美光科技 (MU) 2015 Q2 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 the Micron Technology second quarter 2015 financial release conference call.

(Operator Instructions)

Thank you.

It is now my pleasure to serve forward to your host, Kipp Bedard.

Sir, you may begin your conference.

Thank you very much, and welcome to Micron Technology's second quarter 2015 financial release conference call.

On the call today is Mark Durcan, CEO and Director; Mark Adams, President and Interim Chief Financial Officer; and Mark Heil, Corporate Controller and Interim Principal Financial and Accounting Officer.

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 second quarter 2015 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 6063446.

This replay will run through Thursday, April 9, at 11:30 PM Mountain Time.

A webcast replay will be available on the Company's website until April 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 the forward-looking statements after the date of the presentation to conform these statements to actual results.

And now, I would like to turn the call over to Mr. Mark Durcan.

Mark?

Thanks, Kipp.

I am pleased with our team's performance this quarter.

Our diverse product portfolio and balanced customer base produced solid financial results.

Revenue was within our guidance of $4.2 billion, and GAAP net income was $934 million, or $0.78 per share.

Gross margins in DRAM and trade NAND were in line or better than guidance.

Importantly, we are starting to see the early benefits of our NAND product and technology repositioning.

Free cash flow was approximately $400 million in the second fiscal quarter, based on an operating cash flow of $1.25 billion, less CapEx of $853 million.

We finished the quarter with $6.35 billion of cash and short-term investments, after a successful execution of a $1 billion straight debt offering.

We remain very positive on the long-term prospects for our business, despite short-term headwinds in certain segments.

We expect to continue generating strong operating cash flow as we optimize technology, operations, product and segment mix.

Micron's fiscal Q3 guidance is $3.8 billion to $4.05 billion.

The midpoint of the range is about 6% lower than revenue in Q2.

This guidance indicates a willingness to hold inventory, if needed.

Let me talk a little bit more about technology.

Today, the significant majority of our mobile DRAM and non-Inotera production is on 25 nanometers.

Our advanced DRAM technology deployment is going very smoothly.

The 20 nanometer yield ramp is exceeding both our plan and results achieved on previous process node introductions.

We continue to expect commercial volume in the second half of 2015, with the majority of our DRAM bits on 20 nanometer in the first half of calendar year 2016, 1 X nanometer DRAM development is also proceeding well, and we recently started early silicon in Hiroshima.

We are currently in pilot production of our gen one 32 layer 3D NAND, with early sampling in progress.

We expect to be in full production of both MLC and TLC versions by calendar Q4 of this year, with system mobile solutions following soon thereafter.

3D will be a meaningful percentage of our trade NAND supply in calendar 2016, and will represent a majority of our bits during 2017.

Our gen two 3D NAND technology is progressing nicely in R&D.

Turning now to bit growth, we expect our calendar year 2015 DRAM bits produced to be up mid-teens, although product mix adjustments, including an increased mix of DDR4 and mobile DRAM could impact bit growth.

Mix adjustment decisions are based on margin optimization of strategic positioning, and are not necessarily aligned with maximizing bit growth.

In 2015, we are focused on technology enablement, and we are comfortable growing bits below the market in the near-term, in favor of driving long-term market opportunities for Micron.

For 2016, as we see the benefit of 20 nanometer conversions, we expect to be in line with or slightly above the industry bit growth.

We expect our trade NAND bits -- bit growth to be below market in calendar 2015, as we tune our product portfolio to more value-added applications and prepare for a 3D manufacturing ramp throughout 2016.

Once complete, our Singapore fab expansion, and ongoing conversion of existing planar capacity to 3D NAND, could support 40% to 50% bit growth per annum over an extended time horizon.

Exact timing of these investments is dependent on market conditions and the expected ROIC, but this is an exciting initiative for the Company.

With respect to capital allocation, we continue to believe in the long-term value of investment in our business to drive manufacturing efficiencies and future growth.

We also continue to prioritize appropriate investments in R&D, including memory subsystems and systems development, and manufacturing capacity.

We are actively managing our cash balances, including the deployment of $2.8 billion over the past six quarters, to reduce dilution associated with convertible debt.

We also repurchased approximately $200 million of common stock in fiscal Q2, under an existing $1 billion stock repurchase program.

Now, for an update on our finance team.

We have a number of outstanding CFO candidates under consideration, and are working to identify the best fit for Micron.

While we work through that process, the finance team is reporting to Mark Adams as Interim CFO.

Our finance leadership team has decades of collective experience at Micron and other leading semiconductor companies.

The team includes, among others, Mark Heil, Micron's longtime Controller and current Interim Principal Financial Accounting Officer.

I've asked Mark to cover the financial portions of our prepared remarks today.

Before I turn the call over to the rest of the team, I would like to reiterate that there are a number of significant factors that we believe will deliver growth, margin improvement and strong financial results for Micron toward the end of 2015, and heading into FY16.

Among other things, these include 20 nanometer DRAM, 16 nanometer TLC NAND, 3D NAND, mobile NAND, eMCPs, enterprise SSDs, and the Inotera contract change.

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

Thanks, Mark.

The second quarter of FY15 ended on March 5. When comparing the Q2 results to the first quarter, recall that the first quarter was a 14 week period, rather than our normal 13 week period.

The results for the second quarter include net income of $934 million, or $0.78 per share, on net sales of $4.166 billion.

