美光科技 (MU) 2016 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Micron Technology's first-quarter 2016 financial release conference call.

(Operator Instructions)

Thank you.

It is now my pleasure to turn the floor over to your host, Ivan Donaldson.

Sir, you may begin your conference.

Thank you, Jonathan.

Welcome to Micron Technology's first-quarter 2016 financial release conference call.

On the call today is Mark Durcan, CEO and Director; Mark Adams, President; and Ernie Maddock, Chief Financial 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 cap call dilution table.

If you've not had an opportunity to review the first-quarter 2016 financial press release, it is also 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 86772006.

This replay will run through Wednesday, December 30 at 11:30 PM Mountain time.

A webcast replay will be available on the Company's website until December 2017.

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 might be attending.

You can also follow us on Twitter at MicronTech.

Please note the following Safe Harbor statement.

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

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

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

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

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

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

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

Thank you.

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

Thank you, Ivan.

For Q1 FY16, Micron posted total revenue of $3.35 billion, with gross margins of 25%, non-GAAP net income of $249 million, and non-GAAP earnings per share of $0.24; all within our guided range.

In addition, our non-GAAP operating income was $246 million, and our operating cash flow was $1.1 billion.

Our results were primarily impacted by continued weakness in the PC DRAM segment.

In addition, pricing pressure was also present in the client SSD and certain eMCP segments.

As for Micron's execution, we are on track with the qualification of several new technologies, including 20 nanometer DDR4 and low-power DDR4, as well as our 3D NAND products.

These product and technology transitions can be disruptive to the manufacturing environment in the short term, but we believe they will pay dividends going forward, as our product portfolio will be better positioned to address market demand.

While current market conditions and our financial results have been challenging, we remain confident, and we are focused on deploying our advanced technology in order to drive enhanced operational leverage for the Company.

Taken together, expected market conditions and new product qualifications will continue to create challenges in the near term.

However, we still expect to see stronger bit growth and cost reductions commencing in the second half of FY16.

These advancements in our technology deployment, as well as the new system-level solution products we are developing and deploying, will improve our long-term competitive position, and drive enhanced financial results.

Reflecting on market conditions, we believe that DRAM industry bit supply growth will be in the low 20% range in 2016, in line with demand, and that industry fundamentals will remain healthy over the long term.

Demand continues to diversify, driven by the mobile, cloud server, and embedded segments, which together balance maturing PC demand.

The DRAM industry consists of only three technology developers.

Based on current long-term outlook, we foresee technology-driven supply growth slowing, and can envision a future in which no additional DRAM wafer capacity is required.

Turning to the NAND market, as I noted earlier, we have seen price competition in client SSDs and eMCPs during our first fiscal quarter.

While we expect some of these trends to continue into fiscal Q2, we have also seen some positive signs in other segments, and will continue to monitor market conditions carefully.

Industrywide, we see relatively muted NAND supply growth in 2016, as planar fabs are converted to 3D, creating short-term headwinds to supply.

We estimate industry bit supply growth in the mid-30% range, which is likely below the long-term demand trend.

As the cost advantage of large-scale 3D NAND deployment is realized, we expect solid state drives will see accelerated adoption in the client, data center, and enterprise segments.

This adoption, combined with higher densities, should form the basis of a healthy, long-term demand environment.

These trends will likely be complemented by density growth in mobile devices.

Beyond 2016, we believe that the longer-term NAND demand trends should lead to additional industry capacity, including our own fab 10X expansion in Singapore.

Construction for this facility is on track, and we currently expect to ramp into it, starting in the second half of calendar 2016.

Our capacity ramp will be driven by market conditions and expected ROIC.

Micron is focused on the deployment of advanced technology to drive manufacturing efficiency, and enable innovative new products.

Specifically, in 2016, this focus is on three key areas: ramping 20-nanometer DRAM and enabling 1X DRAM in manufacturing; ramping 3D NAND and enabling second-generation 3D NAND in manufacturing; and finally, accelerating the development of advanced controllers to enable growth in SSDs and other system-level solutions.

In terms of bit growth, for DRAM we still expect Micron to be above the market for calendar-year 2016 based on a market growth assumption in the low 20% range.

The majority of Micron's growth will occur in the latter half of FY16, with continued progress in FY17.

For trade NAND, we expect our bit growth to be below the market in calendar 2016, as we proceed with 3D conversions, which will limit output in the first half of the year.

Our fab 10X expansion and 3D conversions position us to significantly outgrow the NAND market in FY17.

Turning to Inotera, as you heard us announce last week, we entered into agreements for Micron to acquire the remaining outstanding equity of Inotera.

We believe this is a compelling combination for the Companies, our shareholders, our customers, and our employees.

Micron has a solid history of integrating memory assets, and we believe this acquisition will prove to be successful.

Separately, we've also entered into an agreement granting Nanya an option to license two future DRAM technology nodes, in exchange for a royalty and equity arrangement.

These agreements form the basis for a continued strategic partnership with Nanya and the Formosa Group.

I'll turn the call over to Mark Adams now, who will summarize our operational and business unit results.

Ernie Maddock will then cover Q1 financials, and I will conclude with a couple of thoughts prior to Q&A.

Mark?

Thank you, Mark.

I will begin by reviewing our DRAM and non-volatile businesses, followed by an update on each of our four business units, and close with commentary on our operations and technology deployment activities.

