, compared to Q1, based on bit production flat to down low single digits, with the normal 13-week period in Q2 as I mentioned.

ASPs flat to down low single digits, and cost per bit up mid-single digits, primarily relating to mix.

Key trends for the second quarter affecting this guidance are like for like pricing was down mid-single digits, pricing pressure in the spot market, and with client SSDs early in the quarter, although these markets have begun to stabilize as of late, and a shift in mix to a higher concentration in mobile and managed NAND products, which has a slightly improving effect on margin, with increases in both ASP and cost per bit.

On a consolidated basis, we are guiding total revenue for the second quarter in the range of $4.1 billion to $4.3 billion, which reflects the normal 13-week period.

Looking at other P&L and cash flow results and guidance, SG&A expense in the second quarter is expected to be relatively stable when compared to Q1, which came in just below our guidance.

R&D expense in the first quarter was below our guided range, primarily due to improved execution of product qualifications.

We expect a higher level of qualification activities in the second quarter, which is contemplated in our guidance.

Depreciation and amortization expense for the year is estimated at $2.9 billion, but will vary, based on the changes in the timing of equipment receipts.

As Mark mentioned, the Company generated record operating cash flow in the first quarter of $1.6 billion, and ended the quarter with $5.3 billion in cash and marketable investments.

During the first quarter we spent $532 million on dilution management, relating to our convertible notes.

We also replaced our $175 million US AR-backed credit line, with a $600 million AR in inventory backed credit line.

No amounts have been drawn under either of these facilities.

During the first quarter, we announced Board authorization to repurchase up to $1 billion of our common stock.

Any repurchases under the authorization would be performed opportunistically in open trading windows.

There were no share repurchases during the first quarter.

Expenditures for property, plant, and equipment in the first quarter were $669 million.

We continue to expect capital expenditures for the fiscal year to be between $3.6 billion and $4 billion.

Note the beginning of the first quarter, we are combining substantially all payments for property plant and equipment into a single line in the investing section of the statement of cash flows.

Historical periods are being reclassified as well, to facilitate comparability.

In prior periods, our disclosure of capital expenditures was the sum of expenditures for property plant and equipment, and payments on equipment contracts.

So there is no change in the disclosure of total capital expenditures, just a landscape change on the cash flow statement.

We estimate that for every one yen change in the US dollar - yen exchange rate, our cash expenses in Japan change approximately 2.5 million.

Our Q2 guidance contemplates the US dollar to yen exchange rate at the end of Q1, which was approximately 120 yen to the dollar.

As a reference, the average exchange rate during the first quarter was approximately 110.

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

Thanks, Ron.

I will cover a review of our Q1 operating performance, as well as share commentary on market insights, key segment trends, and memory industry dynamics as we enter calendar 2015.

Our computing and networking business unit, referred to as CNBU, had an outstanding quarter, recording $2.1 billion in revenues.

Our operating margins came in at 30%, compared to 26% in Q4.

CNBU benefited from a slightly higher DRAM prices and lower costs, which led to the overall improved operating performance in the quarter.

The growing diversification of our end markets is reflected in a favorable mix across our computing, server, networking, enterprise and graphics segments.

Demand in the PC client segment remained strong in our first quarter.

Bit shipments incline grew heading into the holidays, and pricing held firm in Q1.

We commenced volume shipments of our 25 nanometer technology into the client PC Tier 1 OEM customer base, which resulted in improved costs.

Driven by continued growth in cloud computing and data analytics, we achieved both record revenue and bit shipments in our server business.

Server DRAM bit growth is forecasted to grow 40% year on year.

The growth in server-based memory is based on increasing server workloads, that require higher DRAM performance and density.

Our server business remains a very attractive segment, with a demand profile that is less sensitive to price fluctuations in the market.

The networking segment delivered revenue growth of up 5% quarter-on-quarter.

Demand remains strong driven by LTE build out in China, and other emerging markets.

We are optimistic that bandwidth requirements from increased data, audio-video, and gaming content, projected to grow roughly 20% in calendar year 2015, will drive higher demand for Micron's memory products, in a business that yields attractive gross margins.

