Kipp A. Bedard – Vice President-Investor Relations
Hans Mosesmann – Raymond James & Associates
Micron Technology, Inc., (MU) Raymond James 34th Annual Institutional Investors Conference March 5, 2013 11:35 AM ET
Hans C. Mosesmann – Raymond James & Associates, Inc.
Okay, why don’t we go ahead and get started a little early just to take advantage of the extra time that we have. Welcome, my name Hans Mosesmann, and I cover semiconductors for Raymond James. And today we have Kipp Bedard, Vice President of Investor Relations from Micron that will be presenting. He will do a few slides and then we’ll open it up for questions.
The stock and the Micron story is always one that could be controversial. I think we’re at the early stages of a memory cycle as there seems to be a significant amount of restraint by some of the major DRAM vendors in the world today which is unusual. And hopefully, this is something that we’ll continue for sometime.
We also think that the Elpida and the proposed acquisition of Elpida looks like, it will be going through and Kipp will have some more details on that. And then after about 10 minutes, we’ll open up for questions. So Kipp, thank you.
Kipp A. Bedard
Thank you, Hans. I appreciate all of you spending sometime with us this morning and Hans, I always appreciate the invitation to come down and speak. It’s a great opportunity I think for companies like ours, because generally, we’re at a semiconductor specific or tech-conference and Hans and his group do a great job of a much broader audience for us. So we always appreciate coming down.
As Hans says, I’ve been at Micron I guess since about 1983. It’s been a long, long decade, I’ve got to tell you in the memory space. I had an opportunity to meet with some new investors into the stock or just before coming here and they said could you please summarize out the last 30 years in about five minutes. I think I did in about one in a sense that when I first started at Micron, there were about 40 to 50 DRAM companies in the space. And we spent most of the 80s with the Japanese deciding they wanted to own the DRAM space which they went from 10% market share to about 90%, took all of the U.S. companies out except for two, us and Texas Instruments.
We spent most of the 90s with the Koreans deciding. They wanted to go to gain market share in the DRAM space. So they went from virtually non-existent in the 80s to about 65% of market share in the 90s, and we wiped out all the Japanese except for one. And we wiped out the last remaining Texas Instruments, U.S. based DRAM company, so there were two of us. We still had one. During that period of time, the Europeans consolidated down to one company as well, Qimonda.
So we were left with Elpida Group, a Qimonda Group, Micron in the U.S. and two Koreans. We got into this last decade, where I started this little story about; it’s been a long 12 year. We saw the Taiwanese decide they wanted to be in the DRAM business. We had two fairly weak players financially Elpida and Qimonda, and they were willing to trade out their technology that they have been developing to allow the Taiwanese to come into the space.
Taiwanese over about a six year period spent $20 billion. Today, they’re virtually all gone or we control them. They still have $14 billion, which is all getting written off. So all this 30 years has been some mechanism of consolidation to where today. We’re staring in the face of three remaining DRAM companies, us, Samsung and Hynix.
Moving to the NAND space quickly, it started from a consolidated basis. There were basically four of us that had the technology or still developing the technology that would be again, Micron, Samsung, Hynix and a combination Toshiba and SanDisk. So over 30 years, here we are. We finally seem like we’re down to a consolidated basis where supply for the last two to three year has been incredibly muted.
We haven’t seen a new DRAM fab in quite some time. In fact, we’ve seen quite a bit of DRAM capacity taken off the market and moved into other types of semiconductor production. We have no new country or company interested in entering the business. And for the first time, when I kind of affectionately called this arms race that we’ve seen in DRAM for the last 30 years, doesn’t appear to be anybody on the horizon to accelerate this irrational capital that’s kind of plagued our business and made it so cyclical.
So all those says Micron were primarily a DRAM or excuse me, a memory company, which is DRAM, NAND and NOR. We have from time to time for those of you who are familiar with us extended into different types of technologies like either a solar or an LED or an RFID tag, our display business and generally those decisions have surrounded around a decision-making process where we were trying to lengthen the useful life of our equipment, pretty expensive capital to stay in this business.