Gross margin came in at 34%.

Our reported income from equity method investments for the second quarter was $208 million, substantially all of which was attributable to Inotera.

Our share of Inotera's results includes the benefit of $65 million from their release of a valuation allowance on their deferred tax asset that was reflected in their December 31, 2014 year-end results.

Aside from recurring items, the benefit from Inotera's tax adjustment is the only other noteworthy non-GAAP adjustment this quarter.

So non-GAAP income for the second quarter was $941 million, or $0.81 per share.

Relating to our non-GAAP guidance for the third quarter, please refer to the dilution table that's posted, along with the other materials for this call, on our website.

The dilution table reflects the anti-dilutive effects of our capped calls at various assumed stock prices.

Looking at the results and other guidance for the third quarter by product line, let's start first with DRAM.

DRAM revenue decreased 13% compared to the first quarter, reflecting a 9% decrease in bit sales volume, and a 6% decrease in average selling prices.

Lower bit sales were largely attributable to the extra week in fiscal -- or excuse me, in fiscal Q1.

DRAM gross margin was better than anticipated, being stable compared -- comparing Q1 to Q2, as bit cost decreases nearly offset decreases in selling prices.

DRAM gross margins for the third quarter, using quarter to date ASP and projected mix for the quarter, should be down compared to Q2, based on bit sales that are guided to be flat, average selling prices down high single digits, and cost per bit down low single digits.

Key items affecting our DRAM guidance for the third quarter include bit production, up high single digits over each of the next couple of quarters, as 25 nanometer yields continue to improve.

This increase is net of anticipated effects of increased mix of mobile and DDR4 products, which generally have lower bit densities.

Our sales guidance anticipates taking strategic action to reduce PC DRAM sales this quarter, given the recent demand and price weakness.

Therefore, we are guiding bit sales to be flat for the quarter.

We believe the PC DRAM segment will show improvement in the second half of the calendar year, based on a stabilizing demand profile.

Fiscal Q3 to date mix adjusted ASP is below the second-quarter average, due to pricing pressure in PC DRAM over the past several months, and a high volume of products sold in die form.

On the trade NAND side, revenue increased 3% in the second quarter, with a 12% increase in bit sales volume, partially offset by a 9% decrease in the average selling price.

Trade NAND gross margin declined to the low 20% range, as cost reductions per bit only partially offset decreases in selling prices.

Trade NAND gross margins for the third quarter, using quarter to date ASP and projected mix for the quarter, are expected to be relatively stable compared to Q2, based on bit production down low single digits, ASPs up single digits, primarily from a higher mix of mobile products, and cost per bit up mid-single digits, also primarily on mix.

Key trends for the third quarter affecting the guidance are like-for-like pricing relatively flat, relatively stable component and client SSD markets, lower bit sales into the component spot market, which has a negative effect on bit growth and cost per bit, but improving effect on average selling prices.

And finally, continued focus on mobile and NAND -- and managed NAND products, which has an improving effect on margin, with increases both in ASP and cost per bit.

On a consolidated basis, we are guiding total revenue for the third quarter to be in the range of $3.8 billion to $4.05 billion.

Looking at other P&L and cash flow results and guidance, SG&A is expected to be relatively stable over the next several quarters, in the $180 million to $190 million range.

Research and development expense in the second quarter was just below our guided range, primarily due to a lower volume of wafers used for development.

We expect R&D expense to trend up slightly over the next couple quarters, in line with development activities.

The Company generated operating cash flow in the second quarter of $1.25 billion, and ended the quarter with $6.35 billion in cash and marketable investments.

During the second quarter, we received $1 billion in proceeds from the issuance of high yield notes, our third successful offering of straight debt with near-investment grade terms.

We anticipate utilizing proceeds to repurchase or convert outstanding convertible notes and other debt, and for other general corporate purposes.

We also replaced our $255 million Singapore-based AR backed credit line with a $750 million line.

No amounts have yet been drawn on that facility.

The second installment on the LP to creditors debt of approximately $150 million was paid during the second quarter.

We also repurchased 6.5 million shares, for $192 million, under the board-authorized $1 billion share buyback program.

Expenditures for property, plant and equipment, year to date, are $1.5 billion.

And we continue to expect expenditures for the fiscal year to be between $3.6 billion and $4 billion, with a stepped-up level of spending in the latter half of the fiscal year, as we execute on 20 nanometer DRAM, and commenced 3D NAND investments.

Now, I'll turn it over to Mark Adams for his comments on the operating results.

Thanks, Mark.

Good afternoon, and thanks for joining our call.

I'm going to change my format a little today, and begin by providing some thoughts around both our DRAM and NAND business, and the respective markets, followed by a deeper dive into our business units.

Fiscal Q2 showed some seasonal weakness, which is not uncommon coming out of the holidays, considering the timing of Chinese New Year is within our quarter, I was pleased with our operating performance.

The strength of our diverse product portfolio contributed to relatively stable gross margins, quarter on quarter.

We saw some pricing pressure in the PC segment, but generally, all other market demand remained healthy.

DRAM represented 55% of our total revenue in Q2.

As a percent of that DRAM revenue, mobile represented mid 20%, similar to Q1.

The PC segment represented low 30%, down from mid 30% from prior quarter.

The server business was about low 20%, up a few percentage points, while networking, AIM and graphics were each below 10%, similar to the Q1 mix.