Our graphics business, which is another market segment that delivers favorable ASP and margin uplift grew Q1 revenues 18% when compared to Q1 FY14.

Last year, consoles doubled their memory content per box, and we feel that there will be additional content growth this year, as the use of these devices continues to expand beyond gaming into more compute and home entertainment functions.

We had a strong quarter in DRAM technology enablement.

We are pleased with the team's execution on DDR4, as major OEMs earned qualification for their value-added configurations.

While coming off of a relatively low base, shipments of DDR4 increased four times quarter over quarter.

We are seeing very strong demand signals for DDR4 in the coming quarters, in particular from the enterprise server customer base.

DDR4 ASPs remain at a significant premium to DDR3, given the enhanced performance.

As the market for DDR4 begins to take shape over the next 12 months and beyond, the rate of growth should positively impact our average ASP.

We're seeing good progress of our 8-gigabit GDDR5 technology, as we are shipping engineering samples to two of our larger enabling partners.

And finally, the research and development team saw fantastic progress in the enablement of our 20 nanometer technology DRAM process.

We are evaluating ways to accelerate this transition ahead of our current plan.

Our storage business unit, or SBU achieved $987 million in revenue in Q1, up 9% quarter on quarter.

Our SBU operating margins were stable this quarter, despite some challenging pricing dynamics.

It appears there has been some additional TLC capacity in both the channel components and client SSD segments, which apply downward pressure on pricing towards the end of our first quarter, and into our current quarter.

As we produce primarily MLC technology, we are focused on finding higher-value opportunities that require best in class performance, and are trying to minimize our exposure to aggressive market pricing.

We are making good progress in driving our SSD road map to our award-winning 16 nanometer technology.

We successfully qualified the MS600 drive at a Tier 1 PC OEM customer, and anticipate additional commitments over the next 90 days.

In addition, today we are announcing two Crucial branded client SSDs, enabled by Micron's 16-nanometer process for shipment in this quarter.

We expect to have 50% of our client SSD shipments on 16 nanometer by the end of our first quarter.

On our last call, I outlined the steps we were taking to improve our overall NAND competitiveness.

I want to give an update on our progress.

Our focus is in three areas: Process advancement, system-level enablement, and higher value end market applications.

We successfully hit the forecasted milestones to deliver engineering samples of our 16 nanometer TLC device by the end of calendar 2014.

We are targeting late spring shipments of TLC components to the channel and consumer segments, and expect to commence shipping a TLC client SSD drive into the market during the second half of 2015.

Micron will continue to increase our leadership in overall NAND scaling, demonstrated by our vertical cell 256 gigabit MLC and 384 gigabit TLC 3D NAND devices, which we believe will have the highest density per square inch of silicon in the industry.

We are now sampling our 3D NAND component, and remain on track for initial commercial production during the second half of calendar 2015.

Beyond innovation at the technology level, we continue to add controller and firmware resources that are helping to accelerate product development, and enhance the quality of our enterprise data center and client-based SSD products.

In addition, we are investing in packaging capabilities that allows us to integrate technologies to offer performance, power, and/or reliability benefits.

Such capabilities are the foundation for driving into more solution-oriented products, designed to meet specific customer needs.

Finally, we are continuing to diversify our NAND business into more attractive end market applications.

As an example, revenue for NAND sold into the mobile segment was up over 45% quarter over quarter.

Coupling NAND with DRAM in the form of eMCPs is a high-growth opportunity which I will discuss in the mobile segment shortly.

Our enterprise SSD business set a revenue record in Q1, and margins were up quarter over quarter, as the team drove qualifications of our M500DC product into cloud and data center customers.

We are evaluating options to accelerate growth into this expanding segment of the market, that includes data center, cloud, networking, security, search and e-commerce customers.

The fundamental for long-term growth drivers such as client enterprise storage, mobile storage, and embedded applications driving NAND consumptions continues to be positive.

We are meeting the milestones we set in our plan to improve the long-term operating competitiveness, and feel optimistic about our position going forward.