Let's begin with DRAM, which represented 58% of our total revenue in fiscal Q1.

While PC DRAM average selling prices remained under pressure, we saw more stable pricing in other market segments, where demand remained relatively healthy.

We continue to ramp 20-nanometer DRAM technology, and move production to DDR4 and LPDDR4 to meet customer demand.

As a percentage of DRAM revenue in fiscal Q1, mobile was in the low 30% range, similar to Q4.

The PC segment was in the mid-20% range, up slightly from the prior quarter.

The server business was in the high-teens percent range from the low 20%s last quarter.

And specialty DRAM, which includes networking, graphics, automotive and other embedded technologies was in the low 20%, similar to last quarter.

In our non-volatile memory business, trade revenue represents 34% of total revenue in fiscal Q1.

Performance was consistent with our expectations, making early progress on our 3D ramp and customer qualifications.

As a percentage of trade non-volatile memory revenue in fiscal Q1, consumer, which includes our memory cards, USB and components, was approximately 50%, up from mid-40%s in Q4.

Mobile, including MCPs, was in the high-teens percent range from the low 20%s last quarter.

SSDs were in the mid-teens percent range, similar to last quarter, and automotive and industrial multi-market segment, or AIMM, and other embedded applications were in the mid-teens percent range, similar to Q4.

Moving on to our business units, Micron's compute networking business unit posted fiscal Q1 revenue of $1.14 billion, down 12% from the prior quarter, with non-GAAP operating income of $21 million or 2% of revenue.

CNBU was impacted by lower average selling prices, driven by continued softness in demand from the PC segment.

While we anticipate this demand to remain relatively soft in Q2, we are encouraged by growth opportunities in other areas of the market, including enterprise and cloud segments, and remain focused on optimizing our product mix in fast-growing, high-value segments.

On the technology front, we successfully executed go-to-market activity on our 20-nanometer DDR3, our GDDR5 and 8-gigabit DDR4 products.

Our enterprise and cloud segments saw strong growth for our DDR4 products, driven by increased cloud demand from several of our hyperscale customers.

We are making good progress deploying our 20-nanometer 8-gigabit components, which will drive future cost improvements.

Looking forward, we anticipate year-over-year bit growth of 40%-plus, driven by increased memory requirements to support virtualization and real-time analytic workloads.

Our DDR4 portfolio and innovative non-volatile DIMM products have us well positioned to benefit from these strong growth trends in the future.

The graphic [card] segment experienced softness in demand as customers rebalanced inventory levels of GDDR5 early in the quarter.

We anticipate demand to increase, returning to normal levels within the current quarter.

We continue to successfully ramp our 20-nanometer 8-gigabit GDDR5, with a substantial increase in shipments during fiscal Q1, and we are well positioned to capitalize on growth in system DRAM content in the future.

The networking segment was impacted by seasonal weakness in demand, and the delay of China LTE buildout.

However, market feedback suggests that demand should regain momentum in the coming months.

In Q1 we doubled DDR4 shipments quarter over quarter in the networking segment.

In the client PC segment, we shipped our first 8-gigabit DDR4 samples to major OEM customers, and are well positioned for mass production later this quarter.

Looking forward, as PC form factors continue to evolve, Micron's broad offering in DDR3, DDR4, and low-power DRAM will enable us to meet the changing needs of this market, and deliver greater value.

Micron's storage business unit posted fiscal Q1 revenue of $884 million, up 4% versus the prior quarter, with a non-GAAP operating loss of $27 million or negative 3%.

We maintained relatively stable average selling prices in our storage business for the fourth consecutive quarter.

SBU continues to focus on optimizing our product portfolio to mitigate transactional market exposure, while serving higher-value segments.

Our 3D vertical NAND technology has 3 times the density of existing planar solutions.

We are actively sampling and developing our own SSD product portfolio, based upon 384-gigabit 3D TLC and 256-gigabit 3D MLC NAND, and expect to make products available for broad marketplace adoption in the second half of FY16.

In the components segment, we delivered our first 3D NAND die to the market in Q1, shipping 256-gigabit MLC 3D NAND components to nearly 20 third-party USB and consumer SSD manufacturers.

Shipments to additional customers are continuing this quarter.

In client and consumer SSDs, bit growth increased by double digits sequentially, as decreasing SSD prices continues to accelerate adoption in OEM ultrabook and ultra thin PCs, as well as consumer upgrades.

Lower density consumer SSD will continue to narrow the cost gigabyte parity gap with hard drives, increasing their attractiveness.

Our enterprise business saw quarter-over-quarter demand growth with strong OEM component sales growing 47% sequentially.

Enterprise SSD revenue was up 13% sequentially, driven by market pull for enterprise server, cloud storage, and flash array solutions.

We began sampling our new S600 series of SAS-based SSDs in fiscal Q1, having qualified these drives with OEM customers, and engaging in qualifications with numerous end users and channel integrators.

This SSD series is the first product family developed as part of Micron's strategic agreement with Seagate, combining flash innovation and SAS expertise from both Companies.

These drives are scheduled to begin shipping commercially in the first half of the fiscal year.

Data center SSD bit shipments were down quarter over quarter amid competitive price pressure.