We are allocating less production to the PC segment, and continue to shift more bits toward the other faster growing segments.

We also continued to move production from DDR3 to DDR4, as our customer demand grows.

Although these manufacturing moves generally weigh on production bit output guidance, our DRAM process transitions will more than make up for the bit or wafer effect.

As a result, we are guiding to high single digit sequential output growth for each of the next couple quarters.

Our DRAM team is executing through key technology transitions over our second half.

We are driving expanded 25 nanometer production, and preparing for second-half calendar year 2015 conversion to 20 nanometer, across our fab network.

DRAM technology enablement remains a key focus for our teams.

We are pleased with the market acceptance of our DDR4 technology, as major OEMs are adopting Micron's products for their value-added segments.

We are qualified across all Intel server platforms, and we are seeing very strong demand signals for our 8 gigabit DDR4 parts.

And in particular, from the enterprise server and networking customer base.

DDR4 ASPs remain at a premium to DDR3.

The NAND market has gone through some challenging quarters of late, but we have seen signs that the market pricing has stabilized.

As a percentage of total revenue, trade NAND represented 29%, with gross margins down slightly quarter on quarter, as we guided during our first-quarter call.

Within trade NAND, the sale of components represented about 50% in the second quarter.

SSD units approximately 20%, our mobile NAND was roughly low teens, while AIM and other embedded were roughly in the mid-single-digit percentages.

We continue to leverage our industry-leading MLC NAND flash in key segments that demand higher performance.

We are significantly reducing our NAND supply to the spot market, down 30% quarter over quarter.

And as a result, our trade NAND bit growth in the coming quarters will be limited.

Working with our partner Intel, we recently showcased our new 3D vertical NAND technology, an innovative manufacturing approach that extends more [law] trajectory for flash storage cost and performance.

Micron's high density 3D NAND flash devices will enable small form factor drives with 1 terabyte of storage, and standard 2.5 SSDs with greater than 10 terabytes of storage.

We expect the improved performance of Micron 3D NAND technology to open up expanded segment opportunities.

We plan to commence early 3D production in the second half of the calendar year.

Our 16 nanometer TLC part is coming along nicely, and we are on track for initial component shipment in late May, early June.

Now, moving on to our business unit discussion.

In our computing and networking business unit, referred to as CNBU, our revenue was $1.8 billion in fiscal Q2.

The PC notebook business saw reduced demand and pricing pressure, yet turned in an operating profit, off only slightly at 27%.

Interestingly, customers took forecasted delivery, which we interpreted to be generally positive, as it pertains to overall channel inventory and future shipments.

We saw continued growth in our server business, driven by cloud computing and enterprise.

Server DRAM bit growth is forecasted up roughly 40%, year on year, in 2015.

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

We continue to invest in the expansion of our server business, as this segment offers a growth demand profile that is less sensitive to price fluctuations.

The networking segment delivered strong gross margins, while achieving flat revenue quarter over quarter, despite ASP pressure in the broader DRAM market.

Demand remained stable, driven by LTE build out in the emerging markets.

Demand for DRAM supplies in growing data communications, video and gaming content is estimated at roughly 20% in calendar year 2015.

We believe this will drive higher demand for Micron's memory products and networking going forward next year.

Our graphics business, led by GDDR5, is another growing specialty DRAM market for Micron.

Last year, (technical difficulty) doubled their memory content per system, and there will be additional content growth this year, as the use of these devices continues to expand beyond gaming, and to compute and home entertainment.

Graphics products for the PC segment also reported growth in Q2.

Demand for overall DRAM graphics is projected to be up 25%, year over year, in 2015.

Revenue for our storage business unit, or referred to as SBU, was up -- was recorded at $954 million in Q2, down slightly quarter over quarter.

Although our SBU operating margins were down quarter over quarter, we believe the business is stabilizing, and should improve going forward.

We announced three new enterprise products.

A co-developed SaaS drive, a new PCIe express drive, and a new SATA-based solution.

We also announced strategic alliances with Seagate IBM in the enterprise storage market.

Out agreement with Seagate provides an opportunity to sell high-performance MLC components, and accelerates our expansion into the enterprise SaaS SSD market.

Micron's current client and enterprise drives are based on our award-winning 16 nanometer MLC technology, which more and more of our customers are seeking, due to superior performance compared to competitor's planar TLC drives.

We see a value segment in the channel for planar TLC SSDs, and are expecting late Q3, early Q4 calendar year shipments of a Micron branded 16 nanometer TLC client drive.

The mobile business, or MBU, had another strong quarter.

MBU revenues came in at $856 million, with operating margins at 31% in Q2.

We have indicated on prior calls that our main focus on mobile is optimizing the business for profitability and diversifying the customer base.

The team has done a nice job executing to these objectives.

We continue to see strong demand for our mobile products.

One example is the increasing prevalence of 3 and 4 gigabyte low powered DRAM configurations in the super, mid and high end smartphone segments.

We also continue to see significant growth opportunities for Micron in eMCPs.

eMCPs generally include 1 to 2 gigabytes of low-power DRAM, and 8 to 16 gigabytes of NAND, in an integrated package.

With our innovative DRAM known good die offering and 16 nanometer NAND technology, Micron is uniquely positioned to capture this growing opportunity as eMCPs replace eMMC in the large segments.