The mobile business unit, or MBU had another outstanding quarter.

MBU revenue came in at $940 million.

Operating margins were 32% in Q1, compared with 22% in our last quarter.

We continue to see strong demand in mobile.

The iPhone 6 launch was a catalyst for strong holiday demand.

Memory content for devices driving customer forecast in 2015.

On the high-end, the Samsung Note is shipping with 3 gigabytes of low-power DRAM, and Chinese competitors such as Xiaomi are differentiating with larger memory configurations.

The low to mid range priced smartphone market is driving additional memory content as well, and even the feature phone segment is evolving from phones with virtually no DRAM to new products such as the Android One, which has 1 gigabyte of low-power DRAM.

We are also seeing higher memory content in flash, where mid and high end smartphones have shifted configurations from 32 gigabytes and 64 gigabytes, to 64 gigabytes and 128 gigabytes.

On the product front, we are growing our managed NAND business with increased shipments of eMCPs.

The rapid adoption of eMCP by the midrange market, where there is strong growth, has created significant opportunity for Micron.

With our capability of supplying known good die flow from the former Elpida operations and our 16 nanometer NAND technology, Micron is uniquely positioned to capture this growth opportunity, as eMCPs move to replace eMMC in the largest mobile segments.

The team is also working on low-power DDR4 enablement with our chipset partners, that will allow for key customer differentiating in the future.

As Mark and I have said in prior communications, we're focused on a returns approach to the mobile business.

We are pleased with the progress the team has made to date.

We are constrained to meet our customer demand forecast, and continue to evaluate how to best balance our overall capacity to support Micron's valued customers.

Our embedded business, or EBU, set a quarterly revenue record, achieving $539 million in sales.

This is our eighth consecutive quarter of revenue growth for EBU.

Our operating margins rose to 22%, up from 16% last quarter.

This growth was driven by record shipments to the automotive and industrial and multi-market segments.

Automotive revenues were up 18% quarter on quarter.

The automotive segment continues to benefit from memory content, fueled by both infotainment and advanced driver assistance systems in new offerings.

Our commitment to the unique needs of this market, in areas such as quality, reliability, product longevity, and service have enabled us to strengthen our market leadership in Q1.

The broad category of industrial and multi-market was up 12% quarter over quarter, driven by continued growth in factory automation, machine to machine, and aerospace and defense.

As we see strong demand growth in areas such as automotive entertainment, consumer electronics, connected smart homes, and machine to machine systems, we remain optimistic for a strong demand environment in our EBU business for FY15.

It is worthy of note that we have recorded our fourth consecutive quarter of growth in NOR product shipments, with over 70% now in our 45 nanometer process.

We will continue to seek opportunities to leverage our portfolio of DRAM, NAND, and NOR to drive continued growth in profits in the embedded market.

Coming off a strong FY14, our operations team is focused on managing through a number of transitions to ensure long-term competitiveness.

On the integration front, we implemented Micron's manufacturing information systems in our fabs in both Hiroshima and Taiwan in Q1.

We are also driving expanded 25 nanometer technology at MMJ and MMT.

In conjunction with the our R&D organization, MMJ is preparing for second-half calendar year 2015 conversion to 20 nanometer, which looks very promising, with a focus on pulling in the date for volume production.

In preparation for these technology transitions, we will see lower DRAM bit production in Q2, which will result in a small production downside already contemplated in the forecast that both Mark and Ron messaged in their comments.

The team was also busy preparing our plan for the recently announced fab expansion in Singapore, which we feel offers us the flexibility to efficiently expand 3D and emerging memory production in the future, as the market conditions warrant.

Finally, in the back end of our business, we signed a strategic agreement to partner with PTI to provide local assembly services on our Xi'an campus, which will boast lower cost and overall cycle time.

I would like to now briefly discuss what we're currently seeing in the market post holidays.

The pricing environment for our portfolio of DRAM products remains favorable overall.

We have seen modest pricing pressure in the PC segment, which is not surprising, due to seasonality.

