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Micron Technology Inc. (NASDAQ:MU)

F2Q09 Earnings Call

April 2, 2009 4:30 pm ET

Executives

Kipp A. Bedard – Vice President of Investor Relations

Steven R. Appleton – Chairman & Chief Executive Officer

D. Mark Durcan – President & Chief Operating Officer

Ronald C. Foster – Chief Financial Officer & Vice President of Finance

Mark W. Adams – Vice President of Worldwide Sales

Analysts

James Covello - Goldman Sachs

Tim Luke - Barclays Capital

Gary Hsueh - Oppenheimer & Co.

Uche Orji - UBS

John Pitzer - Credit Suisse

Shawn Webster - J.P. Morgan

David Wong - Wachovia Capital Markets, LLC

Kevin Cassidy - Thomas Weisel Partners

Daniel Berenbaum - Auriga USA

[Unidentified Analyst] – Citigroup

Bob Gujavarty - Deutsche Bank Securities

Kevin Vassily - Pacific Crest Securities

Operator

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time I would like to welcome everyone to the Micron Technology’s second quarter 2009 financial release conference call. (Operator Instructions) Thank you.

It is now my pleasure to turn the floor over to your host, Kipp Bedard. Sir, you may begin your conference.

Kipp A. Bedard

Thank you very much and welcome everyone to Micron Technology’s second quarter 2009 financial release conference call. On the call today we have Steve Appleton, Chairman and CEO; Mark Durcan, President and Chief Operating Officer; Ronald Foster, Chief Financial Officer and Vice President of Finance; and of course Mark Adams, Vice President of Worldwide Sales. This conference call, including audio and slides, is also available on Micron’s website at micron.com. If you have not had an opportunity to review the second quarter 2009 financial press release, it is also available on our website at micron.com. Our call will be approximately 60 minutes in length.

There will be an audio replay of this call accessed by dialing 706-645-9291 with confirmation code of 90736047. This replay will run through Thursday, April 9, 2009 at 5:30 PM Mountain Time. A webcast replay will be available on the company’s website until April 2, 2010. We encourage you to monitor our website again at micron.com throughout the quarter for the most current information on the company, including information of 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 a consolidated basis from time to time with the Securities and Exchange Commission, specifically the company’s most recent Form 10-K and Form 10-Q. These documents contain and identify important factors that could cause the actual results for the company, on a consolidated basis, to differ materially from those contained in our projections or forward-looking statements.

These certain factors can be found in the Investor Relations section of Micron’s website. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of a presentation to conform these statements to actual results.

I will now turn the call over to Mr. Ron Foster. Ron.

Ronald C. Foster

Thanks Kipp. I will briefly review the summary financial results for the second quarter, which ended March 5, 2009. Revenue for the second quarter decreased 29% compared to the prior quarter. Memory revenues were down 26%, due to an unusually steep memory ASP decline of 20%, driven by overall market weakness. Memory revenues included $33 million in royalty and technology fees. Imaging revenues were down 53% from quarter-to-quarter, primarily due to weakness in the mobile phone market.

We ended the second quarter with $932 million in cash and short term investments. Operating cash flow was $339 million in the second quarter, including a one time benefit of $208 million related to a billing to Intel for the termination of the Boise supply agreement. Financing cash flows for the quarter included $208 million distribution to Intel for their share of the supply agreement.

Gross margin was minus 27% for the quarter. The declines in memory ASPs during the quarter triggered a $234 million non-cash write-down of memory inventories to estimated market value. Also included in these results is a favorable NRV flow through effect from prior period write-offs of $277 million. Absent the NRV effects in both quarters, memory gross margin was 11% lower quarter-to-quarter. Idle facility charges of approximately $60 million at Inotera and IM Flash Singapore are included in the quarter results. We anticipate that idle facility costs will be somewhat lower in fiscal Q3.

NAND average selling prices declined 13% for the quarter, while NAND cost per gigabyte declined by 23%. These cost declines exclude the NRV effects and idle facility costs associated with IM Flash Singapore. The successful ramp of our industry leading 34-nanometer MLC NAND product was a substantial contributor to this cost reduction. We expect to realize additional cost reductions in the second half of 2009, as 34-nanometer becomes the majority of our NAND wafer shipments. Overall NAND gross margins performance substantially improved quarter over quarter, albeit still negative.