Despite the market competitiveness in the [SSD] data center SSD segment, we received orders for M500DC and M510DC SATA-based SSDs from multiple hyperscale customers and cloud customers, and continue to ramp these encryption-enhanced SSDs with end users who require enterprise-level data encryption in end markets such as medical, banking and government.

Micron's mobile unit posted fiscal Q1 revenue of $834 million, down 13% versus the prior quarter, due to lower volumes and pricing pressure from the eMCP market.

Non-GAAP operating income was $136 million or 16%, down from Q4, reflecting the higher cost of 20-nanometer product during the early ramp.

Micron's mobile business unit continues to benefit from evolving mobile systems architectures that steadily increase memory density requirements at all product levels.

Demand in the quarter moved toward the high-end and value segments, both of which continue to show rapid growth in memory content.

We started to see seasonally soft demand, in line with our expectations, towards the end of the quarter, which we expect to continue through fiscal Q2.

Bit shipments of eMCP were down 14%, driven by relative softness in the mid-range handset market in China.

We are encouraged by strengthening signs in the higher-value markets.

Demand remains strong for discrete package-on-package low power DDR4, and higher-density eMCPs.

We will be completing a number of LP4 20-nanometer tier 1 OEM qualifications this quarter, and expect LP4 volume to surpass LP3 by fiscal Q3.

The embedded business unit posted fiscal Q1 revenues of $479 million, slightly up from the previous quarter.

Non-GAAP operating margin increased to 24%, which is a 2% improvement from the previous quarter, driven by better overall cost, and growth in the automotive segment.

Automotive revenue increased 5% quarter over quarter and 12% year over year.

These results were driven by solid growth in DRAM and eMMC in applications that include infotainment, instrument cluster, and advanced driver assistance systems.

We recently announced our XTRMFlash, a new NOR flash solution with an octal sequential interface that boasts industry-leading read throughputs, with ultra fast random access times.

We also continued to make good progress in next generation design wins with key automotive customers in Europe and in Asia.

Following a strong Q4 FY15, our industrial and multi-market business declined, primarily due to reductions in NOR volumes.

We launched our first SSD, the M500IT, targeted for industrial customers in the quarter, and we are making positive strides with DDR4 validations and low-power DRAM design wins.

Our consumer and connected home revenue increased 10% quarter over quarter, with significant increases in unit volume demand for DRAM, partially offset by pricing declines.

We anticipate continued share increases in DRAM.

Our MCPs, NOR, eMLC, SPI NAND, and high-endurance eMMCs provide a strong baseline portfolio, in addition to DRAM and low-power DRAM products in the consumer and connected home market.

Key trends include the growth of wearables, cloud-based DVR, and instant-on applications, including graphical [man-to-man] interfaces in multi-function printers and home automation products.

I'd like to close with a few updates on our operations and technology deployment activities.

As is evidenced from my comment about prior design wins and qualifications, Micron remains on track to our conversion plan and yield targets for both the 20-nanometer DRAM and 3D NAND technologies.

We continue to expect 20-nanometer to represent more than half of our DRAM output in the May quarter, and 3D NAND is on track to be a majority of our NAND output by the end of calendar 2016.

Our 1X DRAM and Gen 2 3D NAND technologies are also progressing well in R&D, and we are focused on transferring the technology to production fabs before the end of FY16 for the production ramp beginning in FY17.

We are also very excited about the opportunity to simplify our operations and business model, as a result of the announced acquisition of Inotera.

The fab will be 100% converted to our 20-nanometer technology by the time we expect to close the deal in mid-2016, helping drive significant cost reductions for Micron thereafter.

In addition, we will increase our flexibility to drive capital investment decisions, as well as product and technology mix going forward.

Now, to continue our commentary on Q1 results and Q2 guidance, I will turn the call over to Ernie.

Thanks, Mark.

Consistent with the direction that we shared last quarter, commentary around the P&L will focus on our non-GAAP results.

Please refer to the non-GAAP reconciliation slides posted on our website.

As Mark Durcan noted earlier, revenue for the first quarter was $3.35 billion, coming in at the low end of our guided range.

Overall, our revenues were impacted by declining pricing, particularly in the PC DRAM segment, partially offset by volume increases in both the DRAM and non-volatile trade segments.

Gross margin ended the quarter at 25.3%, consistent with our guidance, and non-GAAP net income for the first quarter was $249 million or $0.24 per share, slightly above the midpoint of our guided range.

During the quarter, we benefited from a better-than-anticipated tax provision, as well as favorable results from our equity method investments, offset by lower-than-expected operating income.

As a reminder, Micron includes both amortization of acquisition intangibles and stock compensation expense in our non-GAAP reporting.

Taken together, these two items represent an additional $0.04 per share for the recently completed quarter.

Now let's look at the results by product line.

DRAM revenue decreased approximately 10% compared to the fourth quarter of FY15, primarily as a result of lower average selling prices.

During the quarter, we saw further market adoption of DDR4 DRAM products in both mobile and non-mobile segments.

DRAM gross margin was in the upper 20% range, lower than our previous quarter, as a result of decreases in average selling prices that outpaced decreases in per-bit costs.

Our non-volatile trade revenue decreased slightly compared to the fourth quarter of 2015, due to decreased average selling prices that outpaced increases in sales volume.

Gross margin remained relatively flat in the low 20% range, as decreases in per-bit costs offset selling price changes.