Mobile DRAM pricing remains relatively stable, as we remain very tight on supply in Q2.

On the NAND front, pricing saw some softness during the last month of Q1 and the first month of Q2.

That being said, we have seen some signs of improved pricing in NAND as of late, including tightened supply in certain segments such as low-density consumer NAND.

Our sense is that client SSD inventory at Tier 1 OEMs is still somewhat high post Christmas.

We also saw increasing TLC supply, from what we believe to be one of our competitors shifting NAND production away from their own internal mobile consumption to the channel and client SSD business.

Despite these short-term pressures, which could potentially cause short-term margin compression, we feel these affects are temporary and remain bullish on the larger outlook for NAND, and we feel we're taking the right steps to optimize our business over the long run.

As the industry converts to 3D NAND, we feel our performance and cost will continue to improve, driving accelerated adoption of NAND in the client, mobile, and enterprise market segments.

In closing, I too want to congratulate our team on another great quarter.

We are excited about the enablement of a number of the technology advancements I referenced in my comments, and feel we are well-positioned for continued success in a diversified memory business.

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

Thanks Mark, and we will now take questions from callers.

Karen, would you please open the lines at this time?

Thank you.

(Operator Instructions)

Monika Garg, Pacific Crest.

First question on the NAND market.

If you look at your cost decline and ASP assumptions, your NAND margins are going down again in the quarter.

So the question is why not to delay the conversion to 3D NAND so there's a lower bit total in the market, and let the market become even stronger, before adding more bits to the market?

Monika, first of all I would point out that the NAND market to us is really long-term very attractive, we see a lot of growth there, and we think it's worth investing in.

Having said that, we believe that 3D is a key enabler to future leading edge products, and frankly to long-term success in the business.

And therefore, as we look at our business, we are prepared to invest in it.

We haven't set a whole lot about what the rate of our ramp would be, or exact timing as to when we would bring on additional supply, but we do believe it's important to get moving down the path of introducing our 3D products in the marketplace, and enabling those end applications to use our products.

Having said all of that, I think we've tried to be pretty clear that there is discipline in our approach.

That we are going to look at the market on an ongoing basis, and make sure we don't disrupt supply, and that we think 3D is not something that is likely to be some step function sea change in terms of how Micron or other competitors in the marketplace manage their production, and that's because there are trade-offs here.

As you point out, there is capital investment required, there is clean room space, and it's not -- while it's enabling and important, it's not a massive disruption that we believe will create the over supply you are alluding to.

And just to follow up on Inotera, can you provide any kind of -- when we can expect, if you negotiate that demand with Inotera, when we see the impact on financials?

Thanks.

I don't think that there is a lot we can add to what we've already said relative to Inotera.

It's a three-year agreement as we said before, its renewable on an annual basis.

We value the relationship, we think the other parties value the relationship, and we think that sets a foundation for reasonable discussion to lead to a long-term beneficial outcome for all parties.

But trying to discuss in advance when and what that might look like, I don't think is particularly productive.

Thank you so much.

Mehdi Hosseini, SIG.

Thanks for taking my question, I have two.

On DRAM, can you please help me understand the mix between consumer PC, server, and mobile, and how these mix changing from November into the February quarter.

And then on the NAND, it's great to give us an update on the milestones, but I'm still a little bit confused what the strategy is.

Are you trying to be everything to everyone, or are you trying to be more focused on a specific segment of NAND that you are pursuing?

Any color there would be appreciated.

Thank you.

So I'll start with the first question.

As it relates to the share in the DRAM segments, best to think of our PC business, the PC DRAM business somewhere in the mid-30% share wise, and our mobile DRAM business somewhere in the mid-20%, and servers roughly high teens.

Directionally, while these things are really tough to shift in one quarter, you see a mild uptick as we start to shift some more capacity over to server in Q1.

Mobile was roughly flat and the server business was -- the client business, PC business was maybe down a little bit, but that's roughly how it shifted, and the relative size of the share in DRAM.

And Mehdi, this is Mark Durcan, maybe I'll take the NAND piece of that question.