Revenues in eMCP were up 70% quarter on quarter, as mobile NAND bit shipments nearly doubled when compared to Q1.

We remain bullish on memory content in mobile, as evolving system architectures still increased density requirements in all handset segments.

Higher performance 64 bit application process, or SoCs, supporting (inaudible) OS platforms and richer applications, as well as large screen sizes and more advanced gaming, all contribute to increased memory density to deliver a more rewarding experience.

Our embedded business posted revenue of $502 million, and operating margins were up slightly quarter over quarter to 23%.

The automotive segment continues to drive EBU performance, with a revenue increase of over 10% when compared to the same quarter in FY14.

We continue to invest in custom segment solutions, to drive our leadership in the embedded memory market across all EBU segments, including IMM, industrial, medical and multi-market, gaming and the connected home.

We are seeing strong market reception of Micron's next generation serial NOR Flash product family, and should benefit from the signing of an open industry standardization agreement.

We initiated qualification sampling of 16 gigabyte and 32 gigabytes eMMC version 5.0, to customers in Q2, and began production for the embedded SSD product that addresses the needs of our auto, IMM and gaming customers.

A complete portfolio of memory solutions, including DRAM, NAND and NOR, along with industry consolidation, is strengthening Micron's embedded value proposition as a stable, memory-focused solutions supplier to the embedded market.

In fact, now, DRAM and NAND now make up more than 70% of our overall embedded business, and growing.

In closing, we are confident in the long-term dynamics of the memory industry, and remain focused on optimizing our margins and returns over the long term.

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

Thanks, Mark.

We would now like to take questions from callers.

Just a reminder.

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

And with that, please open up the lines.

(Operator Instructions)

Harlan Sur from JPMorgan.

Good to see your DRAM bit supply on an upward trajectory.

I know that there was some concern that 25 nanometer and 20 nanometer transitions, and some of the initial prep work, may have inhibited some of the supply growth here in May.

But good to see that back on a growth trajectory.

Can you help us understand, what are the drivers for the bit supply decline in NAND in the May quarter?

And do you guys expect the resumption of supply growth, starting in the August quarter?

There's a couple of things.

One of -- the primary issue is a mix issue, as we shift our products directed more towards mobile and end product SSDs.

The second factor is, we're getting our factories ready for both transition to new process technology, 16 nanometer TLC, as well as prepping for -- in Singapore, prepping -- starting the process for 3D manufacturing.

Thanks for that.

And then, I think on the last call, you talked about relatively high levels of inventories of SSDs coming out of fiscal Q1.

What's your assessment of SSD inventory levels exiting Q2?

And then if you can give us an update on your 16 nanometer SSD products?

I think you might have mentioned it.

Sorry if I missed it.

But I think you were talking about, last time, ramping 16 nanometer SSD, second half of this year?

That's right.

Our assessment is that the industry inventory position on SSDs is improving.

We actually think the pricing in the NAND business is stabilized, quarter to date.

And relative to Micron's performance, we've got a number of products that are going out in [qual] to OEMs, that are based on our 16 nanometer MLC.

Interestingly enough for us, we are seeing a lot of people -- or some of our customers revert back to an MLC-based SSD drive, based on some of the issues that have come up with competitive offerings on performance and endurance and reliability.

Thank you.

Steven Fox from Cross Research.

I was wondering if you could dig in a little bit to the storage business unit.

The business swung through losses.

I think you partially explained that, but maybe we could talk about that a little bit?

And then, you've given some reasons why those losses should reverse back to profits.

But I was wondering if you could talk through, maybe, a road map to getting to acceptable margins?

And where you see, maybe, margins exiting the calendar year, et cetera?

This is Mark Adams.

I will take the question.

The -- we try to avoid speculating on future pricing and projecting margins out in the future.

But I will comment that we continue to feel really good about the execution of the team in delivering against closing the gap competitively.

And for all the reasons we've talked about in the past, those signs are happening.

I talked about, in my earlier comments, how our mobile NAND business is growing, quarter over quarter, at a very successful growth trajectory.

I think that the 16 nanometer MLC SSDs that I communicated just a second ago are pretty good.

Our alliance with C gate, and the fast development, and getting access to the fast market earlier than we otherwise would, is pretty good.

And as we commented into the market last week, in our announcement with Intel on the 3D NAND technology, we still continue to feel that we are in a very competitive and market-leading position in 3D NAND.

So, with all those things in place, we are pretty bullish about NAND, and we continue to think we're going to close the gap.

Great.

That's very helpful.

Thanks so much.

Mark Delaney from Goldman Sachs.

I was hoping you could elaborate a little bit more on your outlook for the DRAM industry for the second half of the year?

And if you could just talk -- I know you don't want to give specific pricing guidance.

But if you could at least talk to the trajectory, or the linearity of DRAM ASPs over the course of the second quarter?

And what sort of confidence that may or may not give you, as you look into second half overall DRAM supply and demand trends?

Mark, this is Mark Adams.

I think that we remain bullish, in general, on DRAM going forward, for the following reasons.

First of all, we think that the second half of the calendar year is going to be pretty strong in mobile, and all signs are indicating to that.

We do think that the PC -- some PC capacity needs to be shifted over there to address that opportunity, and that will balance out some of the current market conditions around PCs.

I'm not sure how to call the PC market, other than to say that we think it could improve from here, because it's not so doing so well.