Non-GAAP operating expenses for the quarter came in at approximately $600 million, in line with the midpoint of our guided range.

The Company generated operating cash flow of approximately $1.1 billion during the first quarter, and we ended the quarter with cash and marketable investments of approximately $5.4 billion.

Expenditures for PP&E in the first quarter were $1 billion, and we continue to expect FY16 capital expenditures in the $5.3 billion to $5.8 billion range, with expected third-party contributions of between $300 million and $800 million.

During the quarter, we repurchased $57 million in face value of convertible notes for $94 million, and approximately 7 million shares of our common stock for $126 million.

Moving now to our second fiscal quarter guidance, on a non-GAAP basis, we expect the following: consolidated revenue in the range of $2.9 billion to $3.2 billion; gross margin in the range of 17.5% to 20%; operating expenses between $565 million and $620 million; operating income ranging between a loss of $60 million and income of $20 million; and an EPS range between a loss of $0.12 per share and a loss of $0.05 per share, based on 1.030 billion diluted shares.

As we've discussed on the call, we intend to acquire the remaining interest in Inotera not owned by Micron.

This transaction will result in the full consolidation of Inotera into Micron's financial statements after closing of the acquisition, which is expected to occur mid-calendar-year 2016.

I'd like to spend a few moments reviewing key aspects of this important transaction.

First, we expect the acquisition to be immediately accretive at closing.

Second, and equally important, we expect to generate significant incremental operating cash flow.

As a point of reference, under the margin sharing structure which commences at the beginning of calendar 2016, we would expect to realize approximately 25% of the total operating cash flow associated with the output from Inotera.

After closing, we will receive the full benefit of this cash flow.

Over the last 12 months, this would have generated an approximate $1.4 billion of incremental operating cash flow for the Company.

Finally, we expect future cash flows from the Inotera output to be well above the capital expenditures required to fund their technology advancements.

Based on current market conditions, Inotera's operations should, on average, generate north of $600 million of incremental free cash flow per year for Micron.

Micron plans to fund the acquisition of the remaining Inotera interest with approximately $2.5 billion of debt sourced in Taiwan, at an expected interest rate of around 3%.

In addition, we have the option to finance up to $1 billion worth with Micron stock sold to Nanya, and we will fund the remaining $500 million with cash from our balance sheet.

Separately, we have entered into agreements granting Nanya an option to license two future DRAM technology nodes, continuing our strategic relationship.

These license agreements may generate a future royalty stream for Micron, in addition to a small equity ownership in Nanya, with timing dependent on the technology deployment.

At the earliest, we would expect these benefits to commence in calendar 2017.

The license is non-transferable, limited to a specific capacity footprint, and terminates upon change of control of Nanya.

Now I'll turn the call back over to Mark Durcan.

Thank you, Ernie.

As many of you know, Kipp Bedard will be transferring out of the investor relations leadership role over the next few weeks, so I wanted to take just a minute today to thank him for all his contributions to the team over the last 32 years.

Kipp has not only been a great leader of Investor Relations for Micron, but a selfless team member, whose contributions internally through the years rival his well-recognized excellence externally.

I've always been able to count on Kipp -- Kipp's honesty and thoughtful input on all manner of issues facing the Company.

And in good times and bad, he is and always has been all about Micron and the team.

I think it's fair to say that Micron would not be the Company it is today without Kipp.

So, we will truly miss our good friend.

Mark, thank you very much for the kind words.

It's been my honor and privilege to represent you and the entire Micron team into the public markets over the past three decades.

For that opportunity and experience, I am truly grateful.

Thank you all for a very exciting and fulfilling career.

Thank you, Kipp.

Let me finish on this topic by saying, we're very fortunate to have a very capable Ivan Donaldson in house and ready to step into the lead IR role.

I think most on the call already know Ivan, and that he too has a thorough understanding of the Company, the industry, along with the skills to excel in this role.

I certainly expect that as he steps in, he will hit the ground running; and though Kipp is leaving behind some very big shoes to fill, Ivan's preparation and dedication make him an easy choice for this role.

To summarize our call today, we're in the midst of some challenging market conditions, but we remain confident in the long-term health of the industry, and in our strategy to succeed.

This confidence drives our long-term investment perspective, and we expect to see stronger bit growth and cost reductions starting in the second half of the year.

Operationally, we're laser focused on execution related to the deployment of leading-edge DRAM and 3D NAND, as well as advanced controller development.

Operator, we're ready for Q&A.

(Operator Instructions)

Our first question comes from the line of Kevin Cassidy from Stifel.

Your question, please.

Thanks for taking my question.

Gross margins coming down again quarter-over-quarter, even with -- you point to transition to 20-nanometer and DDR4.

If you could help us with some of the moving parts, gross margins for those products, 20-nanometer?

How much lower costs are you expecting as that becomes 100% of the Inotera output.

And also, what is DDR4 versus DDR3 costs and gross margins?

So first of all, I think it's important to recognize that although Inotera's output will be -- the wafer starts will be about 80% by year end, it takes a while to move those through the overall system and deliver them into the marketplace.

And so you wouldn't get the full benefit of that 20-nanometer cost reduction as we move into our fiscal Q2.

In terms of overall -- other overall factors, there is clearly continued pressure in PC DRAM.

