Micron Technology, Inc. F1Q09 (Qtr End 12/04/08) Earnings Call Transcript

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 |  About: Micron Technology Inc. (MU)
by: SA Transcripts

Micron Technology, Inc. (NASDAQ:MU)

Q1 2009 Earnings Call

December 23, 2008 4:30 pm ET

Executives

Kipp Bedard – VP IR

Ronald Foster - CFO

Mark Adams – VP Worldwide Sales

Mark Durcan – President & COO

Steven Appleton – CEO

Analysts

Betsy Van Hees – Caris & Company

Glen Yeung – Citigroup

Tim Luke – Barclays Capital

Shawn Webster - JPMorgan

James Covello - Goldman Sachs

David Wong - Wachovia Capital Markets

Manish Goyal - Kraft Investments

Daniel Amir - Lazard Capital Markets

Kevin Cassidy – Thomas Weisel Partners

[Daniel Barrenbaum – Unspecified Company]

Hans Mosesmann – Raymond James

Bob Gujavarty - Deutsche Bank Securities

Unspecified Analyst

Gary Hsueh – Oppenheimer & Co.

Unspecified Analyst

Operator

Welcome everyone to Micron Technology’s first quarter 2009 financial release conference call. (Operator Instructions) It is now my pleasure to turn the call over to your host, Kipp Bedard; sir, you may begin your conference.

Kipp Bedard

Welcome to Micron Technology’s first quarter 2009 financial release conference call. On the call today is Steve Appleton, Chairman and CEO; Mark Durcan, President and Chief Operating Officer; Ronald Foster, Chief Financial Officer and Vice President of Finance; and Mark Adams, Vice President of Worldwide Sales.

This conference call including audio and slides is also available on Micron’s website at www.micron.com. If you have not had an opportunity to review the first quarter 2009 financial press release, it is also available on our website at www.micron.com.

Our call will be approximately 60 minutes in length. There will be an audio replay of this call, accessed by dialing 706-645-9291, with the confirmation code of 76127953. This replay will run through Tuesday, December 30, 2008, at 5:30 pm Mountain time.

A webcast replay will be available on the company’s website until December 23, 2009. We encourage you to monitor our website at www.micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will be attending.

Please note the following Safe Harbor statement. During the course of this meeting we may make projections or other forward-looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially.

We refer you to the documents the company files on the consolidated basis from time to time with the Securities & 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 web site.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after the date of the presentation to conform these statements to actual results.

I would like to now turn the call over to Mr. Ron Foster.

Ronald Foster

Thanks Kipp. For those listeners who haven’t seen our press release, which is available on our website and includes a reconciliation of the non-GAAP numbers discussed on this call, I will briefly review the summary financial results for the first quarter, which ended December 4.

Revenue for the first quarter decreased 3% compared to the prior quarter and gross margin declined to minus 32% as megabit DRAM and NAND ASP declines outpaced cost reductions. Memory revenues included $36 million in royalty and technology fees.

The sharp declines in memory ASPs during the quarter triggered a $369 million non-cash write-down of memory inventories to estimated market value. Including this write-down the company recorded a net loss of $760 million or $0.91 per diluted share for the quarter compared to a loss of $344 million or $0.45 per share in the prior quarter.

In the DRAM space quarterly ASPs declined by an unusually high 34% while our cost per gigabit declined by 12%. These DRAM cost reductions results came in at an aggressive end of our forecast due to successful process node migrations and manufacturing efficiencies.

Fiscal Q2 forecast is for DRAM cost reductions to be flat and bit production will decline as a result of factory production slowdowns over the holiday season.

In NAND average selling prices also declined significantly by 24% while our cost per gigabyte declined by 14%. Successful ramp of our new 34-nanometer MLC NAND product helped us achieve the cost reduction. Now more then half our [inaudible] are produced on the 34-nanometer process node and we will begin to realize increasing benefits as we come down the cost curve after Q2.

NAND bit production in the second quarter is forecasted decline as a result of factory slowdowns. However continuing cost reductions and the 34-nanometer node transition will improve cost per gigabyte despite the factory slowdowns.

Energy and raw materials were flat quarter to quarter with consistent positive gross margin performance. Progress in reducing our operating cost structure continued in the first quarter. Despite a 14-week quarter we were pleased with our SG&A expense controls. They were $102 million, a decline of 5% in absolute terms versus last quarter due to the company’s cost cutting and restructuring activities.

R&D expenses of $178 million also came in below our projections for the quarter due to ongoing cost management efforts and progress moving key development products into production. We anticipate SG&A expenses to be in the $100 million to $105 million range in the second quarter and R&D expenses to be in the $165 million to $170 million range during the same timeframe.

We will continue to proactively manage our cost structure to enable Micron to remain competitive in this environment.

Also of note, Micron’s net loss includes a restructuring credit which incorporates two major items. First we recorded restructuring costs of $22 million related to employee severance. Second we recorded an $88 million credit for termination of the Boise supply agreement related to our joint venture with Intel.