The general useful life of this equipment is three to five years. So we’ve been looking at ways we could extend that. We’ve realized a couple of years ago, we just got to stay true to the memory space and so we basically divested ourselves of all the different distractions that we’ve had. We’re just solely focused on DRAM, NAND and NOR and what’s developing within that, and I’ll get to some of that technology here in a second.
This slide was just to kind of give me a launching point to talk about some of the demand drivers. We have come from a period or in a place where really the PC and Notebook businesses drove 90% of the consumption in DRAM. Today, it’s less than 40% moving its way to about 30% by the end of this year. What has taken its place has been networking, some consumer. Mobile has been, obviously explosive, and to move all this data around when new mobile clients get on the internet, this infrastructure of networking and server technology has exploded. So the biggest growth markets, if I’ve said the mobile space itself, it’s consuming DRAM bits, it’s doubling about every 14 to 16 months.
The server space is growing at a pace of consuming additional memory content to a tune of 40% to 60% per year. The networking space is on the tune of about 40% to 50% per year, kind of three of the big targets. Now, what’s going on in the supply side relative to this consolidation and somewhat conservative approach to adding capacity, DRAM, no new fabs have been added in the last three years.
The projected bit growth or the additional supply growth this year as we call it will be 20%, maybe 25%. Historical has been about 45%, so dramatic reduction when this industry stops adding wafers and we are simply trying to make more efficient, our process technologies through this line geometry shrinking.
NAND has been on a similar approach. We are still adding some wafer capacity. It’s been fairly slow. But we have gone from three years ago supplying 120% more supply on a year-over-year basis to two years ago; it was about 70% to 80%. Last year was about 50%, 55%, this year is shaping up to be about 35% to 45%. So again, dramatic slowing when you’re not supplementing this process technology shrink advantage that we get every year and you’re toping off with no additional wafers.
So we’ve got a pretty decent demand environment in front of us with the mobile trends. We see, probably for the first year ever that smartphones will be more than 50% of all the phones sold. The content difference for us between the smartphone in both DRAM and NAND versus an entry level phone with DRAM and NAND is just unbelievable. Smartphones today in DRAM are all one to two gigabytes and grown pretty quickly, as I mentioned before.
In NAND, smartphones are averaging probably about 30 gigabytes of phone, again doubling about every 16 months to 18 months in terms of its content. What’s nice on the mobile phone area for NAND is that now even the lower end phones that other 49% of the phones are all catching up and adding DRAM and NAND content. And that’s what’s dramatically driving this year-over-year consumption in that particular space.
By the way, I’d like to keep these pretty informal. So if I hit a topic you want to know more about to share about, we’ll get it address there. One of the things that we like to talk about is, it was about a decade ago, we’ve had an officer retreat. We get together about once every six months as a group. We just beat each other up in terms of all the operations in the company. We’ve recognized way back then that this was going to be a PC driven memory space any more. And so we have embarked over the last 10 years in driving a tremendously broad product portfolio.
As Hans mentioned, I’m going to kind of jump around here a little bit. Hans mentioned, we have an opportunity to and we’re fairly long in a process of buying one of our competitors’ assets Elpida out of bankruptcy. And they are one step further for us in diversifying this broad product portfolio.
They’ve done a very nice job of establishing a large market share in mobile, DRAM, and area that we’ve not put as much emphasis on in lieu of doing networking and server with our resources. Combining these two, we’ll again broaden this portfolio pretty, pretty dramatically.
To give you some sense of that, today our mobile exposure in DRAM is probably high single-digits. We’re layer on in Elpida number today in terms of market share that put us up in the 20%, 25% kind of range for market share in that space.