And we think the back half of the year, with Microsoft new OS and holidays, and so on and so forth, we think it's got to be better, hopefully, than it is today.

Beyond that, when you look at our business, we think, as we talked about in the past, that it's a more rational industry, and with that is coming better behavior.

And as Mark talked about earlier, we are going to do the right things to run our business.

And if that means not selling inventory below acceptable prices, we will do it.

So if I look at all that, and I think about other end market growth, I think we are still in a pretty bullish perspective of how DRAM will play out in the second half here.

That's helpful.

And actually gets to my follow-up question, which is around your comments you were making about holding inventory.

Can you elaborate along -- about how long you think you can hold inventory?

And then you just talk about what would happen -- have to happen if you were sitting on inventory and market pricing continued to decline?

How quickly you have to true-up your inventory with pricing in the market?

Interestingly, let me comment on one thing around inventory.

You didn't really ask for it, but I'll get to your answer.

Channel inventory has increased a little bit, and since the first quarter.

Now, my interpretation of that is pretty positive.

The people who accumulate this inventory in the channel, that's how they make money.

They make money by taking inventory and waiting to sell in a better market.

And the accumulation of -- it is not dramatic, but it is probably now a 4 to 6 weeks in DRAM and NAND.

And as you think about that, they are buying memory at current market pricing, and they're betting on a rebound, and these are some people that have been in the business for quite some time.

I happen to believe that's a pretty positive sign.

Now relating back to your question on how we can do that, I'm not going to give you a number or weeks on hand, or what have you.

But we do believe that, given the diversity of our end markets, it's more a matter of how we shift our capacity, and not that we sit on a bunch of old aged inventory.

We would just move our capacity to better end markets.

Thank you very much.

Monika Garg from Pacific Crest Securities.

Just for clarification, you are guiding high single digits for production of DRAM bits, but for shipment and revenue purposes, it's flattish?

That's right.

All right.

So the second question I have is, if you look quarterly, ASP guidance of DRAM, you're guiding minus 9%.

It was about minus 6% last quarter.

When do you think we see some stabilization in PC DRAM pricing?

And also, if you could talk about pricing in the other segments of DRAM, like mobile DRAM and server DRAM, going forward?

Sure.

So Monika, this is Mark Adams again.

Relative to pricing, you know it's hard for us to get on that, and try to make projections out in the future.

What I would say is, the comparison between the 9% and the 6%, Q2 and Q3, remember, the 6% was on a much higher base coming into Q1, and so the 9% and 6% are not really apples to apples.

We do believe that, for the reasons I stated earlier, that the overall DRAM business will remain in pretty good shape.

We don't see massive price pressure in any of the other segments.

Our down 6%, actually interesting, in Q2, was PC down a lot more than 6%, and the other segments flat to even some better.

So what I would say there is that we don't see a lot of pressure in the other segments at this point.

Now remember, each of the businesses -- this is what's great about diversification.

Each of these businesses act differently.

Meaning, for example, the commodity component DRAM business is what it is, and we've known it to be, is a lot smaller portion of our business.

But when you look at things like mobile, mobile is a different business.

It a design end business.

More concentrated customers, and there are a number, 10 to 15 major customers, that we fell to.

And we negotiate with them, and we negotiate more long-term, and so that's a different business.

So the pricing dynamics are much different.

The fact that pricing stayed good is a great sign for us in mobile.

And our costs are going to get better, and as we grow our market share, we are going to continue to expand that business.

And that's true if we look at each of the segments, whether it be embedded, mobile, networking and automotive.

That's all true, in terms of how we look at the business.

We take each of them as individual segments that run differently.

Thank you.

That's all for me.

Mehdi Hosseini, Susquehanna.

Two questions here.

First, given your ASP cost and bit production and shipment trend, how should we think about trends in DRAM margin profile by different segments?

Particularly for PC, mobile and server DRAM from the reported quarter to the current quarter?

And I have a follow-up.

Mehdi, this is Kipp.

We are not going to dive into gross margin by segment, but we will give you another chance to ask a different question, if you'd like.

Sure.

How should we think about the impact of [field] building inventory, since you think DRAM is going to be higher?

How should we think about the impact of the inventory total on the margin profile in the current quarter?

I think the answer, Mehdi -- this is Mark Durcan -- I think the answer is the same, that we're not going to try to predict margin.

But the fact that we're talking about this -- and by the way, it's nothing new.

But the fact that we're talking about our willingness to hold some inventory here, is really reflective of the fact that we've got a lot of confidence.

As we move into the back half of the year, we're seeing a lot of signals.

Mark talked about a bunch of them.

I will say, even within the compute business, we are getting signals from some customers that maybe they want to look at longer-term ordering patterns, et cetera.

So we've got a lot of confidence that this business is going to be pretty solid in the back half of the year.

And that's probably about all we can say about it.

Fair.

And looking into the NAND, and the alliance with SiGe and the recent optimism about 3D NAND, especially looking into the 48th layer.

And the fact that Intel also has some collaboration with (inaudible).

How do all these dynamics play out into 2016, when maybe a 48th layer 3D NAND would become cost effective to commercialize?

You have direct alliance with SiGe, then you have indirect supply into Western Digital through Intel.

Any thoughts, or any qualitative assessment, that you can offer us, looking into next year, giving this kind of a dynamic?

Yes, let me just say this, Mehdi.

We complete with Intel in the marketplace.