Given the challenging market environment Micron has undertaken additional cost savings measures to enable us to increase our competitiveness. These actions include reductions in executive and employee salaries, and elimination of bonuses, a continued hiring freeze, and reduction of other discretionary costs such as outside services, travel, and overtime.

These actions are anticipated to save an additional $200 million of manufacturing and operating cash costs in the remainder of 2009.

Also in Q1 headcount declined nearly 7% to 21,888 quarter to quarter. We ended the quarter with just over $1 billion in cash and short-term investments. Operating cash flow contributed $359 million in the first quarter and increased to 48% in the prior quarter. This increase was realized primarily through improved working capital management in inventory and trade accounts receivable.

During the first quarter Micron received strategic financing of $285 million with favorable terms as part of the $400 million acquisition of Qimonda’s 35.6% stake in Inotera which was completed on November 26.

Through this acquisition Micron will receive 50% of wafers produced by Inotera once fully transitioned. This will represent capacity of over 60,300 mm wafers per month for Micron. Going forward approximately 36% of Inotera’s net income or loss will be reflected as non-cash item on Micron’s financial statements in other non-operating income or expense.

In other financing activity during the quarter Micro paid off debt including that borrowed in Japan of $101 million. Total debt increased by $140 million to $2.87 billion in the first quarter.

Capital expenditures for the first quarter totaled $334 million, down significantly from $759 million in the fourth quarter of 2008. Anticipated capital expenditures for fiscal 2009 have been revised downward to approximately $650 million to $750 million from last quarter’s FY09 guidance of $1 billion to $1.3 billion.

Micron and Intel have agreed to delay the IMFS fab build out in Singapore until market conditions improve. In addition the capital contributions previously committed to our Maya joint venture with Nan Ya have been deferred. We anticipate that the Maya joint venture will be folded into Inotera in the near future. Inotera is a publically traded company that manages its capital requirements separately from Micron. Micron has not yet made any capital commitments associated with Inotera.

I’ll close there and turn the commentary over to Mark Adams.

Mark Adams

Thanks Ronald, despite continued industry oversupply and the global economic downturn Micron was able to drive DRAM bit shipment growth of 35% and NAND bit shipment growth of 40%.

In these tough market conditions we have found that our key customers are looking for Micron to increasingly support their memory needs. While PC desktop systems showed signs of weakening demand going into the holidays the notebook segment continued to show positive growth.

Memory content per system was 2 gigabyte in Q1. In addition we are seeing a growing demand for our DDR3 product with shipment growth of 96% quarter over quarter. Clearly Micron is in strong competitive position as a leader in DDR3 technology.

Our server and networking shipments were flat quarter over quarter. We remain optimistic that we can increase our leadership position in these segments due to competitive reduction in output for these products.

The mobile segment continues to be a bright spot for Micron. Shipments of MCPs, multi [chip] packages, were 1.9 million units, a dramatic increase quarter over quarter. We anticipate increasing density per unit in this category to drive growth for Micron in 2009.

Our product portfolio in mobile has evolved in the second half of 2008. Micron is in a unique position to drive bits into mobile handsets with MCPs, imbedded NAND technology, and mobile memory cards.

In Q1 2009 Micron began shipping our 34-nanometer 32-gigabit flash memory product in high volume production. As we enter calendar year 2009 Micron is in a cost leadership position which translates into a stronger operating performance from our NAND business.

On the DRAM technology front Micron recently launched our [50] nanometer product which boasts the smallest [inaudible] in the industry. Our customers and partners are excited about the [efficiencies] in this technology that will generate as we move forward into 2009.

During the last six months our Lexar business began shipment of two major retailers that are ranked in the top 10 in North America. Lexar is now solidly positioned in the number two position in the North American retail market space.

At a time where our channel competitors face severe challenges we continue to see a renewed confidence in Micron’s commitment to the retail channel at major customers worldwide with the Lexar and Crucial brands.

Lexar announced a number of industry leading performance products in photography, mobile, and gaming for the holiday season. In fact, the Lexar [Shoot and Sink] product was featured today on the CBS early morning show.

While the combination of industry oversupply and the overall global economic crisis continues to put pressure on Micron and our competition we feel confident of our position and strength in the eyes of our customers.

Our recent announcement regarding the acquisition of Inotera Capacity, further highlights that Micron can be a scale technology partner serving a broad array of market segments. As we enter 2009 we will continue to monitor the industry reductions and capital expenditures already in the mid-30s in 2008 and projected to be 18% to 20% in 2009.

With that we ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Betsy Van Hees – Caris & Company

Betsy Van Hees – Caris & Company

Could you give us a little bit of color in terms of fiscal Q2 what type of reductions we’re going to see in bit growth, bit supply.

Ronald Foster

Given the market conditions and the slowdown we already have in place throughout the holidays we want to try and stay away from precise bit guidance this quarter. We’re going to be pretty reactive on a go forward basis and see what plays out in the marketplace and I think throwing any guidance out there right now might be as likely to be misleading as helpful.