Somebody’s that I’ve talked a little bit about networking obviously that trend in terms of mobile devices getting connected to the Internet has this three point attachment for us. It’s the content within the handset. It’s the networking equipment that’s going to move this information around, and then hopefully as the server, it’s going to serve up the content. And all of that is driving again this additional content for handset and for node within the infrastructure. And so we see some social revolution out there in the world, where people stop getting connected anymore or stop running their experience to get better. We’re going to continue to see this sort of a demand growth in that area.
Automotive, we don’t talk about a lot in our space, because it’s not necessarily a huge driver for us. But it is one of the most profitable businesses. The business is what we would like to call sticky, where if I compare it to something that term to be not sticky PC basically gets contracts get renegotiated every two weeks. So if you are not one of the best price or have the right product portfolio in there, you can be replace pretty quick.
In the automotive space, you’re going to contract and you’re pretty much in that space for the next five to seven years. So lot big differences have occurred from the turn of this century where 90% of our business was turn business, every two weeks we renegotiated contracts where today less than 35% of our business is exposed to that kind of turns business.
One of the big drivers outside of mobile, I think I kind of beat that enough today has been solid-state disk drives. We had a false start a year ago in terms of client acceptance. We had a flooding in the October timeframe of Taiwan, which looked to the industry like were dramatically disrupt hard disk drive business. We as a NAND suppliers and solid-state drive manufacturers built a bunch of inventory going into Q1 of last year, thinking this was going to be the period of time where tax rates really happened in the traditional computing and notebook area. Of course, we got into about February, the hard disk drives, industry recovered pretty good. Price points were still quite high on SSDs, ran in the inventory and took us about four to five months to start cleaning out that inventory.
Literally to us, it looked like a light switch went on in August. We got to the right price points. It felt like consumers all of a sudden saw some value in solid-state drives and since then it’s been month-over-month increases to the point where on our last conference call, we pointed out, we believe the industry is growing probably about 20% units q-over-q in SSDs today on the clients side, which means hard disk drives in a desktop or in traditional notebook. That kind of growth rate doesn’t even include some of the embedded applications that will show up in ultras or shows up in tablet.
So we can talk more about that if you like to. But I think I’m just about NAND, a little bit of mobility DRAM shift. I think I covered this, again enhance us. We’re growing doubling content and consumption in every 14 to 16 months. It doesn’t look like we’re going to stop the data packets that we – it seems like we all get a smartphone and then develop some content.
We go out and take photos and then we want to share with everybody. And again all of that just drives content of these various touch points, as I mentioned the end utility, the networking boxes and hubs and routers, and then also the server side.
So I touched on a little bit of this. We do have the consolidation with Elpida/Rexchip coming up pretty soon. One of the things I haven’t mentioned is, we just recently revamped if you will our joint venture with Inotera. Inotera was the asset we bought from Qimonda, one of those companies I mentioned that went bankrupt few years ago. This Inotera has about 120,000 wafers of capacity per month. To put that in perspective, the total industry produces just over a million wafers per month. So they’re about a 12% in terms of capacity share. We’ve been taking – our original agreement with them was to take half of that output at cost and then share the margin with them.
Recently, we’ve changed that to where we will take a 100% for no capital for us. We will buy at a market price average minus, so we lock in a margin on a certain percentage of our DRAM assets. That starts to show up, that financial impact starts to show up for us in our fiscal Q3, which is this March to May quarter reported in June. So pretty dramatic change for us in terms of DRAM capacity between the way we’ve restructured the Inotera agreement and what’s happening with the Rexchip and Elpida facilities.
Finally, okay I like the part where I just get to answer your question. So don’t be bashful and feel free to fire up. Yes, please.
Kipp A. Bedard
Yeah sure, great question.
Kipp A. Bedard
Yeah, you bet. The question was from the audience. What would cause the deal to fall apart today? Let me reverse and say kind of where we are in the process. We now have gone through the bondholder vote which they affirmed, that they accepted the sponsorship agreement. The court has affirmed that. So there is basically in a process, a 30-day period where a creditor could object and file an appeal with a higher court.