NAND bit production in the third quarter is forecast to be in the high teens, as a result of a 200- millimeter phase out, offset by rapidly accelerating process node migrations. Continuing production efficiencies, and the 34-nanometer node transition, will lead to a quarterly cost per gigabyte decline, averaging mid to high teens for the second half of fiscal 2009.

Even though DRAM cost per gigabit declined by 12% quarter over quarter, de-ramped ASPs declined by an unusually high 30% in the same period, due in part to a decrease in the mix of higher ASP specialty DRAM products that service the weak consumer markets. These cost declines exclude NRV effects and idle capacity costs related to Micron’s supply agreement with Inotera.

Qimonda has defaulted on its wafer purchase commitment to Inotera. As a result, Inotera has significantly reduced wafer production, triggering the idle capacity charges per our supply agreement. Due to the weak demand for consumer related products, we are phasing out 200-millimeter capacity in Boise and are adjusting all global 200-millimeter capacity to balance with projected future demand.

Fiscal Q3 DRAM cost reductions are expected to be in the mid to high single digits, and bit production is forecast to increase in the high single digit range, primarily due to 50-nanometer process node migrations, and relative stability in wafer production. These projections exclude charges associated with idle capacity at Inotera.

Imaging gross margins were down as we experienced a slow down in unit sales and production, driving up per unit costs. Imaging gross margins did, however, remain positive at 2.8%.

Progress in reducing our operating cost structure continued in the second quarter. Restructuring programs and spending controls reduced SG&A expense to $90 million. This was below the guidance range of $100 to $105 million and 25% below the prior year period. R&D expense of $168 million was in line with projections, and resulted from ongoing cost management efforts and progress in transitioning products from development to production.

We anticipate SG&A expenses to be in the $85 to $90 million range in fiscal Q3 ’09, and R&D expenses to be in the $175 to $180 million range. The increase in R&D expenses is primarily related to product qualifications. We expect the R&D spend to decrease in future quarters. We will continue to proactively manage our cost structure to enable Micron to remain competitive in this environment.

Micron reported a net loss of $751 million or $0.97 per diluted share for the quarter, compared to a loss of $706 million or $0.91 per share in the prior quarter. The net loss includes restructuring charges of $105 million, which incorporates two major items. First, restructuring costs of $17 million related to employee severance. Second, an $87 million non-cash charge for asset write-downs related to the Boise fab phase out. Also, as a result of prevailing market conditions, the company wrote-off all of the $58 million of goodwill previously included in the imaging segment. This eliminates all remaining goodwill on Micron’s balance sheet.

Headcount declined by 5% in the quarter to 20,794 employees worldwide. In financing activities, Micron utilized new loan proceeds to contribute $99 million to the TECH Singapore joint venture. Total debt increased by $29 million to $2.895 billion, as the normal amortization of existing loans partially offset the new loan.

Q2 cash expenditures for property, plant and equipment totaled $139 million, down significantly from $334 million in the first quarter of 2009. Anticipated capital expenditures for fiscal 2009 have been refined to approximately $650 to $700 million from last quarter’s guidance of $650 to $750 million. It is important to note that nearly three-quarters of the 2009 capital expenditures were already spent in the first half.

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

Mark W. Adams

Thanks Ron. Goods shipments from Micron’s memory products were down slightly when compared to our fiscal Q1. The dip decline was driven by our strategic desire to optimize our production on more stable market segments, and manage our overall inventory through a relatively unpredictable demand cycle and the depressed pricing in our holiday quarter.

Even so, due to our overall supply contraction in the market, our performance enabled us to grow share in both the DRAM and NAND segments. At a time where both NAND and DRAM pricing is trending in a positive direction, we see Micron as well positioned to take advantage of more favorable market conditions.

Our core DRAM segment, which includes our PC and server business, grew 5% in big ship quarter over quarter. While market forecasts suggest the PC state to be down 10 to 15% range in Q1 calendar year ’09, we were able to drive market share growth from competition in this segment as well.