Betsy Van Hees – Caris & Company

When we’re looking at pricing can you give us from when your quarter started if DRAM ASPs were not to decline any further what type of price reductions we would see.

Mark Adams

It looks like we’re going to see, if nothing changed from here to the end of the quarter we’d be about down mid-teens on the DRAM side of the business and closer to down to high 20% mid 30% in NAND. That doesn’t factor in the last week of activity in pricing which has been quite favorable both in DRAM and NAND. We’re hesitant to make too much of a conclusion on the uptick in DRAM pricing and NAND over the last five business days or so but certainly positive about it and want to stay on top of it going into the post Christmas season.

Operator

Your next question comes from the line of Glen Yeung – Citigroup

Glen Yeung – Citigroup

I was wondering if you could talk about your expectations for bit supply growth on DRAM and NAND in fiscal 2009 and how it will compare to the industry.

Ronald Foster

Its similar to what Mark’s comments were about our production and our view on how we’ll react. You can imagine that the estimates for bit growth in calendar 2009 from the industry are wide as well. What we’ve seen out there so far expectations in DRAM in bit growth is as low as 20% maybe as high as 40%.

And NAND we’ve seen anywhere from about 70% bit growth up to about maybe potentially 100%.

Glen Yeung – Citigroup

Can you talk about inventories that you’re seeing in the channel currently and you talked a bit about being hesitant to make any comments on the recent movement in DRAM spot pricing but I guess if you can discuss what you see for any potential for increases in first half January.

Mark Adams

The inventory position in the channel is quite favorable both in DRAM and NAND and actually we think that’s very much connected the activity of last week in the spot market. The dramatic increase in pricing on both DRAM and NAND to us was a pretty good indicator that people have been pretty prudent in planning their inventory going into the holiday season and even managing it through all the way up to where we are today.

The big question mark becomes the demand profile that comes out of Christmas and the inventories at the resellers and the retailers after the Christmas season which will drive which way the price moves but again, I think the indication that we got as of last week is that the inventories are pretty light, very light on NAND and I would say that what we learned last week, equally light in the DRAM segment.

Operator

Your next question comes from the line of Tim Luke – Barclays Capital

Tim Luke – Barclays Capital

I was wondering if you could provide a bit of color on some of the factors that have contributed to the somewhat stronger then expected bit growth in the quarter that you had reported and I was wondering also if you could comment on how you perceive the potential for any actions in terms of further consolidation in the Taiwanese market in terms of DRAM.

Mark Adams

Relative to the cost improvement and I think there’s a number of factors but I wouldn’t want to downplay the efforts we’ve been making on just an operational cost to labor perspective and the controls we have over all of our manufacturing costs. Technology transitions have also done very well in the 34 nanometer, our NAND continues to move ahead smoothly with better then expected yields there and on the legacy 50-nm node and the transition to 68-nm on DRAM going well as well.

Steven Appleton

On consolidation I’ve said now for several months that the current environment is right for driving some type of activity around consolidations. Clearly there’s been a number of announcements around governments willing to help out the industry and I would say that although I think the initial interpretation of that might be to believe that that would essentially cancel any consolidation efforts, I don’t think that’s true at all.

I think that there’s still quite a desire among both the companies and probably some of these governmental entities that are involved in these discussions around providing funds to the [inaudible] and inject some working capital that there’s still a large interest there to try to help them.

It takes time. I don’t think anybody thinks that the next few months are going to be just awesome for the industry and as a result I think that all of the discussion around potential consolidation will continue. Obviously I’ve said before as well that Micron is continuing to look at it and see if there’s any opportunity for us to participate in that and so that’s where we’re at right now. I think clearly we have to get through this week to see, there’s not too much activity but I don’t, I’m not under the belief at all that consolidation goes away now that some of these governments have talked about stepping in and trying to help out the industry.

Tim Luke – Barclays Capital

With respect to the gross margin, its obviously been under significant pressure, can you give us what you think is the key elements of the roadmap to get that back into more favorable territory?

Steven Appleton

Well if you look at the gross margin, there’s a couple of different ways to look at it. One of them of course is with and without the [ARVs] charge and [ARV] makes the gross margin look pretty bad but that’s obviously based on a forecast going forward but, we’re pretty conservative and we just don’t really know what’s going to happen there but we want to do the formulas and run the model and then you have to put that in there.

The other impact on gross margin is really on the ASP cost side which I just mentioned the ASP forecast side that gets put back into the model, the other is on the cost side and I think as Mark Durcan described we’ll continue to make a lot of efforts on that and use the costs.

It’s a little bit of a mixed perception although its very helpful to have ASPs increase. It can improve our margin quarter by quarter if we can just get a little bit of stability in the pricing as opposed to what Ronald described which was, just the decreases in pricing of [inaudible] in terms of cost reductions and if we can just get some stability in the pricing itself or it doesn’t continue to decline at those kind of rates then we’ll start to build margin back in and that’s I think the way its been at least in the near-term and going forward.