We have for a long time.

And we expect that Intel product, whether it is shipped by Intel or by Western Digital, will be competitive -- or will be competing with Micron solutions in the market in 2016.

Now the good news is, we think we've got a great 3D NAND solution, and we also have a lot of capacity at Micron.

And so we think that over time, we are well-positioned to do well in that business.

But if 3D NAND is going to be the [destructive] technology, is going to be the catalyst, how are you going to be able to manage the conflict of interest, when you are effectively supplying these three different entities?

Remember, Mehdi, it's -- the partnership we have with Intel is the co-development of the core technology.

That's a big piece of the solution.

Other areas are the SaaS controller, the firmware, the software, and the go-to-market capabilities that each of the other people that you're [repping], it's -- the Sige and the Western Digital references, that comes into the equation of going to market with a full-fledged enterprise SaaS SSD.

So, as we look at that, it's our core technology we've developed with our partner, and it's really two avenues, one with Intel taking it through their channel, and one with us taking it through our channel.

And by the way, if they do well, we will be happy to sell them some NAND Flash.

Got it.

Thank you.

CJ Muse from Evercore.

First question, regarding your pricing guide for DRAM, down high single digits.

Can you talk about what like-for-like pricing looks like, versus mix shift?

When you think about the pricing like-for-like, the overall pricing, I think we guided down, was 9% for the quarter.

So high single digits.

And as I said, I made the comment earlier that that was really driven by where we exited Q2, going into Q3.

As some of the mix changes, to think about our business, mobile, server and the other markets had pretty stable pricing.

So a lot of the fluctuation in the guidance we're giving you is coming out of a quarter that started higher, ended lower, and we are starting from a lower base.

Okay.

That's helpful.

And then as my follow-up, can you walk through the progression that you see, in terms of the 20 nanometer ramp at Inotera?

When you start to see bit production, and then when you expect to actually have shipment and revenues?

And then I guess, over time, what are the milestones, in terms of percentage of your overall DRAM mix?

At whatever time frame you want to discuss?

Let me characterize it generally for Micron.

And then I think, relative to Inotera, you can get some more specifics from them.

But for 20 nanometer, we said the second half of calendar 2016 will be -- sorry, the second half of this calendar year will be ramping.

And by the time we get into the first half of 2016, it will be the majority of our bit mix.

And when you say ramping, that is production?

Or that is shipment?

That is production.

And how should we think about --

There will be -- let me say it this way, then.

There will be significant shipments in Q4 of the calendar year for Micron.

Great.

Thank you.

Rajvindra Gill, Needham & Company.

Wondering if you could discuss a little bit about the competitive pricing environment in DRAM and NAND?

You gave some highlights, in terms of what the actual numbers are.

But wondering, qualitatively, what's happening in the market?

A lot of this positive thesis on the DRAM industry was some sort of rationalization that's occurring in the industry -- rational behavior.

So I'm just wondering if you are seeing that continue?

You can describe a little bit about that?

Sure.

As I've highlighted today, in our script and some of our comments, the real catalyst for some of the disruption here in the PC segment of -- was really the demand side.

And I think if you talk to other people in that business, in the PC business, the hard drive guys, the CPUs, the unit decline in the PC notebook segment drove some of this.

Now the interesting thing for us is that none of the other segments showed that.

When you think about where our business is today, where it might have come from years ago is, yes, our pricing in one of the segments had some pressure in the first quarter -- I'm sorry, in the second quarter.

We felt pretty good about the rest of our business, and it showed up in our performance.

So as I think about pricing for us, we clearly -- Micron, if you look at industry pricing, and you look at pricing per gigabit and DRAM, for example, Micron is clearly the leader in pricing on the ASP [curve].

And so, at least historically, we have been, and we feel like we are today.

And we are going continue to try to drive it up.

And with that, that might mean holding inventory, like we said.

It might mean moving capacity to other segments, server, networking, mobile, so on and so forth.

And so that is the picture today.

And I think that my comment earlier, about what the timing of channel inventory, and even our customer reaction.

We've had customers try to -- who initially wanted to get off the quarterly pricing come back to us in this past quarter, and want to go back to quarterly pricing.

So we are generally bullish on the dynamics of pricing in the market.

And yes, there was an industry catalyst, in the form of demand for PC and notebooks, that drove a little bit of disruption in the business.

We do not think it's major.

Yes, it -- so you can measure it.

But the rest of our business is pretty good.

Okay.

Thanks for that.

And on the NAND side, you talked about NAND pricing stabilizing a bit.

Just wondering what's driving that stabilization?

And can you comment, in terms of what percentage of your NAND business will be TLC, exiting this year?

And should we start to see NAND gross margins increase, as we exit this year?

Thank you.

As we think about our business, we think about the end markets, where they're going, and where the products will be -- generate the highest return, and as we achieve our strategic objectives in NAND.

And on a competitive basis, okay, we believe we will be closing the gap between our competitors in the second half of our fiscal year, and throughout 2015 calendar.

We believe that will happen.

TLC, today, is less than 10%.

It's not a large number today.

And as we ramp our fabs, it won't be materially much larger.

We will see some growth in the back half of the year, but it won't be materially much larger.

Because we've got other parts of our business, whether it be mobile, or I talked about the success of our MLC 16 nanometer product, a Tier 1 OEMs.

And so we will seek TLC growth at Micron, but we're not going to do it just to do it.