At a high level, what we said is, we want to play in a lot of different application segments for NAND, and we've acknowledged that takes a lot of resources.

And that getting the balance of those resources right requires ongoing work, and that we need to do a better job over the next couple of years than we've done over the last couple of years, relative to how we allocate those resources.

Having said that, we talked in our commentary, we feel like it's important for us to be in the mobile NAND segment.

We think we have a lot of synergy with our low-power DRAM business there, and with our customers, and we think there's a lot of value-added things we can do for them in the mobile segment.

We can't ignore what is a very large and fast-growing segment of the market, which is the client SSD piece, and we clearly want to be in the enterprise, because over the long haul, we're going to drive significant value there.

So we will continue to deploy our resources across a number of different application segments, and then allocate our capacity, as we see progress in all those different segments.

Thank you.

Doug Freedman, RBC Capital Markets.

Thanks for taking my question.

When I look at your guidance, it assumes a little bit of a challenging environment for you in terms of cost declines.

Can you maybe walk us through what is happening over at Inotera, with the node migration, and what if any impact that will have on the DRAM cost per bit?

Yes Doug.

Maybe I will take that.

As I mentioned, mix is an increasingly important piece of the answer in all these questions, because as we move to more value-added applications that's going to drive different bit growth.

Think about DDR3 to DDR4, there's a 10% to 15% die size factor moving to that technology, depending on exactly how you are positioned.

That's going to mitigate bit growth in the year, but it's going to probably drive value.

The customers certainly see a lot of value in getting their DDR4 today.

Likewise, as we move to more differentiated products for service, networking and high-performance computing, and move more of our mix in that direction, we won't see the cost declines we've seen in the past, but hopefully will see value add recognized by the customer.

Beyond that, I would say there's not a lot structurally that would change here, other than you should recognize that Micron today is deploying capital to support a 20 nanometer ramp that is a large productivity step, and any time you deploy capital, you don't get are returning instantaneously.

It takes a while for that capital to become installed and productive, and for the line to be loaded and move through inventory out into the marketplace.

And so you have to contemplate that a little bit, as 2015 is an exciting year for us in terms of technology deployment.

Steven Fox, Cross Research.

Thanks, good afternoon.

Two questions from me, just to dig in a little bit more on the client SSD market.

How much, can you go into some color as to how much of the competitiveness you are seeing is temporary, and then from a Micron standpoint, how much gets fixed as you roll out your TLC product, or are there other things you can do to improve margins there?

And then secondly if you could just give us a little bit more color around the DDR4, timing of the ramp and how that's going to affect your mix and margins, because I guess I was under the impression we were going to start to see it more in the quarter we're in now.

Thanks.

On the SSD side, we started to see kind of pre-holiday inventory build at the key customers, and we truly do believe it's a temporary piece of the market dynamics in NAND.

What we have been seeing, as I said over the last week or so, is that the NAND pricing actually stabilized a bit in some sense, and in some segments has gone up.

So relative to the question on TLC competitiveness, yes as we bring those products to market, as I mentioned in my comments early in the second half of calendar year 2015, we do expect to be able to compete more favorably, and we'll then be able to drive more of our mix to the TLC SSD client products.

At this point, as we look at our opportunities there, we're just being careful not to try to compete with lower-cost products, when we can take these MLC products and pursue better higher value homes.

On the DDR ramp, as I said earlier, we are pleased with the ramp, although albeit early, and we think it's reasonable to see by the end of our fiscal year, somewhere in the area of 30% plus or minus of our server bits will be DDR4, and really we'll let market dictate what that looks like, as far as the ramp and the scaling of it all.

Thank you, that's very helpful.

John Pitzer, Credit Suisse.

My first question is a follow up on the bit production for DRAM.

Can you quantify how much lower than the market you expect to grow this year?

And I guess importantly, given the timing of product transitions, technology transitions, would you expect bit growth to resume sequentially from the February to the May quarter?

Let me take the last bit of that, John, and maybe Mark can take the first part.