Tim Luke – Barclays Capital

You cash balance went to around just $1 billion why do you feel comfortable maintaining that going forward and how do you expect that to trend?

Steven Appleton

I think in particular in the next quarter it will trend down but we have I think that Ronald mentioned our cash flow from operations was pretty positive in the quarter that we’ve just announced. We think that will decrease although I will say that we believe it will still remain positive for the quarter that we’re in and obviously we’ve been [dialing] the CapEx down. We’ve done lots of other things on the cost side so we’ll continue to be pretty diligent about making sure that we have a pretty good cash balance.

I would also say though that I think Ron’s team have done a great job. We can obviously operate the company on much, much less cash then that but we’re still going to remain pretty conservative in our approach and try to make sure that we maintain a pretty good balance.

Operator

Your next question comes from the line of Shawn Webster - JPMorgan

Shawn Webster - JPMorgan

I understand that you don’t want to give specific guidance on production for Q2, can you share with us what the sequential change in production in Q1 was for both NAND and DRAM.

Ronald Foster

Bit growth on a production basis in DRAM was up at mid-teens range, 14% and we had NAND production bit growth up 8%. You might recall the original guidance was around mid teens but we initiated the shutdown of the MLC in Boise midway through the quarter.

Shawn Webster - JPMorgan

Are the effects that are happening in Q2 in terms of a sequential decline in bits mostly related to Boise or is there other stuff you’re doing as well.

Mark Adams

If you’re referencing the slowdown that’s worldwide depending on the product line. Some product lines are impacted less then others. As you know we only build what we think of is the more commoditized stuff. Obviously we have less specialty DRAM and some of those products have pretty good margin and also are either single [inaudible] source and we’ve got to continue to support the customer base so its not 100% worldwide. That’s why we called it a slowdown as opposed to a shutdown but most facilities around the world are being impacted.

Shawn Webster - JPMorgan

What did your wafers to sequentially in Q1.

Ronald Foster

We were up about 9%.

Shawn Webster - JPMorgan

And that inventory write-down, what was the mix between NAND and DRAM?

Ronald Foster

We don’t normally break that down between the two because we have a lot of complex computations and cross over inventory etc. but in general it was a little heavier to DRAM this quarter out of the total [inaudible].

Shawn Webster - JPMorgan

All the I guess discussions on government funding for memory companies globally, can you talk about Micron’s role, what your plans may be to the extent you can talk about them both in Asia as well as in the USA?

Steven Appleton

Well we’re [inaudible] USA so I can’t say too much about that. I don’t have any idea on how we might participate in something there going forward but I’m not, and I haven’t done any analysis on whether we want to or not. But with respect to some of the other regions, obviously in particular there’s a lot of news coming out of Asia, we have operations in Asia as you know.

We now have not only a partnership but we have a fab operation that’s in Taiwan and we already operate in Singapore and to the extent that those governments are interested in assisting their industries, clearly we’re interested in understanding how that might impact what we’re doing in those areas and how we might be able to participate in that and the benefit of the joint ventures etc. so we are continuing to look at that and have interaction with those people in that region and its undetermined at the moment just how that will play out.

Operator

Your next question comes from the line of James Covello - Goldman Sachs

James Covello - Goldman Sachs

On content for box, thoughts on content per box for the industry as you move through 2009 it seems like its holding up okay for now, a lot of concerns in the market that that would slow down considerably as we go through 2009, what are your thoughts.

Mark Adams

On the PC side, PC server segment we continue to see driving across the 2 gigabyte per system box density and while there has been a lot of discussions and comments on that slowing down we see it along the same trend line.

On the other devices, i.e. mobile phones, we’re pretty optimistic there as well. What we’re seeing especially in terms of the Smart Phone segment growth we’re seeing increasing applications driving the density well up from where it was in the first half of 2008 which was more on the 1 gigabyte per system per phone, we’re seeing that, a lot of it driven by cost reasons and also by new applications driving across the 2 gigabyte so we think pretty heavy increase in density over 2009 from where we are today on the NAND and DRAM side.

James Covello - Goldman Sachs

How about specifically on the notebooks including the net book impact.

Mark Adams

I think in the notebook segment we’re seeing that get more inline with the overall density, the overall desktop and notebook categories so we think that will be somewhat positive and the net book obviously given the application usage we think that’s also a fairly good market for us. The challenge for us there is trying to understand how big that market will be. We’ve seen estimates from 10% to 15% of the overall PC marketplace or even and then down as low as 5% of all notebooks.

So the effect of that on the overall market size for us is challenging but still very positive for us.

Operator

Your next question comes from the line of David Wong - Wachovia Capital Markets

David Wong - Wachovia Capital Markets

Do you expect your cash balances may drop to a level of which you will have to raise cash over the next few quarters and if so are there already any plans in the works for you to raise cash? Do you think you may have to raise cash at some time in the near future?

Steven Appleton

I don’t know how you define near future. We think our current cash balance will be in pretty good shape for a while. Whether we choose or not to raise any additional money depends on what happens in some of the markets. I think that one that Ronald pointed out or referenced is that we’re actually decreasing our debt levels.