Server revenue, as a percentage of our overall DRAM business, held steady at the 20% level. We continue to see an increase in memory content per system. Q2 [inaudible] are approximately 2.4 gigabytes and trending to 2.6 gigabytes in calendar Q2.

Although the industry migration from DDR2 to DDR3 has been slower than anticipated, Micron continues to lead in this transition with our 50 [anometer] DDR3 product. The shipment of Micron’s technology leading DDR3 product increased 125% in bit growth quarter over quarter and represented 20% of our overall DRAM sales.

Networking shipments were down 10% quarter over quarter as we saw corporate spending negatively impact overall bit growth in Q2. The mobile segment saw a sharp decline in overall demand, which resulted in a build-up in mobile inventory. Net shipments in mobile were down 57%. Despite the challenge around the mobile business, Micron saw continued growth in shipments of MCPs, multi-chip packages, while we experienced a 73% increase from previous quarter shipments.

Despite the reduced industry forecast from mobile in calendar year ’09, we continue to feel Micron is in a unique position for growth to drive bits in the mobile handsets with our portfolio products, including MCP, PSRAM, e-MMC NAND [based] technology, and mobile memory cards. During the quarter we saw a number of new OEM opportunities in mobile, largely driven by competitive suppliers unable to meet customer requirements. We expect that this new business will materialize over the remainder of 2009.

[Inaudible] continues to be depressed in our fiscal Q2. It’s important to note that our fiscal Q2 included a December month where DRAM pricing was substantially lower than today’s pricing. Given the recent uptick in DRAM pricing during the last week, there appears to be market reaction to an ongoing reduction in DRAM supply. We believe that Micron is well positioned to take advantage of a potentially [inaudible] memory market that has seen almost two years of capital expenditure reductions and significant capacity from older technology coming offline.

In Q2 ’09, our NAND shipments were down 8% from the previous quarter, primarily due to our holiday production slowdown. Micron began shipping our industry leading 34-nanometer 32-gigabyte Flash NAND drive in high volume production this past quarter. In our current third quarter we are forecasting that the vast majority of our NAND shipments will be based on our 34-nanometer based products. We feel this puts us in a very strong position to beat our competition.

Due to a decline in production of lower density NAND components, we are projecting a substantial increase in gigabytes per unit in fiscal Q3. As point in fact, we anticipate that Lexar’s average density per card will be approximately 3.5 gigabytes per card in fiscal [O3], an increase from under 3 gigabytes per unit during the holidays. Overall, our NAND units experienced substantial improvement for the quarter.

[Inaudible] we caught up with demand pricing which led to component prices increasing in the channel, such that quarter to date NAND fees are up around 10%. In addition, [hydroid] product segments such as FFE, metrics and NAND for mobile phones represent large bit consumer applications which, in combination with reduced supply growth, we anticipate will lead us to improved production in the NAND market.

General last few months of pricing in NAND increases, and the weaker increase in DRAM pricing, we are hopeful that the worst is behind us. While our Q2 results reflect a very tough memory market driven by over supply and a softening demand, we are optimistic that improving demand picture when coupled with the imagery supply contraction, can lead us to a more stable business environment.

With that, I’ll hand it back over to Kipp.

Kipp A. Bedard

Thanks Mark. We would now like to take questions from callers. Just a reminder, if you are using a speaker phone, please pick up the handset when asking a question so we can hear you clearly.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Covello - Goldman Sachs.

James Covello - Goldman Sachs

Good afternoon guys. Thanks so much for taking the question. Maybe a couple of things. The content per box comment was interesting because, you know, there’s a lot of concern about the fact that content per box could be flattening out here. What gives us – what is driving the increase in content per box?

Mark W. Adams

Jim, this is Mark. The content per box, I think, for us a lot of the projections we’re seeing that flatten that out is the percentage of bytes and bits going into netbooks and what have you. In the desktop arena, we’re seeing that it continues to drive toward a fairly good byte standard for configurations coming out of the manufacturing base. So while there is some growth, obviously, in the 2009 period for netbooks kind of having an impact on that, we still see the overall configuration being driven to 4 gigabytes for notebooks and desktop.