We need to make sure that we're getting the right value for it, and that's important to us to run our business.

Thank you.

Tristan Gerra, Baird.

Given this trend to the US dollar, there's been some concern about potential (inaudible) of [DUM] content (inaudible).

Is that a trend that you are currently seeing, or expect in the second half?

Yes, I think, for us, this question around FX is really more a question around what is worldwide GDP growth going to be?

We are a global company.

We've got global customers.

Some will do better in some FX situations, and some will do slightly worse.

But unless something dramatic happens to worldwide GDP growth, we think we're pretty well positioned with manufacturing all around the world, and with customers all around the world, some of which will do better under certain circumstances, and some of which won't.

So we are not overly worried about it.

Obviously, we have manufacturing in Japan, and there's a certain cost reduction associated with the weakening yen.

Obviously, we've got some manufacturing in Singapore, and certain costs associated with the strengthening sing.

But net-net for Micron, these aren't huge effects.

Okay.

And then, what is the ramp of 3D NAND mean some of the equipment we use 10 point?

Is this going to be a significant percentage of your existing equipment?

And could this impact DRAM production next year, if some of the equipment gets shifted to other memory product lines?

Absolutely.

We plan a lot of equipment reuse as we transition planar NAND to 3D NAND.

I assume that was the question, is 3D NAND transition?

Yes.

So there is incremental equipment required, there is incremental floor space.

There is some amount of tooling, all of which can be reused in other parts of our -- or the vast majority of which can be reused in other parts of our business.

Generally speaking, we will trade out planar NAND wafers for incremental -- for 3D NAND wafers.

And we think that is the most capital-efficient way to run the business.

Great.

Thank you.

Kevin Cassidy from Stifel.

Maybe along those lines also, with 3D NAND, is that a drag on gross margins as it first ramps into production?

And when do you think would be the crossover, where it could be a tailwind to gross margin?

Yes, sure.

It's almost always a short-term drag on GM when you make the transition like this.

You've got new tools coming in, takes a while to qualify them, get them loaded, et cetera.

And there are inefficiencies associated with yield ramps, et cetera.

So we are pretty comfortable, by the time we get to late in the year, late in this calendar year, we'll be looking pretty good.

Okay.

Great.

And you also mentioned that, if the DRAM pricing isn't what you expect, you're willing to hold inventory.

Is there any willingness to cut CapEx?

Or is that fixed for this year?

We would be willing to do that, if we thought the market situation were such that that would make sense to us.

I can't actually foresee that, sitting here today.

Clearly, as we think about our plans for 2016, and things a little bit further out, we will take into account where the market goes over the next number of months and quarters.

But as we sit here today, we just told you, we think things are looking pretty good.

So we're not anticipating making any major changes, as we sit at the table today.

Okay.

Thanks.

Daniel Amir from Ladenburg.

In terms of DRAM side, you expressed that PC DRAM, you're thinking that is going to decline here in the next couple quarters.

What is the ideal mix that you see your mix of DRAM, a year from now?

Is it PC DRAM at the 20% level?

Or do expect it to decline, and then come back maybe to 30%?

I think directionally, where you were going initially was right.

We think, over time, that it will decline as a percentage of the mix, and a lot of it does depend on the business.

But I think directionally, that -- we think you are spot on.

Okay.

And then the second question is related to -- it sounds like the eMCP business is something that one of your growth drivers here -- do you feel that this is the leading factor here, to drive your mobile business?

It's up 70% Q-over-Q.

In the eMMC space, you probably didn't have as big a competitive advantages now that you have in the eMCP space, given that you have a very good integrated product with the DRAM side.

Yes, I think absolutely.

In full transparency, we are coming off of a somewhat lower base.

But I think we've stated, in prior calls, I will state today, that we think eMCPs for the mobile business, coming out of our fiscal year, will be somewhere around 25%, a little bit lower than 25%.

But somewhere up from zero in the last 12 months.

So we -- as you identified, it's a strategic play for us, leveraging our portfolio.

And quite honestly, given our makeup in the mobile business, we think we've got an advantage over just about anybody in the space.

Great.

Thanks a lot.

David Wong from Wells Fargo.

Can you give us some idea about the ownership of the IP associated with 3D NAND technology, between Micron, Intel or the joint venture entity?

If there was some concern about someone encroaching on your IP, or the possibility of licensing the IP, who does the negotiations, or drives the legal action?

We are not going to talk about intellectual property strategy, David.

But I can tell you that we do the -- we fund the development together.

We do it jointly, and we both own different pieces of the intellectual property.

But beyond that, there's not a whole lot I want to talk about.

Okay.

Then, could you give us some idea of the proportion of your DRAM production in the May quarter, between PC DRAM server and mobile memory?

How are you allocating what you are actually making?

I think we -- I will go back and give you some of the comments I gave earlier.

We think that PC DRAM in the quarter will be down from mid 30%s in Q2 to low to 30% range, and we think that that will signal increases in other areas, such as mobile in the mid 20%, server in the low 20% of our business.

And so we see a blend.

It's not just one category picking up for the PC business.

Mobile will get some more capacity.

We will allocate some server, some PC business to -- bits to server, and we will look at networking [out of those], as well.

So that's the full suite of things we evaluate.

Okay.

Great.

Thanks.

Mark Newman from Bernstein.