It was up a little bit because of the Inotera purchase and because we borrowed some money that was related to that purchase obviously from some players over there. So that increase took a really net net, if you think about the ongoing debt that we had prior to that purchase, we’ve been actually decreasing debt, not only did we [buy] the Japanese debt down but we’re not initiating any new debt regarding our typical ongoing equipment financing that we might normally do.

So I think that if the finance markets are more available moving into the next quarter or two I think you would expect us to see us continue to try to do more of that as we have in the past. Its not a change in our behavior, its just that we’ll continue to do that.

With respect to anything else which you might consider more strategic whether it be in partnership or whether we do something with any of these other areas where the governments are looking at putting money etc. I just don’t know right now. We’ll just have to wait and see what evolves over there but let me just say that we feel pretty good about where we’re at at the moment in our cash balance and so we’re just going to move forward and evaluate really what we want to do in terms of [inaudible] some of the more strategic things and you should expect us to move forward in the event that equipment financing normalizes that we’ll just probably continue to replace on an ongoing basis a lot of the debt that we’ve had.

Its important to point out that that’s actually been decreasing. We’ve not been doing that in recent months.

David Wong - Wachovia Capital Markets

Can you give us your weeks of finished goods inventory at the end of the quarter.

Ronald Foster

We’re looking at core DRAM in the two to three week range, specialty DRAM a little bit higher then that, NAND actually less then that and [edging] pretty close to the specialty DRAM area.

Operator

Your next question comes from the line of Manish Goyal - Kraft Investments

Manish Goyal - Kraft Investments

Your inventories declined quite rapidly in the current quarter and I was wondering how low can you take your inventories.

Ronald Foster

A couple of observations, our inventory went down in the current quarter both from good management of our total inventory and total units but also related to the net realizable value write-down that we had in the quarter. So both those effect our results as you’re looking dollar number on inventory.

In terms of how far we can go down, I can tell you we got significant efforts going on to improve our working capital management, both in inventory and in other elements of working capital such as accounts receivable and you saw some of the results of that this last quarter with the improvement in operating cash flow which obviously is extremely important in these market times and tight financing times as Steven already commented on.

So in terms of further improvement we do expect to get further improvement in our inventory management over time in FY09 going forward and I think we made good progress this last quarter even independent of the write-down of the NRV value.

Steven Appleton

So obviously we have what you would think of as inventory in the entire chain of operation, a lot of what Ronald is referencing and then we have inventory in terms of finished goods and clearly we’re trying to just get much more I think, much more precision around managing inventory that’s along the entire chain of operation but in addition to that, in terms of finished goods inventory that’s also had some improvement and I think, historically we have run what I would say probably about two weeks of inventory on hand is where we get uncomfortable in our ability to properly service the customer base.

Mark Adams

For those of you who were on the fourth quarter 2008 earnings call, you recall that I mentioned that we kept some inventory in August to go into September to help support our module build up for finished goods into the holiday shipment schedule and obviously we don’t need that same level of inventory to support post holiday so I think that also contributed pretty favorably.

We did a good think in not trying to sell inventory in the spot market in late August. We carried it over to September and then we sold through to the channel and again helped put our finished good inventory in a much better position coming out of this quarter.

Manish Goyal - Kraft Investments

What do you think your depreciation will be next quarter?

Ronald Foster

Its in the low $500 million range.

Manish Goyal - Kraft Investments

Why will depreciation, so if I’m looking at this number, so $594 includes amortization as well?

Ronald Foster

Yes, but you’ve got a 14-week quarter in Q1 going to a 13-week quarter in Q2 and we depreciate by week.

Manish Goyal - Kraft Investments

So the February quarter number will be in low, so $520, is that a reasonable number to think about?

Ronald Foster

Yes, in that kind of range.

Manish Goyal - Kraft Investments

So just lastly if I look at your current quarter’s operating cash flow it was predominantly [inaudible] by working capital production especially inventory, and I just wonder how much more room is there to squeeze the working capital need and where we sort of in a quarter or so we end up running with negative operating cash flows.

Ronald Foster

Actually there were two elements, inventory which I already commented on and also trade accounts receivable which improved significantly, about $100 million. Other receivables related to I think like the Boise supply agreement that also were in that receivable number. So we had substantial improvement in our trade AR. In terms of how far we can go with that, we’ve actually been developing plans and modeling internally to drive our working capital down which is the driver of minimum cash requirements and we believe we’ve substantially improved our position already and will as we go through the year in terms of minimum cash requirements to support the operations of the business.

I don’t have a specific construct for you but I think you can anticipate seeing improvements notably in the inventory category as I mentioned and continued focus in AR.

Operator

Your next question comes from the line of Daniel Amir - Lazard Capital Markets

Daniel Amir - Lazard Capital Markets

My question is more focused on the cost structure, how do you see yourselves comparing your cost in DRAM and NAND compared to the rest of the industry right now. It seems like last quarter you were thinking that you’re still one of the lowest cost in DRAM, can you just expand a bit where you think you stand in the roadmap for next year.

