Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Micron Technology, Inc. (NASDAQ:MU)

Wedbush Technology, Media, Telecommunication Management Access Conference March 6, 2013 12:45 ET

Executives

Kipp Bedard - Vice President, Investor Relations

Analysts

Betsy Van Hees - Wedbush

Betsy Van Hees - Wedbush

Good afternoon everyone. Thank you so much for joining us here and on the Wedbush event and I am just going to get (technical difficulty) analyst here at Wedbush Securities. And today, I am very excited to have with us Kipp Bedard, Vice President, Investor Relations of Micron Technology. So, today’s format is going to be about a 20-minute presentation and then 10 minutes for Q&A. So, with that, I am going to turn it over to Kipp. Kipp?

Kipp Bedard - Vice President, Investor Relations

Thanks, (Betsy). I appreciate it. Thank you very much. Thanks for joining us. Hope you all enjoyed lunch, and it’s like too cold out there. Here the storm is coming. So, with that, as Betsy mentioned, I just have a few slides, but I’d like to keep it pretty interactive if you have particular questions or topics you would like to cover just use the slide as a starting point to get this going on math. So, the traditional Safe Harbor that I am sure you have all seen quite a few times even today.

Maybe I will just start with kind of a quick overview of a couple of markets, that of course we are fine tuning ourselves pretty tightly around the memory space. We have over the last 20 years spent some money looking at different types of things that might parlay and extend the use of equipment in the space. We have dabbled in some solar. We have dabbled in some LED. We have dabbled in some RFID tags and some display technology. And I’d say right now our thinking is more about getting very focused, tightly focused on memory space, NAND, DRAM, NOR, and maybe some new emerging technologies like PCM, and we are divesting ourselves as some of these others what might some people might have called distraction. So, again pretty toned in and maybe the timing is pretty good based on some of the recent market activity, which I’ll cover here in a minute in terms of pricing and demand for NAND and NOR. So, this gives you a brief overview of the entire semiconductor market than where the DRAM, NAND flash markets kind of fit within that. So, this is our available market to us in that $57 billion range broken down between PC, non-PC, NOR, and NAND below that.

This slide, memory, basically is just to kind of show you. We believe there is still some pretty nice growth based on some secular trends that are in the market and the way that we are consuming new devices that connect ourselves worldwide. And it’s driving both NAND content and memory content. Some of those trends are, of course, I am not going to surprise you with anything new, they are well-known. The mobile explosion worldwide is phenomenal. It’s a huge grower, not only because the number of handsets, for example, that are getting bought every year and that the majority of those now are smart type devices, but the fact that they all immediately get attached to some sort of internet point. And so WiFi technology and hubs and routers and servers and then the storage of all that content that gets developed everyday is all hits these different areas of memory for us.

Content and the handset content on the server, storage on the server, and up in the Cloud. Again, I’ll just drive tremendous amounts of this content. I’ll get into more detail here as we dive down into it. We recognized, well, notwithstanding even the current events of how our industry is changing relative to discussion around consolidation, which we will have in a moment. We have recognized over the last decade that this business was changing pretty rapidly from an end demand standpoint. If I just go back as early as 10 years ago, a 90% of all the DRAM, for example, content was consumed by traditional computing environment in E&P, in desktop PCs, or notebooks. And of course today, that number is about 35% of the bits produced in DRAM are consumed by a PC.

Mobile has exploded. It’s now about 25% of the exposure in DRAM. Servers are probably about another 20% or 25% of the consumption of DRAM in a given year. Networking is probably in that 15% range. And then there is this category down here that’s kind of listed as industrial and medical and automotive is a very fast and very profitable segment of the DRAM space as well.

To react to what we notice being a change in the market from PC-centric to a much broader, we embarked on a – in a strategy to broaden our product portfolio as well. And so to that extent what was an exposure to 90% of our revenues in PC DRAM today is about 15% of our revenue is exposed to that with exposure of the rest of the revenues set based on lot of these different specialty DRAM markets and NOR and NAND markets as well.