You talked about the inventory on the DRAM side, and you're saying your production is going to be up high single digits.

What is the -- what are the assumptions you are using for the bit shipment for FQ3?

Mark, I think in the business, we said basically flat on shipments, and we normally don't say a whole lot more, in terms of future guidance.

But I think you can suggest, that -- from our other comments around, we're going to do what's right for the business, and drive the right return in margins, and there's not going to be a fire sale, by any stretch.

Okay, great.

And then follow-up question on NAND Flash.

I thought I heard you say components, 50% of NAND.

Could you clarify that?

Perhaps I misheard?

Go ahead.

And then I wanted to get some ideas from you about how is that going to be fixed over the long-term?

Because clearly, as you increase the percentage of your solutions, and decrease the percentage of [raw] NAND components, that's obviously very good for your margins, basically moving up the value stack to create -- to capture more of the value.

But in addition to that, it actually helps to consolidate the NAND to market by essentially taking out the competitors.

Because a lot of raw NAND customers are actually, at the end of the day, they are also competitors [serving] flash cards and SSDs.

So could you give us a bit of a road map for how we can expect that percentage of components to decrease going forwards?

Sure, Mark.

Let me take that.

So the data I spoke to in my opening comments was that in Q2, components shipments was -- includes cards and components.

And that is somewhere around the area of 50% of our overall shipments in the quarter, Q2.

In Q3 alone, that number will be cut by 30%, as we start to the transition of what you just highlighted, away from component and card sales, to mobile and SSDs.

Part of that dynamic, by the way, and discussing how this plays out, is we now will be shipping, in the quarter, 16 nanometer MLC qualified drives that were in process, and didn't have that volume in Q2.

So the move from components and cards to mobile and client SSD, based on 16 nanometer, certainly is a positive move for us.

As you say, we move up the stack.

And we continue to drive things like enterprise -- drive both in PCIe and SaaS, as we explained earlier.

That's how you should think about our target.

And I mentioned also, I think we gave guidance that NAND bit growth will be flat to down in the Q3 timeframe, as we think about the evolution for 3D manufacturing set up, as well as a switch to some of our (inaudible) towards 16 nanometer TLC.

We think that all resonates to a better optimized mix of products for our NAND portfolio.

Great.

Thanks.

If I could ask one quick follow-up.

On -- for LP DDR4, my understanding is, Apple is moving to LP DDR4 for the next iPhone.

And also, I understand, 2 gigabytes.

Do you have an update on your readiness, or your road map for LP DDR4?

When do think that will be ready?

I think that, Mark, it's safe to say that we feel pretty good about our position there, both existing 25 nanometer LP DDR4, as well as our 20 nanometer LP DDR4 offering.

This is less about Micron readiness, and more about customer demand lining up for the back half of the year and beyond.

Great.

Thanks very much.

And it looks like we have time for about one more caller.

Thank you.

John Pitzer from Credit Suisse.

I want to go back to this idea of building inventory in the May quarter.

I'm curious, why that route, and not accelerating the transition to 20 nanometer more quickly?

Because clearly, I would argue, if you had 20 nanometer at a larger percent of (inaudible), your cost structure would be better.

And I can't remember a time when building inventory, either internally or in the channel, has been a good thing.

So I'm curious, why the inventory decision, and not a faster ramp of 20?

Yes, John, this is Mark.

So we talked, this quarter, about how we were doing exactly what you just mentioned, which was in fiscal Q2, we made some adjustments in our manufacturing line to start positioning equipment for the 20 nanometer ramp.

These things are always about balance, and certainly the market today is not the market of last year, or the year before.

We have pretty broad diversification of end segments and customers and products, where we feel pretty good about our ability to move some stuff, over time, if the market demand is not there this quarter.

Now, we don't know exactly what the market demand looks like this quarter.

Maybe we end up not holding anything at all.

We've left ourselves some room to maneuver there.

But we're trying to strike a balance between what you're suggesting, as well as just building product, and then seeing what the market looks like.

That's helpful, guys.

And then maybe on my follow-up, just on the OpEx line, and specifically the R&D line, continues to creep higher, especially R&D, independent of revenue levels.

I'm curious, to what extent is this the new structural norm we should expect in R&D, as you go after a lot of different market segments, with a lot of different products?

Or would you characterize the current spend as accelerated or elevated, because of where we are in the 3D transition or something else?

Or just some long-term guidance on R&D and OpEx would be helpful.

Yes.

So just on the R&D piece, there are a lot of different dynamics in play here.

Obviously, we've got a lot of new 20 nanometer products that we are going to want to qualify and ramp.

And so we're always wanting to make sure that we don't let the R&D dollar spend get in the way of qualifying products on a timely basis, and getting to the market, as you just suggested we should be doing.

So there's that dynamic.

There's also -- I think there is an overlying dynamic of -- as we start thinking about some of these storage class memories that we talked about making investments in, and as we start -- continue to add resources to position the Company to lever system-level products, that there are -- there is a different nature to the R&D spend than there has been historically, as well.

Over time, we may spend less on some of the other things we spent R&D dollars on.

But what we're talking about right now, in terms of the next number of quarters being up a little bit, I think it's more related to some of the short-term dynamic around technology ramps and new product introductions.

Thanks, guys.

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-Ks.

Thank you.

Thank you.

This does conclude today's Micron Technology second quarter 2015 financial release conference call.

You may now disconnect.