Mark Adams

You have to be careful how you talk about costs. Obviously we have a pretty broad portfolio including some specialty parts and legacy parts and the cost per bit on those is not always going to be the best in the industry. But I think when you look at segment by segment what’s going on in the commodity space in both NAND and DRAM, we’re very comfortable with the process capability we have deployed and our ability to be at the leading edge relative to cost competitiveness.

So specifically when you look at NAND in 2009 Micron on a primarily 2 bit per [sell] 34-nanometer node versus the competitors something roughly 35% bigger, we think that’s going to drive a substantial gross margin advantage for Micron on a go forward basis.

On the DRAM side, moving to 50 nanometer as we already alluded to that’s the industry leading size there and we’ll additionally be layering in in the second half of the year additional low cost capacity from Inotera so we’re pretty happy with what we’ve got going on on the cost side and we think we’ll actually continue to make improvements on a relative basis.

Daniel Amir - Lazard Capital Markets

Where do you stand on 3 bit per sell in NAND and do you feel that your current 34 is basically cost competitive to the 3 bit that’s out there by some of your competitors.

Mark Adams

Taking the second question first, yes we do. We think what we have out there is the most cost competitive offering. We haven’t seen anything in 34 nanometer 3 bit per sell from anyone. We have seen 56 and some samples of 43 but we think actually today those are really hitting just a very small piece of the marketplace and are really only capable of being a solution in a relatively small piece.

Now relative to Micron of course we have our own end bit per sell offering and those will be coming out on the leading edge 34 nanometer later in 2009 and at that point we believe that will be something that’s cost beneficial to Micron.

Operator

Your next question comes from the line of Kevin Cassidy – Thomas Weisel Partners

Kevin Cassidy – Thomas Weisel Partners

I was wondering if you can give a timeline on the Inotera ramp.

Mark Adams

By ramp by you mean Micron technology deployment in Inotera?

Kevin Cassidy – Thomas Weisel Partners

Right and when you start receiving the wafers.

Mark Adams

There’s two pieces really, there’s when does Micron transition so the wafers are [inaudible] to Micron and the other is the technology transition and in terms of the wafers transitioning to Micron that will happen on a graduated basis really over the next nine months so that by the time we get nine months out Micron will be taking its full share, 50% of the Inotera output.

On the technology conversion which will of course drive some manufacturing efficiencies, that will be a second half of 2009 story really and we’ll continue to fine-tune that business plan per market conditions.

Kevin Cassidy – Thomas Weisel Partners

Is that when you recognize the licensing fees, as the technology converts?

Mark Adams

Well we have a somewhat complicated relationship with our partners there and there are a couple of components to fee the transfers, as we’ve talked about in previous calls, some are more associated with the development cycle and those are ongoing and some are more associated with volume ramp and you would expect to see that portion of it increase more substantially as the volume begins to increase.

Operator

Your next question comes from the line of [Daniel Barrenbaum – Unspecified Company]

[Daniel Barrenbaum – Unspecified Company]

Can you tell us what royalty revenue was in the quarter and can you maybe give us a bit of guidance for how that ramps recognizing that its complicated and there’s really some [change] in some licensing and some royalty and then on the CapEx can you breakout that full year CapEx by which project its going to and then can you also help us understand how much your partners are contributing to CapEx for 2009.

Ronald Foster

In terms of the royalty construct it was about $36 million in total royalties in Q1. Going forward that will be roughly the construct in terms of technology, license fees, etc. Then in addition, as Mark mentioned there will be the ramping of volume and that will be a percentage royalty base off of that flow of volume activity as we move out quarter by quarter so we don’t have a specific estimate of that piece.

But the number this quarter is representative of the technology fees going forward, in that kind of ballpark.

Mark Adams

As to the CapEx piece, think of it as roughly 40% high end flash, 20-25% the joint venture of [Tech] Semiconductor, and the remainder Micron. So of the high-end flash piece that’s really, there’s really two pieces to that. One is the completion of the manufacturing fab in Singapore, just the build out and set up of that fab.

And there’s a small amount of residual capital in 2009 there associated with the 34 and a couple of tools early into the next, the 2x node for NAND. Sorry on the flash piece that’s shared 50-50 or 51-49 with our partner.

On the tech piece that’s essentially 70% Micron, 30% partners and that’s really associated with the completion of the 68-nm transition and a small increment [for] 60-nm node. And then the Micron piece is pretty distributed dribs and drabs around some completion of 34-nm NAND and 50-nm DRAM at NTD as well as some [back end] facilities around the globe.

[Daniel Barrenbaum – Unspecified Company]

What do you expect depreciation and amortization to be for the full year.

Ronald Foster

Its roughly in the range I gave for Q2, $500 million quarter kind of range, low 500s.

[Daniel Barrenbaum – Unspecified Company]

So running sort of $1.5 billion for the rest of the year on top of the nearly $600 million for Q1, is that the way to think about it.

Ronald Foster

Yes, just a little bit above that, closer to $2, including Q1.