And as we have talked about for some time, 20-nanometer doesn't get you to lower costs immediately, whether from Inotera or out of any other fab as a result of startup costs, and getting those ramped to scale.

And then finally, DDR4 costs, which is getting to be an increasingly important part of the mix, are clearly a little bit higher than DDR3, and that creates some pressure, as well.

So those are the general characteristics of the margin trends there.

Okay.

And just as a follow-up, also on NAND flash, there was a conversion to TLC, or can you say what percentage of your output was TLC versus MLC, and is that expected to help gross margins going forward?

Our TLC output is about 10%, plus or minus.

We have more capability for upside volume, if we so chose.

That portion of the market has been super competitive, both in components and in TLC-based client SSDs.

So we've moved some of our capacity that we initially targeted to TLC toward some higher-value sockets, which really has allowed us to insulate against pricing pressure a little bit better than the market.

I think longer term, though, fair to say that as we ramp 3D, we would expect that penetration to begin to increase again.

Okay.

Great.

And all the best to Kipp, and congratulations to Ivan.

Thanks, Kevin.

Thank you.

Our next question comes from the line of Harlan Sur from JPMorgan.

Your question, please.

Thanks for taking my question.

Assuming another year of relatively muted demand trends in DRAM in 2016, does it make sense to accelerate your move to 1X DRAM technology to drive acceleration in your cost curve?

And the same question on potentially accelerating the move to TLC and 3D NAND transitions within your NAND business, because it just seems like the team is continuously fighting this uphill battle on the cost front.

We have said for some time that really, it's absolutely imperative that we not necessarily have an identical technology profile to others in the market, but certainly narrow the gap relative to the deployed advanced technology.

That enables a couple things.

One, it makes sure we have timely introduction of the right products for our customers.

But additionally, it makes sure that we don't have a situation in the marketplace that competitors can take advantage of, and drive increased market share, due to a different profile relative to manufacturing efficiency.

So yes, we think it's strategically important that we narrow this gap.

We're focused on it, and we believe that with the demand growth that we see in the marketplace, it can absorb that incremental capacity as we make those transitions, as long as others in the marketplace don't add too many incremental new wafers.

Thanks for that.

And then a better mix of enterprise and data center SSD I think would drive a nice offset to the price aggressiveness you're currently seeing on the client side.

So if you could just give us an update on your enterprise SSD progress.

I know you talked about rolling out your data center M500 series.

You also talked about rolling out your 600 series with Seagate.

How big is enterprise flash as a percent of your total NAND business, and can you just give us any view on the growth outlook for enterprise looking into calendar year 2016?

Let me set the baseline from where we sit today.

Enterprise is relatively small, but the growth trajectory is pretty big.

The three areas of investment we're driving today are continued focus on enterprise level controller and firmware.

Obviously driving the Seagate product line to market in the SaaS category, and we're also investing very heavily in 3D NAND drives for enterprise, which we will be sampling soon.

The final piece for us is, I mentioned briefly my comments, our components that we market to other enterprise players are probably the highest margin products we have in NAND, because of the quality of NAND we manufacture.

So when you combine all that out, we're pretty bullish about enterprise going forward, and we will continue to invest in such.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Monika Garg from Pacific Crest.

Your question, please.

Thanks for taking my question.

I just want to delve deeper into the margin guidance for next quarter.

The gross margins are guided like 600 to 700 bips lower Q over Q. Maybe could you walk on the details, is it mainly in the DRAM side the margins are going lower or in the NAND side?

I would say it's more oriented on the DRAM side for all the reasons we've talked about on the course of the call.

We expect NAND to be relatively similar to what we're seeing this quarter, maybe a little bit sequentially lower, but DRAM is where the most significant movement is.

And in the DRAM is it mainly PC side, or are you seeing that going now moving into mobile and server as well?

There's a continuum of performance, and as you might imagine, if you look at things that are closest to PCs, the enterprise space, maybe some of the cloud spaces that look a little bit more like PCs, those may be subject to some increasing price pressure as well.

If you go to the mobile side, which is a little bit more specialized, that tends to be buffered somewhat.

But generally speaking, as we talked about on the call, you see pressure throughout that whole sector.

Thanks.

That's all from me.

Thank you.

Our next question comes from the line of John Pitzer from Credit Suisse.

Your question, please.

Yes, good afternoon, guys.

My congratulations to Kipp, and much thanks.

Ernie, I guess from my perspective, I'd like to go back to the gross margin guidance for the February quarter.

I think you did a good job talking about the puts and takes.

Do you think that the February quarter represents the maximum quarter of pain on the cost side, and it improved there?

Can you help me understand, as you look at 30-nanometer/25-nanometer DDR3 to 20-nanometer DDR4, at equivalent yield, what's the cost-down you would expect in that transition?

I do think from a cost perspective, that we've been talking for some time about the fact that the first couple quarters of this fiscal year were going to be the most challenging for us, as we got everything lined up relative to 20-nanometer, and also on the NAND side.

I think that without certainly providing guidance beyond Q2, I would say our expectation is that with increased bits out, we're going to see cost-down that will be very helpful to us in the back half of the year.

DDR4 has a bigger die size than DDR3 but the shrink gets you closer to parity, and also the production of 8-gig is also a big cost driver.

So it's really hard to say specifically, but you're certainly in the same zip code, based on that comparison.

That's helpful.