James Covello - Goldman Sachs

You know, one of the other concerns that people have about the supply side argument is that there is a fair amount of latent or idled capacity that could come back online. As we get into a little bit of [alpha] period for DRAM and MRAM, and that that latent capacity coming back online would kind of stymie any price recovery. Do you guys have any thoughts on that?

Steven R. Appleton

Yes, Jim, this is Steve. I think there’s a couple of things to point out around that. Some of it that you’re mentioning or I guess not that you’re mentioning but that’s going on in the industry, you know, the capacity that existed at – let’s use [Qimonda] as an example. The Richmond facility was running 30 thousand 12-inch per month. I mean that is just down and gone. And we can’t imagine a scenario where that recovers. They also were running about 40 thousand 8-inch per month on DRAM. In the 8-inch facility [say] next to the 12-inch. That’s down and gone. They’ve obviously stopped producing [inaudible]. I don’t think that capacity is coming back at all.

And I would also note our Intels, we shut down our 200-millimeter. I should say we’re in the process of shutting down our 200-millimeter here in Boise. We don’t expect that that would return. So there’s a fair amount of capacity that will not come back on.

Now, the other part of the capacity that exists that I think you’re most notably mentioning is some of that capacity in Taiwan, and whether it’s what we just mentioned around 8 or 10, we know [inaudible] has had substantial reductions; [Prior Chip] announced reductions; etc. That capacity could come back on. I think there’s some truth that if it were to be in the short term, in other words in the next few months, that maybe some of it would be brought back on line if you had such a substantial increase in the ASP that it would make sense from a cash cost basis. But keep in mind that that capacity is going on for weeks over time, and it’s getting old. And in fact from my perspective, and one of the challenges that the Taiwan industry has, is that a lot of that capacity is old today by comparison to what Micron’s doing.

So, you know, we’re already running production on next generation node and they haven’t made any transition yet for a lot of that capacity. So a few things have to happen. One, it has to be available pretty soon. It has to be upgraded, which would require a fair amount of money to do. So the other thing that probably no connection with that is I’ve seen some estimates where, in order for that capacity to make any sense at all, even on a cash basis, that the DRAM ASPs would need to get out somewhere closer to $2. And, you know, as Mark already mentioned and others, it’s really kind of in the $1.05, $1.10 range as we see today, which by the way, I’ll note that for those who don’t remember, the main pricing per gigabyte that’s down to about $0.70 and the DRAM pricing per gigabit got down to about $0.50.

And that’s one of the reasons that I think people might be a little surprised that our quarter over quarter pricing was down so much. Just as Mark noted, remember that the [inaudible] is an entire class in ASP and that was essentially the first third of our quarter that we had to deal with, as opposed to how other companies report, you know, not being offset like we are. So that’s just something to keep in mind, Jim.

James Covello - Goldman Sachs

How much of a lag should we expect between the much better spot pricing we’ve been seeing and hopefully an increase in contract pricing? Thank you so much.

Kipp A. Bedard

So the question being, Jim, the [inaudible] contract pricing catching up to where the spot is?

James Covello - Goldman Sachs

Yes.

Mark W. Adams

Well, I don’t think it’s a tremendous lag. We’re starting to see a lot of customer inquiry in terms of supply agreement and negotiations for not just the next quarter for [Bedford] back halves. We’re starting to see some upward movement there. And I would suspect, you know, normally get too [formal] on the possession side of that, but I’d say, you know, it’s probably next quarter we’ll start to see a tightening there in terms of the overall gap being closed.

Ronald C. Foster

Yes. What’s interesting, Jim, is of course when the price is going up, the customer only wants to negotiate once every three months. When it’s going down, [inaudible] say it every day. And that’s the natural trend that exists.

Operator

Your next question comes from Tim Luke - Barclays Capital.

Tim Luke - Barclays Capital

I was wondering if you could maybe clarify, out of today’s pricing, how you would have expected the revenue off the bit growth to look as you move out for the May quarter.

Steven R. Appleton

Tim, I think maybe what you’re asking for is the quarter to date ASP update, and if that’s the case we’re looking at NAND being up about 10% over last quarter’s average. And in commodities, DRAM we’re looking it up mid-teens.