Operator

Your next question comes from the line of Hans Mosesmann – Raymond James

Hans Mosesmann – Raymond James

Regarding the bit growth it was pretty strong and it seems that even if you assume the 14-week quarter you either gained market share or bit growth was a lot stronger from an industry perspective, can you give more clarity on what actually happened there.

Mark Adams

I think we absolutely feel positive about the share growth. I think there’s a couple of things that have gone on. As I mentioned earlier, one of which is we optimized where we were putting those bits coming into the quarter. Secondly I think we were able to drive more of that volume through our retail channel then we had initially planned which [throws] some of the bit growth. And finally as you look at both DRAM and NAND for us, we had some larger customers who came back and asked us for some additional share primarily due to our strength and position in the industry and where we were from a product availability perspective.

So when you couple those three things with the focus from the operations perspective on the inventory management and driving some cash flow through that, for those efforts, I think its resulted in a pretty strong bit quarter for Micron.

Hans Mosesmann – Raymond James

On the sensor business it was flat and that’s unusually strong too in this environment, are you gaining share or is it that you’re not exposed to some of the markets where perhaps they’re seeing a lot more weakness then you saw.

Steven Appleton

I think we did gain some share in the quarter but if you looked at some of the other forecasts and the competition, I think that’s indicative of what we’ll probably experience too. In other words I don’t think we’re going to escape the general economic decline and we would expect, and by the way its also the season of course is weaker, so we would expect for the what we call our Q2 or the calendar Q1 to be inline with what others are forecasting and it’ll be down for the quarter.

Operator

Your next question comes from the line of Bob Gujavarty - Deutsche Bank Securities

Bob Gujavarty - Deutsche Bank Securities

Can you remind us about the Inotera ramp also, what you’re planning in terms of the max capacity and how much you’re going to get. I think you mentioned its going to happen in about nine months, you’ll start to receive wafers in a significant way.

Mark Adams

So first of all let me clarify we will start receiving wafers sooner then nine months, but by the end of nine months we will be taking our full 50% of the output. Now relative to capacity it’s a big fab and we think there’s a lot of room to optimize it on a go forward basis so current production is in the roughly 100,000 wafer per month range. We think that when optimized and transitioned to our technology that the fab is capable of supporting as much as 50% more then that.

And then if you layer in the Maya space on top it could, that site could clearly exceed 200,000 wafers per month. We don’t have plans to do that today. Our plan is in the second half of the year to transition or begin the transition to Micron’s technology without necessarily increasing output as we wait and see how the market conditions play out.

Bob Gujavarty - Deutsche Bank Securities

Its safe to say then even if your bits decline next quarter and maybe even lagged industry can catch up quite a bit once the Inotera capacity slides over to you.

Mark Adams

Oh yes.

Operator

Your next question comes from the line of Unspecified Analyst

Unspecified Analyst

Around CapEx, following up with Inotera given the weak pricing environment do you have any flexibility or do you want to have any flexibility in your plans with that Inotera transition to get that equipment moved over to the Micron process.

Ronald Foster

You mean in terms of either deferring or accelerating?

Unspecified Analyst

That is correct.

Steven Appleton

I think we have total flexibility, its just a matter of discussing what we’re going to do with our partners. I think the best way to think about the current state of the industry, its not just Micron, is that the entire situation is pretty fluid at the moment and you’ve obviously seen some of the announcements from a variety of other producers in the industry that they’re either slowing down for Christmas like we are or they’re actually doing capacity cuts.

Most of the companies have already announced in the neighborhood of 20%, some 30%. Saw the recent [Heinex] announcement that we noticed in their press release that they were going to cut 30% of their capacity from January forward. All that of course is pretty fluid and will have an impact and I think that the rate at which things transition, or the rate at which capacity comes back online will all be determined on what the demand profile is when we do the first half of 2009.

Unspecified Analyst

And so having Qimonda taking part of the production from that Inotera fab that does not decrease your flexibility as far as you’re concerned.

Steven Appleton

No, I don’t think so.

Unspecified Analyst

Relative to Micron’s CapEx do you still see additional room to cut CapEx further in fiscal 2009 if you need to and then what is your perspective relative to the rest of the industry where they are at relative to rock bottom CapEx levels.

Steven Appleton

As has been the case historically there are only two companies that don’t react as dramatic as most of us do in the memory business, [inaudible] has been one of them although I think the [inaudible] guys will say that they’ve been substantially in the background in reducing their CapEx plans and then Intel is the other one and Intel, they tend to run on of course their own course in terms of what they do for little different reasons.

And then other then that and particularly in the memory industry we don’t have, we really don’t want a lot of room for additional CapEx cuts is because essentially we’ve cut everything that costs could be cut and we’ve already spend half just in the first quarter.

I think that is the current state for most of the others at least in the memory industry and if you, really the guys to talk to are the equipment guys and if you talk to the equipment guys, they will tell you that they may not have any business in 2009 at least in certain categories and there’s certainly no expansion going on and will be, CapEx that gets spent in 2009 will be for cost reasons and I think short-term pay backs on improving their cost structure. I don’t think there’s going to be much else and at least that’s what I’ve been hearing from them.