Mark, maybe as my follow-on, relative to the implied guidance for February, it doesn't look like Inotera would be accretive on February numbers.

And maybe Ernie answered the question already.

Is the expectation by the time the Inotera acquisition closes that some of these cost headwinds will become tailwinds, and hence, this is an accretive acquisition?

Or can you help me walk through that dynamic?

I think -- and maybe Ernie wants to comment on this too, John, but I think the key point is that as we get a little further into the year, that 20-nanometer transition is driving some pretty significant improvements at Inotera, and we expect it to be quite accretive to us right out of the chute, once we close.

The only thing I'd add to that is the bulk of the CapEx spend for their 2016 will already be completed.

So certainly from a cash flow perspective, there's a lot of leverage there as well.

Thanks.

Thank you.

Our next question comes from the line of Daniel Amir from Ladenburg.

Your question, please.

Thanks a lot, and good luck Kipp, in your next life.

Couple questions here with regards to the eMCP and the client SSD.

Looks like those were areas, a bit of weakness here this quarter.

Can you give a bit more clarity, where we stand at this point in the quarter and specifically the eMCP, given that bit shipments were down 14%.

Is this an area that you're going to still be focusing on, as well?

Thanks.

Sure.

On the eMCP category, there's really two dynamics going on, one of which is some market softness in mobile, which we identified earlier in my comments.

The second piece is that as is consistent with some other DRAM segments, the 20-nanometer transition puts us in a position where this was a heavy focus on qualifying at major OEM customers.

Having said that, there's also one area of mix issues that relates to the high end and low end doing better than the mid-range segment of the market.

So you combine all those three together, and there's pressure on eMCP demand.

We're continuing to feel that as a place for our product focus, but, again, weighing that against mix and other opportunities.

And the client SSD side?

That for us, as I mentioned earlier, we saw very heavy competition in client SSDs, driven by low-cost TLC products, both in the consumer and OEM market.

And we chose to move some of our capacity out of that market to higher value sockets, and that allowed us to get kind of the most out of our capacity.

And is that a trend that you're continuing this quarter, as well?

I would say that without forecasting, it's something that, yes, we see pretty consistent quarter to date and we would -- as Mark commented, we're going to watch that while we position our 3D NAND TLC out longer term because of the performance and cost advantages there.

But today, we see other opportunities, as I said, for our NAND capacity, more high performing MLC capacity, that allows us to make that shift.

Great.

Thanks a lot.

Thank you.

Our next question comes from the line of Steven Fox from Cross Research.

Your question, please.

Thanks.

Just a follow-up on those details.

I was wondering if you could just step back and if we look big picture around some of your comments about the PC market as a whole stabilizing, what gives you sort of confidence on that happening over the next several months?

And then similarly, given some of the weakness you're seeing in the mid-range, especially in China mobile market, again, why do you think that improves as you get further into next calendar year?

Thanks a lot.

I'm not sure we sent forecasts out on either one of those, as stated.

We think that the PC market, the signs are that channel inventories are leveling off a little bit better.

Obviously, the inventory was low.

If you look at it more specifically to our business, DRAM inventory in the channel, with the exception of one player, one larger player, DRAM inventory across our channel is pretty low.

The demand seems to be flowing through, and replenishment of inventory seems to be a dynamic in the PC space.

So that's where -- that's behind our view of the world in terms of PC shipments.

If you look at the data, while not stellar growth, certainly better than the first half of calendar year 2015.

On the mobile side, we still believe that this same dynamic goes on with smartphones.

Inventory is relatively low, and the other side, if you look at the configurations that are coming out for holiday and beyond, the memory content per unit is going up nicely in our favor.

So it's all about -- for the mobile phone place market segment, it's really all about what's the weighted average content, and we still see, not withstanding some of the weakness in the middle, pretty reasonable growth in aggregate for the smartphone business.

Great.

That's very helpful.

Then just a quick follow-up.

Similarly on just the enterprise side, I think you talk about a little bit of competitiveness.

You're not the only ones to talk about that on SSDs in the last couple months.

Is there a reason to believe that that is temporary in nature from a demand side, putting aside some of the supply issues?

I think overall, the penetration in enterprise is so low that we think it's likely that tends to be a better market going forward, and we're going to invest as such.

Some of our competitiveness comments are really more around value segment, consumer and channel SSD type products, that are really driven by a cost approach and not a performance approach.

Got it.

Thanks so much.

Thank you.

Our next question comes from the line of Doug Freedman from Sterne Agee CRT.

A lot of questions have been asked on the gross margin side, but if I could get a little bit of color around the revenue.

We're looking at a revenue decline quarter-on-quarter of 9% at the midpoint.

What are the piece that's are driving that?

I'm looking at the bit growth side here and just struggling to come up to see -- to align your longer-term bit growth outlook with what's going on in the near term.

So if you could help me understand, what are the pieces to top line, that would be helpful.

So I don't think it's too dissimilar a story from the discussion we had about margins, which is, we've talked about the fact that for the first couple quarters of this fiscal year, our bit growth is going to be limited.

Now, we are growing bits.

However, in the face of some of the pricing pressures that we've seen in PCs or PC DRAM space, et cetera, that is not enough to overcome -- the bit growth doesn't quite overcome the pricing and that leads to the revenue circumstances.