Generally speaking, when that has happened, there’s another three to four-month timeframe for that to work itself out to the Japanese court system. Then there would be a ruling on that. Then there would be another 30-day period basically where again there could be an objection or appeal by either party and that would end up in the Japanese Supreme Court.
So we are somewhere between 30 days and four to six months away from having the bankruptcy procedure done. The other critical path was regulatory approval by various governments that we want to make sure we can sell products into their countries. Those have all been removed now.
Two weeks ago, I believe our last one came through was China, so that’s done. So we don’t have a critical path item there, so that’s more of the – just legal proceedings relative to the bankruptcy itself.
Kipp A. Bedard
Probably, give me 30 after that to get all the closing documents, so probably 60ish to four to six months is probably the right way to think about it.
Kipp A. Bedard
Yeah. The question was kind of how do the financials come together. Did they reclose? Then we will start integrating all of the financials. We gave you a sneak preview when we issued a convert here a few weeks ago. There’s pro formas based on what the last September quarter looked for them combined with our November quarter adjusted for 82 yen to the dollar rate, which is now 90 in change.
Generally speaking, a depreciating yen improves the results of Elpida. They have a lot more cost base in yen than they do dollar-based sales. So it’s an improvement since even then. Those numbers, those pro formas, if you want to go back and look at them at the 8-K we filed, also don’t include really any of the price increases that we have seen in DRAM or NAND since that period of time. Yeah.
Kipp A. Bedard
Yeah. The question was – thank you. We’ve tried to do a good job of moving away from PC-based sales, part of that of course has just been the rate of market has developed, these other once have grown faster and we’ve been fortunate to be involved in those. How we see the PC business today?
Generally speaking, I think a little bit similar last year, don’t get scare by that yet, in the sense that our PC-based OEM customers are hoping for a second half better environment. They are certainly not positioned for it today. They are very conservative with their inventory supply chain today.
I would say the expectations if we put them on hamper and mix them up, it’s probably anywhere from a PC growth rate of minus a couple percent to plus a couple percent with content probably up 12% to 16%, 17%. So there are big expectations in that space.
I think most realized that the potential upsides are to give some true corporate consumer based touchscreen options for the second half of the year with Windows 8 as a complement to that. We haven’t seen a lot of those yet that have grabbed the market. So I think folks are kind of waiting for that or looking at that to be really the driver.
But our assumptions for big growth are pretty minor in terms of the PC. I guess why I spend so much time kind of defining some of these other markets, because those even going forward are going to be the more critical items for the DRAM space. We’ve gone just in the last couple of years from PCs consuming 60% to 40% and now below 40% today. So it’s becoming less and less of a driver and we’ve got to start focusing more of these other things like that mobile and infrastructure to mobile type categories. Yeah.
Kipp A. Bedard
Yeah, I have a couple of thoughts. The question for the webcast was, can I discuss a little bit how that mix change impacts margins. And generally speaking, everything is better than PCD RAM. If you go back the last two, three years in particular PCD RAM gross margins for the industry were averaging something like negative 40% or 50%.
Obviously, we’ve seen that is the area that still is the most commoditized. So tends to react the quickest and the most violent if you will to tightening in the market. From the bottom of pricing, saying about October last year for PCD RAM pricing is probably up 50% of that bottom. So those gross margins are starting to move up in the positive categories for the industry.
So generally speaking, even today, today’s pricing is still more profitable just about anything, but PCD RAM, which is why I think when you read the third-party reports and harms and others, we as an industry are still telling customers, we’re moving capacity away from PCD RAM and into these other categories. So I expect that this kind of remain pretty tight here unless for some reason macro environment, we start chasing a very fast decline in PC market.
And we did last year, by the way. We started with expectations as a PC industry about high single-digits and ended up shipping minus five or whatever the number happened to be. So those things can’t happen. Don’t see that today, PC seems pretty stable to us. Again, I think they got their supply chain rightsized about Q3 or Q4 of last year and that’s when we start to see PC DRAM pricing start to flatten out as well. Yeah.