Mark Adams can take the first point.

I think we will see, as we move out in time, get back to a more normal bit growth rate quarter over quarter.

As I mentioned just a minute ago, when you deploy technology, sometimes there is disruptions in manufacturing.

In particular, you want to make sure you are facilitating all the equipment to have legs out in the time, and then as you deploy that technology, you don't necessarily get the bits in the output immediately.

So yes, we would anticipate being back on a more normal trajectory further out in the year.

And John, would you repeat the first half of the question for Mark, please?

By how much you think you will undergo DRAM bit growth this year, you said you would under grow industry?

Well, we don't have a whole lot of position in that, but it kind of depends of the mix of DDR4 we put out in the marketplace, and exactly how we progress with some of these specialty products I was talking about.

We said sort of for the market in the low to mid 20s, and we think we will probably be 20% plus or minus, but a little bit below it.

And then guys on the NAND profitability side, you have been working hard over the last 12 months to improve that.

One of the arguments was you were just selling bits into the wrong market, and as mix improved, you would start to see the margin benefit.

You are starting to see that mix improvement.

It sounded like in your prepared comments that the move to mobile is accretive, but not a big enough move in mix yet to actually drive gross margins higher.

Can you help me understand where the mix of mobile and NAND is today, and given where you think that mix is going to go, are you confident in thinking that February might be the gross margin trough for the NAND?

Let me take the first part of that.

I think the first part of your statement was right.

We are happy with the progress.

There's not enough of that yet to be really moving the needle in the overall scheme of things.

I would comment that the NAND business generally has been a little tougher for our competitors as well over the last number of quarters.

The relative improvement is better than the absolute improvement, so to speak when you look at it, and we continue to put the pieces together for the longer term, and we think we're making progress doing that.

I will make a comment on the front part, where you talked about the product mix, John.

Mind you, these things are not necessarily things that shift dramatically in a quarter, but to your point, you will see mobile as a percent of our overall NAND business, just quarter over quarter, almost double in terms of the share of the business, up almost slightly below 20% of our NAND business.

And then you will see a healthy shift away from our product and component business as we do this, and find better homes, and we'll continue to look at ways to drive enterprise storage and client SSDs.

For those markets, that makes sense.

Mark made an interesting comment in his prepared statement today, that we are finding customers that are not totally invested in TLC for their client SSDs, or they are finding higher performance requirements or simply reliability issues that they don't want to bet on in TLC, and so we're going to continue to drive our customers to evaluate our higher performing MLC-based client SSD storage as we drive that forward as well.

So that should be the trend you see: mobile, a shift away from channel, and driving more enterprise and high-performance client SSD.

Thank you.

Mark Newman, Bernstein.

Hi, thanks for taking my question.

The results on DRAM continue to do very well, continue to be much stronger than expected, actually.

And I think if I could summarize what you were saying, we think that the market is going to be strong and tight, and that's going to continue throughout 2015.

But looking at NAND obviously continues to disappoint, I think, with gross margins down, and it looks like you are projecting down again next quarter.

So the question really I have for you, and some of it you've already talked about, but I want to ask more specifically, do you think this is somewhat disappointment on the NAND side I would say, or delay in the recovery.

It seems to be -- is it related to the market being worse than expected, due to oversupply in the market, or is it difficulties on execution?

And what kind of timing should we expect for some improvement on the NAND side?

It seems like the NAND recovery always seems to be about two quarters off, and obviously TLC SSDs, both have been mentioned as big parts of that solution.

Now it seems like you are moving some of your mix to mobile.

So we'd like to understand what the updated plan really is to improve the profitability of the NAND.

Thanks.

Mark, this is Mark Adams thanks for the question.

Couple things.

If you look back over the last couple of quarters, on a relative basis, our margins have held pretty stable, relative to our competition actually incrementally closing the gap a little bit.

We're not satisfied with that by any stretch, but those are just some data points.

This quarter, again, gross margin was pretty flat in a relatively tough period for NAND in the market dynamic.

So as a backdrop to your question, that's what we're up against.