As you heard both Mark and Mark speak about today, in terms of those things that are going to drive our bit growth in the second half of this fiscal year and into FY17.

Those are still well on track, which would be the full deployment of 20-nanometer throughout the DRAM space, as well as the 3D NAND conversion.

Doug, let me just add.

As we do this substantial ramp of 20-nanometer, we have a lot of new products to qualify as well.

Getting complete certainty as to exactly when all the products are going to qualify, and when we will ship that product is difficult, although we have complete confidence that we will qualify them, and that they will be delivered.

So there's that dynamic, and that aspect as well, which is associated with ramping a lot of new products simultaneously.

I guess for my follow-up, if I could, a little bit of a two-parter.

I just want to make sure I understood.

You said your DRAM bit growth would be above industry average of low 20s.

Was that for the calendar year or your fiscal year?

And then when I look at these transitions that you're going through, like 20-nanometer, one of the things I think investors struggle with is that your results tend to -- we're seeing a much greater oscillation at Micron, in the financial performance, than we do in your peers over at Samsung, yet they did through these same transitions.

Why is it that we're seeing such a greater impact to the financials here than we see at your peers?

A two-part question.

Relative to the first part, yes, it's a calendar reference, and it's weighted in the back half of the calendar year.

Although we've told you that fiscal Q3 should be a significant step up.

Relative to the impact on financial performance, I'm going to let Mark comment on that in just a second.

But I would make the point that this just reinforces why we need to accelerate the introduction of these tech nodes, because we have fixed operating expenses, and in an environment where we're generating less gross margin because we're deploying less advanced technology, that takes a bigger bite out of the net picture.

Mark, do you want to --?

One other comment.

We've communicated all along for many years that as a percentage of our capacity, we sell and market our products into much higher value segments.

If you look at ASP per gigabit in DRAM for example, we've been a market leader in that for as long as I can remember.

And when you're not in that model, meaning you're in ramp stage, and you're driving these products into lower value segments, the volatility in pricing will have a much bigger impact on margins during that time phase.

So Doug, in summary, we look at all of this as opportunity, and certainly we think we can do better and we intend to do better.

Great.

Thanks, guys, and congratulations, Kipp, on a very long-lasting career.

Thanks, Doug.

Thank you.

Our next question comes from the line of Timothy Arcuri from Cowen and Company.

Your question, please.

Thanks a lot.

I had two.

The first question is on the Dalian announcement from Intel.

I think that happened on October 20, so you really haven't talked publicly too much since that and there's still a bit of confusion out there.

We understand that you're basically ramping the fab there, and for all intents and purposes, you're operating it.

My first question is, do you have any rights to the output of the fab, and do you have the option to invest in the fab?

And then I had a follow-up.

Thanks.

So Tim, we are not operating the fab.

We are not ramping the fab.

Intel is our partner, and we are helping facilitate the deployment of the technology to that fab.

So that relationship remains healthy.

And we would expect that as Intel progresses with their ramp of the manufacturing technology there, at some point, we will have more discussions about whether it makes sense for increased collaboration at that site.

We're not involved today.

Okay.

Thanks for that, Mark.

And then the second question, I think John asked a question previously about cost and when do the headwinds start to wane after this current quarter.

And it sounds like they do, and you should get a little bit better PC pricing environment per -- I think, Mark, your comments as well.

My question is, is it fair to say that the February quarter is the bottom in gross margin, if you assume those two factors?

Thanks.

Well, yes, again, we've got to stay away or we are going to stay away from projecting ASPs for you.

But in terms of our internal operational leverage, we think things get a lot better in Q3.

Thanks a lot.

Thank you.

Our next question comes from the line of Vijay Rakesh from Mizuho.

Your question, please.

Kipp, thanks for all the help, and Ivan, congratulations.

I had a question on Inotera here.

What percent of the 20-nanometer output at Inotera's DDR3 versus DDR4 today?

At 20-nanometer also, is the DDR4 cost still higher than DDR3?

I don't have the DDR3/DDR4 mix by fab, and I think we want to stay away from giving you that fab specific information anyway.

The second part of the question was DDR4 crossover?

Yes, is the 20-nanometer DDR4 cost higher than DDR3?

20-nanometer DDR4 cost --

We commented on that a little bit earlier.

Not at 8-gigabit, but we would expect that as we ramp up and cross over, that we will be at parity and actually see some reductions.

But at present, it's fair to think about it as a headwind for us.

Got it.

And on the 3D NAND side, I know you mentioned second Gen 3D NAND in second-half 2016.

That is a 64 layer 3D NAND, and just as a background, what percent of output today is on 3D?

I know you said you shipped some here.

We haven't said what our Gen 2 technology looks like exactly, but you can count on it being a significant improvement in both bit density and cost.

And sorry, the second part of the question?

Percent of 3D?

Percent of 3D.

It's relatively small today, but ramping fairly aggressively.

And again, as we get into the second half of next year, we'll actually be into the new fab expansion as well.

So it will really take off then.

Got it.

Thanks a lot.

Appreciate it.

Thank you.

Our next question comes from the line of Hans Mosesmann from Raymond James.

Your question, please.

Question on 3D XPoint.

Can you give us a little more flavor?

I forget if you actually even commented so far on the call regarding this.

But can you give us a sense on the ramp, and is there a change in the nuance of the opportunity, being used as main memory or as storage?