Kipp A. Bedard
Kipp A. Bedard
Yeah, two questions and remind me if I forget to answer part of that. First one is, gaming consoles and kind of what impact can that have in our space? And secondly was, our position within SSDs, and I’m guessing you want to kind of breakout a client versus enterprise?
Starting with gaming consoles, it moves the needle in terms of graphics memory. That is one of the more profitable areas. Most of that impact you will see through Micron’s financials when we report the Embedded Memory Systems Solutions Group, most of that goes through there. So you can kind of see how we’re doing. If you go back to last quarter, it was our most profitable group.
It’s not as big as some of these other big categories of PC, Notebook or mobile application, but is a very solid kind of a 12% to 15% DRAM consumptive market. That’s very, again sticky, stable with very nice margins in it and is now getting even more complementary for those of us who have both DRAM and NAND in the sense that it’s not only increasing content in DRAM, graphics DRAM, but also now in storage. So we get a little bit of embedded SSD lift in those consoles as well.
In terms of SSDs, if we specifically broke out our SSD revenues, we’d probably be the largest SSD public company today. If I had to guess, we’re probably running on a revenue basis somewhere around 80%, 85% client, 15% to 20% enterprise. Enterprise obviously, I guess to anticipate a question is more profitable. They are more cautious in how they qualify product. And so there is a lengthier qualification process.
They basically want a 1000 drives for a 1000 hours without any errors. And so this takes time to get into that space and they’ve been again cautious to hold hardly except SSDs as a replacement to storage.
And I think in the back of their minds as well, they are watching how quickly we as a people are driving content that has to get stored somewhere. And there is no way possible, we have enough NAND capacity to get anywhere close to store even 20% of all that data somewhere. So the initial impacts of SSDs and enterprise has been more as a cashing mechanism at either level one or level two over time and more recently in the last three to four months, we’re starting to see bigger storage solutions.
Our position within client, we’re probably a 12% to 14% share player today. My guess is, we’re probably half of that in the enterprise. We first focused on the client consumer piece, because we have direct – we have a retailer in Crucial and a retailer in Luxor that gave us direct market access. We feel like that was a best place to start and that’s where towards the success that you see today is really come from.
So we’ve done a nice job, introducing both PCIe and driving some joint ventures with EMC and Dell to name two on the enterprise side. More recently, we just introduced our first SaaS interface also for those of you who follow that business closely.
So I think this will be a year where we do a pretty good job in enterprise and probably 2014 looks to me like it’s probably – I think we’re at that hockey-stick curve in terms of enterprise drives in general. And to the extent, we execute well. I think we have a pretty good product. I think we can take some of that market share.
Kipp A. Bedard
Yeah, question was how do we see retail SSDs? And it’s a lot of that driver that I mentioned that’s getting us to a point. We think that units are growing 20% per quarter. Interestingly, we tend to protect our OEM clients first. So our Crucial division has actually been under shift their demand, now since that August timeframe. So we’ve been working internally to get even more SSD quality NAND flash to keep serving, but these spaces keep growing fast enough that it’s to lifting pricing now up to bottom for SSDs and for the discrete thing sell into that space.
Kipp A. Bedard
Yeah, the range of densities today in client that we shift is 64 megabit to 512 megabit. And in enterprise, it’s – can be terabytes depending on the type of server that or storage system that you’re going into. Yeah.
Kipp A. Bedard
I would suggest that probably our partner shipping with a hard drive is manufacturers probably more from a discrete, selling them a discrete device that it is probably more formal type joint venture at least today. As soon as I say that I am probably wrong, so I’m here next week and change that, don’t forget me. Is there anything else?
Well, thank you all. If you have any follow-up questions, I think we have a breakout here for the next 30 minutes and happy to answer any additional questions. And Hans thanks again for invite. I really appreciate it.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!