When you talked about a confusing or changing strategy, I don't think that's the case.

Please don't mix TLC with where the end application products go.

You mentioned TLC and now a shift to mobile.

Actually mobile, enterprise, and client SSDs were always part of our strategy, and continue to be part of our strategy.

TLC is the technology foundation for what we enable low-cost solutions in the market, and we're investing that.

Over the last year both Mark and myself have made comments to the tune of sampling at the end of the calendar year.

That's in place, we've done that, we're in process of starting qualifications.

We said components and consumer applications would be shipping late spring, end of the calendar second quarter.

And we would be launching client-based SSD drives with TLC.

Those are all tactics to the strategy of deploying TLC where it makes sense in the market.

That's not the whole story.

Using our DRAM and NAND technology, the known good die flow from Elpida combined with our technology in MLC and eventually TLC, we are going to launch and develop the mobile market.

We're going to continue to invest in, controllers and firmware and software technology to advance both enterprise and client SSDs.

We don't see TLC in the enterprise just yet.

We'll continue to evaluate that path, but that's an end market, that has nothing to do with TLC or MLC, and the client-side, same thing.

We're going to still make client MLC drives, but in the markets that are looking for lower-cost alternatives, and willing to sacrifice some performance, we'll deploy TLC.

So those areas of mobile, and enterprise, and client storage are three pillars of where we are investing to drive applications, and the technology whether it be MLC or TLC is the core to how we get there.

That's very helpful.

Which area do you think is more -- is higher -- how would you order the margins for Micron amongst the businesses in NAND, out of client SSD, enterprise SSD, mobile and everything else?

How would you order those?

I think the best way to look at it is enterprise SSDs are likely to garner the highest margins, mobile would probably be second, and client SSDs third of those three, and then there is still a healthy, in terms of volume, there's a components channel out there for consumer applications and embedded applications, so on and so forth, that can vary depending on the overall market dynamics.

I see and then looking forward to later on this year, do we expect that the market is going to become healthier in NAND flash?

Do we need to see a healthier market in NAND, for margins to get back up significantly higher than this, do you think?

Well, you know as it's always tough to predict, I would say I want to caution you, but gut feel right now, based on the feedback from our customers, is that NAND is going to be relatively tight.

Now when we talk about this changing business we are in, it doesn't mean that you won't have small periods, temporary periods, where there is an oversupply in a certain segment of the market, whether it be a client SSD issue, whether it be something else, and so we think overall, with the growth in demand drivers in mobile, enterprise, and client, that overall, we think it's going to be in pretty good shape.

And the type of demand forecast we are seeing from our customers suggests that things will remain in balance and be headed -- be pretty positive in the remainder of our fiscal year.

That's very helpful.

Thanks very much.

Thank you, Mark, and Karen, we have time for one more caller.

Daniel Amir, Ladenberg.

Thanks a lot, thank you for taking my call.

So I was wondering here what has basically change maybe from your perspective in the past 90 days?

Is that more the DRAM business, more the NAND business?

It certainly looked like that 90 days ago there was more of a thought here that the NAND business might be in a change.

Demand remains pretty solid for DRAM, but now you were looking at maybe lower bit growth here.

So does something surprise you on the negative side, or was this the thought process 90 days ago, about the business?

Thanks.

Thanks for the question.

The way I would answer that is, we don't see any structural change in the business.

On the NAND side, we do believe there was some shifting of some capacity from competitors away from certain segments and into the low volume segments that hit pricing a little bit on the spot market, and the entry-level client devices and what have you, but we don't see anything structural there, we're very bullish still on the NAND demand side of the business.

In the DRAM piece, I think Mark spoke to the rationale behind what drove our decisions to making the DRAM capacity long-term decisions and investments, and so we still think it's a very good business, very stable, and ASPs are relatively flat, and we're still pretty positive.

All right, great.

Thanks.

Thank you Daniel, 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-Q and 10-K.

Thank you.

Thank you.

This concludes today's Micron Technology first-quarter 2015 financial release conference call.

You may now disconnect.