As I mentioned this mobile phenomenon is certainly a cog, that’s the biggest driver in terms of content growth in DRAM and NAND. The second to that in terms of fast growth rates are the solid state drive phenomenon that’s going on as well and that can be defined pretty broadly as something that replaces a traditional hard drive in a notebook or desktop, all the way into a more embedded SSD application inside of an ultrabook or a tablet or even a high end smartphone. So, SSD is growing pretty quickly in terms of content. In fact maybe to give you some real world data, we are basically on task to see say about 20% unit growth in our SSD units quarter-over-quarter-over-quarter. We have been on that run rate since August of last year. The pace did not slowdown going into calendar Q1 here of 2013. And we are also seeing a density increase now. We believe that the average content today is about 178 gigabytes per SSD that’s going into that traditional notebook segment. So, that sounds – feels like the price points are finally reached a place where consumers believe there is value to it and we believe that the PC OEMs have figured out now basically how to market and make some money when they replace a hard drive with an SSD.

Little bit more maybe on the shift to mobility hitting some of the different markets in terms of handsets, we are seeing 100% growth rate in content about every 14 to 16 months. Tablets are moving from about an average of DRAM content last year around 725 megabytes a unit up to about 1.3 gigabytes per unit again in tablets. My personal belief is both the handset and the tablets are on a march to around 4 gigabytes of DRAM per system. The reason for that is the way that we use them. We want them to basically do everything that our notebook can do today and we are a long way from that happening. It needs a more robust operating system. It needs more robust and faster efficiency in terms of executing applications.

And it has to refresh an ever improving display screen, it has to capture, manipulate, and move data in an ever faster way. All of those things combined will eventually make the memories of the system within a handset of tablet look very much like a notebook does today, which is around 4 gigabytes to 4.5 gigabytes of DRAM and anywhere depending on your storage requirements anywhere from 16 gigabytes to 512 gigabytes of storage. So, look for those trends to keep this part of the market moving pretty quickly and driving a lot of content growth.

I just have a couple more slides and we will get a little bit specific here.

Betsy Van Hees - Wedbush

Hey Kipp, can you (indiscernible) pause for a second.

Kipp Bedard - Vice President, Investor Relations

One moment, got it.

Betsy Van Hees - Wedbush

Okay, great. Thanks. So there has been a lot of discussion around NAND pricing doesn’t go down, then it’s going to increase growth SSDs and a lot of new application. So, I am wondering if you could kind of talk about that, we have seen a really good and can you also talk about what you are seeing in the NAND market today from a pricing standpoint and things like that.

Kipp Bedard - Vice President, Investor Relations

You bet. NAND pricing has been more stable than traditional from a seasonal standpoint in Q1 versus Q4. Generally we see a pretty good second half of the year build with either new product announcements consuming more NAND or consumer type holiday, gift giving type impact from a demand standpoint on alternative units and then a bit of fall off in Q1 and that we haven’t seen that today and in the most recent two to 3 week data on NAND suggest that now pricing has moved up pretty broadly across. We started to see a nice price move in the lower density NAND devices around the month to month and a half ago, and that followed up beginning a couple of weeks ago with a broad and higher end, higher density price increase as well. So, pretty good signals on NAND especially for where we are seasonally.

There is a lot of new products, especially around new handset refreshes, new tablet refreshes, and then ultra launches coming in the second half of the year, that promised to be a pretty decent demand draft for us on the NAND space. More specifically, we think supply in NAND is lining up to increase the share around 35 – somewhere between 35% and 45%. If I throw all this third-party data together on the demand side, that comes in more on the ground at 55% level, which gets directly o Betsy’s question which is how does that all work, if demand is above supply, pricing would arguably be flat to up, and what does that do on the demand side? But I think there is a couple answers to that, number one in both DRAM and NAND I have always felt like there is a part of the market that’s somewhat – that’s very elastic with pricing.

We have seen it over the years on PCs where if the price of the memory per PC box or for the bill of materials gets too high, then the over-the-counter sales or the offered sales by the PC guys that content tends to shift back down to some level like we saw a shift couple of years ago when the price got up to around 8% to 12% of the bill of materials price, back from about 4.5 gigabytes, back to about 4 gigabytes and they did that with certain amounts of their SKU until they right-sized the price to get it back down below that 8% of the BAM. So, I think in DRAM that’s where the elasticity happens. It’s going to be less so for the handset guys to move around, because I think we, as consumers, are still demanding that handset to do more than it does today and same in the tablets to kind of complement some of the earlier comments I made, but I think on the desktop, notebook PC, there is that ability to kind of adjust the content and maybe even make those of us as consumers that are buying a 4 gigabyte enhanced DRAM box, go out and add our own additional content to it.