Thanks.

Well, I think it targets both main memory and storage applications over time.

Probably a higher value in the near memory than in the storage applications, but could be targeted at both.

We're really more in an enablement mode as opposed to a significant production ramp today, but we think the revenue does become significant out in 2017 and more so in 2018.

Okay.

Great.

Kipp, we're going to miss you.

Good luck.

Thanks.

Thank you.

Our next question comes from the line of Mark Newman from Bernstein.

Your question, please.

Thanks a lot.

I wanted to ask a question again on 20-nanometer ramp.

So it seems like, from the comments, that schedule is ramping pretty much in line with what you were saying, about half of production within the May quarter.

But based on this gross margin guidance again, it's coming down quite a lot.

It seems like the cost isn't quite performing, at least not in FQ2, yet.

So I'm wondering, is this because of poorer yields than expected on 20-nanometer?

Is there any difference in the yields on 20-nanometer than your expectations versus previous nodes, or is it just that the 20-nanometer that you're starting to produce, which I assume should be a fairly significant portion in FQ2 is really being held more in inventory, and so it's not really impacting the top line and the cost?

There is a dynamic that as you ramp new technologies you have to get those products qualified.

So they don't necessarily always flow out to the customer quite as quickly.

So there is an inventory dynamic that you're referencing.

I think the bigger issue is that when you're ramping new technologies, it just takes a while to get the tools ramped and loaded, and get that output out.

And the cost reductions do come.

They just don't come quite as quickly as people anticipate.

We are on track or slightly ahead of where we expected to be, from a yield perspective.

So everything is progressing nicely there.

Obviously ASPs are a lot lower than we thought they were going to be.

So as we look forward to the back end of fiscal year, so if you look over to FQ3, the May quarter, then we should see a much -- we should see some of this cost decline finally happen?

I think that's probably fair to assume.

And can we assume that the previous guidance for the cost decline from 20-nanometer that you guided us earlier is still intact, but just more back end of the fiscal year, and rather than the front end?

Yes, yes.

I think we've said for quite a while, Mark, that fiscal Q3 is when you should really start to see the impact of 20-nanometer ramp and all the guidance we've given over previous quarters I think is still on track and intact.

Okay.

Thanks very much and special thanks to Kipp, and congrats to Ivan.

Thanks, Mark.

Thank you.

Our next question comes from the line of Ian Ing from MKM Partners.

Your question, please.

Yes, thanks.

Could you talk about your assumptions on keeping mobile DRAM in supply/demand balance next year?

There's a lot of unit variability at the big OEMs that, given how that plays out, would you ever consider not trying to overship the industry?

We'll certainly look at that dynamic.

Our view of the world is that even with that variability that you're projecting, there's a content increase per device that we feel comfortable mutes that out, and so we think over the long run, mobile is pretty solid.

And again, we're taking a look at all market segments, and there's networking we think will continue to be a good market for us.

Hyperscale servers, as well.

So there's some balancing we'll do in general, but all in all, we think mobile's a good place over the long run.

Okay.

Thanks.

And then in the DRAM server market, you talked about some pricing pressure.

Could you talk more about the sources of demand in the server side, the next few quarters?

There are some mixed signals out there.

You've got some suppliers talking about enterprise being stronger than cloud customers.

Any workloads that you're excited about the next few quarters?

All in all, I'd say the enterprise market of the two appears to be more favorable for us.

Data center is a little bit more commoditized.

Some of the data center material sometimes can be consumed with high end PC grade material.

But overall, we think that the projection for the market and servers gets us into a pretty good growth environment, and as we look at that server, again, like mobile, will be a good market for us.

We're not -- we don't think it's a challenge for us, as far as adding growth in the bits to that segment.

Thanks.

And Kipp, congratulations, and thanks for helping us all out in your career, thanks.

Thank you.

Operator, we've got time for just one more question, please.

Certainly.

Our final question comes from the line of Rajvindra Gill, from Needham & Company.

Your question, please.

Thanks for taking my questions.

There have been some recent reports that a major competitor of yours could have 18-nanometer DRAM by the second quarter, calendar second quarter of next year.

Given the transition to 20-nanometer this year and next year, how do you think this impacts your competitive position in the overall market from a supply/demand perspective?

That's a relatively muted step from 20 to 18, and relative to that particular competitor, we think there are also some architectural changes that will cost them some array efficiency.

So we believe that, notwithstanding the fact that other competitors will continue to migrate their technology at a more muted pace on a go forward basis, we will continue to narrow the gap.

Just switching gears to the Inotera.

How does the Inotera buyout affect your CapEx plans, and will the Company plan to utilize Inotera's cash flow for non-DRAM products such as 3D XPoint?

Is that also one of the purposes of it as well?

We talked about in the announcement that was on average you'd expect to see Inotera add somewhere around $800 million a year to our CapEx that we previously discussed, and the reality is cash is fungible.

So it will add cash flow into the Company, and the Company will direct that cash flow where it sees best.

So the idea of specifically saying that cash flow would be used for 3D XPoint is sort of a moot issue.

Unfortunately we're out of time today, so we'd like to end the call now and thank everyone for their participation.

If you would 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, everyone.

Thank you.

Thank you.

This concludes today's Micron Technology first-quarter 2016 financial release conference call.

You may now disconnect.