So I think that almost all companies at least in the memory industry are now approaching their minimum CapEx levels and I’ll tell you that I think that some of the forecasts that I’ve seen for CapEx at least attributed to memory for fiscal 2009 are still too high. I haven’t seen an estimate yet that’s probably going to be what it really ends up occurring in 2009.

Operator

Your next question comes from the line of Gary Hsueh – Oppenheimer & Co.

Gary Hsueh – Oppenheimer & Co.

Bigger picture, bottom line could you help us explain the net effect of (a) the financial bailouts of [Comonda, Heinex] and potentially the Taiwanese DRAM companies and the (b) in near-term production cuts that most of these companies have mentioned. How does this shake out.

Steven Appleton

Its pretty tough to know with precision what happens and that’s predominantly because even though its probably relatively easy to calculate what comes out of the market from the capacity cuts based on the decisions that the companies have announced, its almost impossible to understand what the demand profile will look like and what the economic environment is going to be like in the next three to six months.

Now with that in mind, let me make two comments around what we see happening on the bailouts. Most of, in fact all, of the discussion around the bailouts coming from the various governments are around trying to provide what I would characterize as either one of two things, debt release so that they can defer debt retainment or immediate working capital needs because they frankly can’t even meet payroll if they don’t get something.

None of it is around expansion. None of it. None of it is around capacity additions, etc. its all around debt release or short-term working capital to stay out of bankruptcy and as a result, the bailouts of course to the extent that they occur will, may have a longer term effect in terms of those that otherwise would have exited the business but I don’t think they’re going to have much if any effect in terms of capacity being put into the marketplace any time in the next year, maybe probably next two years.

This is a pretty big hole that the industry is in and in fact I’ve seen a couple of statistics now, if you were to just take the Taiwanese industry and talk about the difficulties they’re facing, essentially the total market cap of the companies is around $2.5 billion. The total debt of those same companies is around $12 billion and the cost just to convert to the [next] node is around $5 billion.

So that’s a [inaudible], that’s just a [darkened] characteristic of how things exist right now. So I think that you’ve got to keep that in mind when you think about what happens on the supply side. The capacity cuts that are taking place are absolutely going to have an effect and the bailouts aren’t going to do anything for new capacity coming into the market in the next year or two.

But what we can’t predict is the demand profile and how much that [inaudible] on the supply even though its the last [inaudible] that supply.

Gary Hsueh – Oppenheimer & Co.

When you don’t get consolidation clearly you can’t really shed excess supply immediately so I think for DDR2 DRAM I think its going to be a pretty complex picture even in 2009, but if you look at DDR3 it’s a real opportunity here to kind of wipe the slate clean. There’s not too many companies out there as you said that can afford the R&D to move to DDR3, are economics given the pricing today of DDR3 today, are the economics in DDR3 attractive for Micron at this point or is the premium on DDR3 really not enough to offset higher manufacturing costs or larger die sizes.

Steven Appleton

Well clearly its attractive for us but I don’t think we can subscribe too much of a premium to it in the current environment but just to follow-up I absolutely believe there’s going to be consolidation. I made an earlier comment on the conference call that just because some of the bailouts are occurring that I think it would be a mistake to assume there’s not going to be consolidation.

I think in fact some of the bailouts are occurring just so that we can get to a consolidation otherwise the companies would be filing bankruptcy right now and I’m not really going to talk about the politics of that, negative or positive, its just a reality that we have to deal with.

But I don’t think that’s going to eliminate consolidation. I think that’s still going to happen. When you say wipe the slate clean on DDR3, there really only are a few of us that are capable of right now the technology in the marketplace. We have an advantage, we’re really an early ramper of DDR3 and becoming more and more a percent of our product line, but I don’t think its sufficiently over, add premium to that device, over what we’re having to deal with on the DDR2 or the DDR.

Operator

Your final question comes from the line of Unspecified Analyst

Unspecified Analyst

You mentioned you have made no commitments to Inotera as far as CapEx I just wanted to understand for the transition that they are going to have to Micron’s memory is that conditional on them being able to get the financing to do that or do you expect that to be discussed later as you get closer to that.

Steven Appleton

Obviously the buyer at the moment was to have been able to finance their own transition to the technology. As Ronald noted we have remained [inaudible] in our commitments, CapEx commitments to Inotera at this point. No, I’ll just tell you it’s a little bit fluid. Clearly that industry and the government is talking about how they get those companies to the next generation of technology and Inotera is included in that group of companies.

There are a couple of other models that are similar and we just don’t know. I think that the most important thing to note is that it, over time it will transition and the better capable it is to fund itself the better it is for us but, the partner, if we think it’s the best use of our dollars then we’ll look at doing that. But as of right now there hasn’t been any terms.

Kipp Bedard

And with that we’d like to thank everyone for participating on the call today. If you 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 this 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.

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