Now, in the NAND side, I think maybe that one, there is maybe a couple of elasticity pieces. One would be in the category of USB drives and microSD cards. I think that’s very elastic with pricing. And that can be dialed down real time based on how we sell into the retailers. We can adjust the demand profile to be a little bit lower by keeping the price up a little bit or we can encourage that demand profile by dropping the price a little bit with certain promotions. I think the same thing is possible in Client SSDs. I think we can adjust that fairly real-time. And we can adjust it within densities. So, although we may want to – we may have a strategy to have a certain percentage of units of TAM relative to the notebook and desktop total units sold, w can adjust the density to where we can hit that unit number for running short on units. So, there is a little bit of discussion around. And I think you are maybe aiming at something else too which over the last few days, I have had a lot of discussion and questions around what would promote you as NAND suppliers to build another fab.

And I tell people I think we are kind of outside of the playbook today. We are off the grid, because we haven’t been in a situation with memory in general where we are just not adding any capacity. And what happens if we get into a situation where there is more stability and profitability to it. What then is the economic equation to cause us to go add fabs. And quite frankly, we just haven’t had any history to suggest what that economic formula might be.

Betsy Van Hees - Wedbush

I wouldn’t know that. Thank you.

Kipp Bedard

So, see I could probably go on and on about different mechanisms that could be used, but I kind of come from a history of this where a lot of our decisions to invest have been defensive in a way. I told the story a couple of days ago where largely the DRAM was monetized in the 80s by U.S. firms, there were some 40 of us in the business and the Japanese decided they wanted to get into the business. And so they went from 10% a share to mark to 90% market share in a period of about six years, which drove all, but two of the U.S. suppliers out of the business. Then the Koreans decided they wanted to be in the business in the 90s and they drove all, but one of the Japanese and one more of the Americans out of the business as well. So, we have always had this odd race, this arm’s race that we have thought that have driven as much of our decision to invest in new fabs as anything else. So, here we are at the end of that big arm’s race and there is no one left to start a new battle.

And we are looking around with not much investment going on and our bit gross selling in an environment where arguably the demand profile looks like it should be better for period of years. So, what is that economic formula that incentivizes us to had another fab versus maybe just move capacity from side to side. I happened to think that one of the first moves is within DRAM. We see a tightening of the gross margin profile between different types of DRAM. If I go back over the last four or five years we have had this plus 40%, 50% gross margin profiles specialty DRAM business and this minus 50% gross margin PC business within the industry.

I think these things start to tighten up into a band and then personally I think because three out of four of the NAND players make about DRAM and NAND. If there becomes some delta in one of those if NAND sticks with a gross margin of 40 and DRAM gets stuck at 20. It would make sense to me that economically we’re moving some supply from DRAM to NAND or vice versa if the reverse happens. So, I think those things tend to get worked out first. And then we think through this next question of adding additional wafer starts. That’s just kind my thought process behind that. We would love to hear the rest your guys’ ideas on that too and that’s if you had any comment relative to that also.

Betsy Van Hees - Wedbush

We’ll I want to ask you the question because I think the question we will get it many times (indiscernible) long-term is to work of Toshiba. So, looking at the SoC market and looking at your position you are building SoCs yourself and then you are also supplying NAND to the third party SoCs. So, how do you balance that in terms of your competition because you are actually supporting competition with components?

Kipp Bedard - Vice President, Investor Relations

I think we’ve had a pretty good history over time trying to balance both. We protect our OEM customer. We had an E-tailer called crucial.com and a retailer called Lexar now for a number of years and we always try and balance shipping product into those different distribution channels direct into OEMs versus an E-tailer and at some point with compete with some of our customers. And basically our internal mode of operation is that our retailers and E-tailers have to make a higher gross margin than what our OEMs can get out of the products. So, we’ll never undercut our OEMs and that’s basically the balance that we try and here too and the same thing happens now as we sell SSDs both internally with the Crucial brand name on them or we sell discrete products into our end of the market with other customers like OCZ, or STEC or Fusion-io. So, I think we have a pretty good balance since works pretty well for us over the year or so.

Betsy Van Hees - Wedbush

Okay. So, let moves on DRAM side.

Kipp Bedard - Vice President, Investor Relations

Okay.

Betsy Van Hees - Wedbush

That has been a not – NAND has been a very good front line, but DRAM haven’t been very good place. But now DRAM is becoming a (indiscernible) because there is a consolidation that we’re seeing in the industry and the changes. And going where you could talk about the dynamics that are already there pricing the DRAM (indiscernible) see that pricing going up on a contract basis.

Kipp Bedard - Vice President, Investor Relations

Yep.

Betsy Van Hees - Wedbush

And then how does that impact PC OEMs and could you talk about earlier about the loading (indiscernible) and pricing with that?

Kipp Bedard - Vice President, Investor Relations

Yeah.

Betsy Van Hees - Wedbush

Provide questions I know that.

Kipp Bedard - Vice President, Investor Relations

Yeah. Lot of in there, it sounds like I can just ramble a little bit here. And again as you have specific points you would like to make directly in that way. But I think that your first comment DRAM has been much more volatile than NAND and I look at it again in almost to explain like I just put my little history story there where NAND never had this big and ongoing decade after decade arms race. It pretty much started with core suppliers and that’s where we are today and it started with a very fast growth rate that absorbed all of those building that initial scale. And so I think we in NAND perhaps differently than DRAM we were all able to grant to grab that scale we needed that we felt was a baseline for being competitive in the NAND business. And then from there and the NAND growth on that early profile was enough to early absorb that for the most part we all made some money. And now we are mature in the sense that three out of four of us have been through this multi-decade DRAM arms race and we have settled into watching how the markets developed and trying to match supply with demand on a closer basis without this need to defend turf for market share as much as we saw in DRAM over the years with new countries entering.

Again kind of filling on with – going on with Betsy’s questions, we are on the beginning of our fourth decade of being in the DRAM space and it doesn’t look like consolidation is finally here. And some of the things that I would say had lengthen that or the last chance we had through to kind of ramp up consolidation was probably in 2002, ‘03, ‘04 and we had a couple of what we call technology developers that in (indiscernible) and Elpida who are still developing their own DRAM process technology and design their own DRAM products that needed away to continue to grow or didn’t have the resources to build capital. So, they went to Taiwan and said, okay, look I will provide you the DRAM technology that you need both in process and design in return for cheap wafers and that’s how they stayed alive for a period of time and that’s how quite frankly that the Taiwan is we are able to build a pretty massive installed base of fabs to build DRAM.

Without those two companies allowing Taiwan and to get into the business, this I think this consolidation we played out a lot earlier, but an essence we went through another decade of over $20 billion invested just by the Taiwanese alone and then the rest of us defending market share in a way that we just completely over built perpetually in a memory space and it took a credit crisis and some pretty bad balance sheets to trying to right size of spending and sure not it seems like we had one company already go bankrupt in (indiscernible). We had another one filed for bankruptcy Elpida last year which were proud to be the lead sponsor on and more recently we got the bondholder approval to move forward the quarter’s firm that may be just a quick update on the process. There is a 30-day window here where a creditor could trial and appeal so way through that period and see what happens. There is two such appeals possible as one to the higher court and there’s one more to the spring court so somewhere between the next 60 days and four to five months we expect to get that offset. So, boy, it’s been a long 30 years I think for me and Betsy for you comment to Toshiba, you’ve been through a lot of that as well. So, not sure I hit all your questions, but happy to comeback and to answer a few more.

Question-and-Answer Session

Unidentified Analyst

(indiscernible) you won’t close before 60 days and you could be as long as four to five months depending there is an appeal.

Kipp Bedard

Yeah, I think that’s the reason in that four to six months with five represent two appeals in there that won’t be above the district code of Tokyo that just ruled in our favor, there is one above the inventory now in the Supreme Court so there could be two process that happen.

Unidentified Analyst

As of today, do you know is there any appeal?

Kipp Bedard

There is nothing filed as of today.

Unidentified Analyst

And when (indiscernible).

Kipp Bedard

As I recall its 30 days from the core from affirmation which was two Fridays ago.

Unidentified Analyst

30 days.

Kipp Bedard

30 days from them (indiscernible).

Unidentified Analyst

Yeah, thank you, I said its (indiscernible) when you get around 8% of raw materials for the DRAM, where is it now given the pricing most probably in the last 10 days really has it look like.

Kipp Bedard

Yeah, contract price will down 3% today to the laptop, desktop on DRAM.

Unidentified Analyst

So, we want to be optimistic with our – strictly your prices and take respect on the – in every conditions for allowed price in the triple when you get.

Kipp Bedard

Yep, generally we can get the six without too much of a scream after that we start getting a lot of some pushback and then usually somewhere around 8 to 12 there, they just have to start to (indiscernible) content.

Unidentified Analyst

And we just experienced from the first decline – annual decline of (indiscernible) I’m curious that some players are getting pushback, it’s different than the historic norms as they said because first nine months (indiscernible) is that no longer either metric or do you think in the (indiscernible)?

Kipp Bedard

I don’t get a sense from our sales folks that there is any additional push back just because the PC guys came off the tough year. I think they understand the more competitive natures are units that are being bought instead. And that’s not something we’re necessarily engaged in meaning more people are opting for tablets. And even I would go so far to say is what used to be the entry point of being a low end cheap desktop or notebook for somebody brand new buying an appliance to get connected is now some sort of smartphone that seems to be the entry point in China and in India and other countries like that that now are through economic advances have more disposable income and some more people are getting connected if you will didn’t really explain that very eloquently. But the touch points used be – the first touch point used to be buying a PC and getting connected that’s just not where people spend their money to get connected anymore. So, I think that’s a realization why the PC manufacturers if they are having lived through. In terms of our pricing methodology with them I think they’ve recognized we have to stay in business and they can’t do it – we can’t do it only by PCs and they recognized that we will be shifting capacity into these higher growth markets. And that will probably still have a very healthy debate every month that comes along when we set pricing.

Unidentified Analyst

And last question. The – I think you are around 40% DRAM…

Kipp Bedard

Yep, percent of revenues, yep.

Unidentified Analyst

Can you talk about that ability given (indiscernible) getting late results if you design to allocate the wafers away from one or the other?

Kipp Bedard

Yeah it’s a great question I get quite a bit around this. There is a couple of answers and I’ll just kind of maybe remind you the process and then you can gauge it from there. I mean basically if you already running DRAM and NAND and you have both processors introduced into a fab and it literally can be a cycle time which is around 45 days through the fab that you could start seeing a shift in the wafer mix. And then the question just becomes how aggressive do you want to change that, in other words do you want to move 100% on day one to do it or do you want to just take your time and over four or five quarter period just slowly increase the starts one way or the other. And so literally you could have an impact in 45 to 60 days and then after that it’s really your decision on how aggressive you want to be to transition the capacity.

Unidentified Analyst

And then just last question when you had a time (indiscernible) but the 2012 is the tough year well in terms of companies (indiscernible) started we just had Chinese New Year how are you guys seeing order rates coming back, orders coming in line with how you expected after Chinese New Year?

Kipp Bedard

Yeah, good question I would probably should make a point here. I mean I think what we’re seeing in memory strength in terms of pricing is as much driven by right sizing supplies it is by demand. I am not here to tell you today that for some reason PCs have taken this huge step function up in units shipments from just last quarter which is why we have seen a 50% increase in PC DRAM pricing, I don’t think that’s the case at all. I think most of this has been right sizing supply and we finally hit that equilibrium where the supply chain is where it is, there is not a lot of inventory in it. The shipments going out and the shipments going in are pretty much the same and as a result we still – we are seeing the kind of a correction the pricing that was probably artificially weak last year as we chase this decreasing PC environment.

I think when I go back and think about this time last year the expectations by most of our customers were still pretty healthy high-single digit unit shipment growth rate in PCs and of course we ended up negative by some number 3% to 7% depending on what you think. So, we were trying to chase supply and right size that supply all year long where every quarter the expectations for PC shipments got lower. So, I think we finally caught that in about that September, October timeframe which is where we started to see DRAM prices bottom out and then we have seen a nice growth since there. So, again, most of this in Q1 has been on the DRAM side probably rightsizing supply with some help from the mobile segments and the mobile segment and SSDs in particular are continuing to help on the NAND side.

Betsy Van Hees - Wedbush

Alright. Well, thank you so much Kipp. We really appreciate you coming all the way up to New York.

Kipp Bedard - Vice President, Investor Relations

Thank you, Betsy. And thanks for spending the time with us today. I 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: transcripts@seekingalpha.com. Thank you!

Source: Micron Technology's Management Presents at Wedbush Technology, Media, Telecommunication Management Access Conference (Transcript)
This Transcript
All Transcripts