Tim Luke - Barclays Capital

Up 15 in commodity?

Steven R. Appleton

Correct.

Tim Luke - Barclays Capital

And specialty?

Steven R. Appleton

Specialty generally doesn’t move its pricing all that much. So to that end it’s really more of a mix, how many specialty bits we ship compared to commodity in the quarter. And of course that’s always a tough one to predict.

Tim Luke - Barclays Capital

So Steve, could you just update us in forecast three how you perceived opportunities with Inotera and in terms of migrating that from trench to stack, and how that might be funded? And to what extent it appears that you’re still in some discussions with the Taiwanese Memory Corporation, and how you view that landscape.

Steven R. Appleton

Well, with respect to – let me take Inotera first, and Mark Durcan’s here with us. You could probably chime in or answer something, if you have maybe a more granular question around it. But clearly they’re still running trench. And that – there’s a pilot line being put in place to be able to install our technology and prototype to stack conversion. The timing of that conversion is obviously the dependent upon the capital expenditures to finish out the conversion. And I would just say that we’re primarily focused right now on getting the pilot line running and getting the trench technology proven out in the facility before we lock down the schedule of conversion. But obviously you can expect us to do that moving forward.

The financing of that is – we’re still looking at [breaks], considerations. Of course you know Inotera is a public company and they have historically financed their own conversion. And I know they’re looking at that. Of course, Nanya is a partner of their as well as [Permosa], and is part of Nanya. So all of that’s in the mix.

In terms of what’s going on in Taiwan, obviously there were announcements the last couple of days that the Taiwan government had decided to choose [Alpeta] for the technology partner. I would just say that we’re still in discussions with the Taiwan government, but you know I do want to note that the deal that I think Alpeta – that’s okay with Alpeta is not okay with us. And, you know, we just haven’t seen any compelling reason yet in terms of benefits for Micron to participate there.

And I want to note that there has been a lot of speculation around the consolidation of the Taiwan assets, and I think others outside of Micron know as much as we do at this point. But, you know, there was some hope that there would probably be consolidation of assets and how that would occur, and obviously we had recommendations on how that – we think that that would be most effective, as well as others. And clearly that’s not going to happen right now. And so, we don’t know what happens now. As you know, the Taiwan company is I would say very unstable in terms of the debt and the cash structures.

And the good news is that when we look at really what exists in Taiwan, the two largest producers of – the two largest companies that deal in capacity are Power Chip and Inotera, and then ProMOS was pretty close to capacity and [Wind Rider] was not that much. And [inaudible] of course had a new power chip in [Alpeta]. You know, mainly [inaudible] small producers, but remember NAND and Inotera are already part of the Micron camp, if you will. And then what you really have is okay, what could happen with ProMOS? And [Lex Chip] and [inaudible] are already part of Alpeta, and I think [Win Barn] over time would probably decide to go with another product.

So, you know, short of – there’s nothing really that’s not negative for Micron in the event that we aren’t able to come up with a formula that works for both us, and I think what the Taiwan government wants to do. But having said that, I mean, we’re ready to do something to the extent that it makes sense. We will pursue it and we’re still in discussions with them. But what Alpeta did just didn’t [make] much interest to us, frankly, and so that’s why we’re [not] on that.

Tim Luke - Barclays Capital

I think you guys have said that you are likely to put your own capital into the Inotera migration, and then just more broadly as you look at your cash balances through the end of the year to what extent do you feel you might look to bolster it through sort of the capital markets or equipment financing?

Steven R. Appleton

On the Inotera piece, you know, obviously we’re participating there now. And you know Ron had mentioned of course we have idle capacity charges that we’ll take. And we’re looking at that. But as I said, I think we’re hopeful that Inotera deal will [inaudible] finance its needs going forward as it has in the past, and that’s what we’re working towards. Ron, do you want to take the other question?

Ronald C. Foster

Yes. Tim, this is Ron. In terms of Inotera, Steve already mentioned they’re a public company and have specifically worked on their own financing constructs. But to your question about do we, Micron, have any plans to deal with capital requirements and how to address them in the company, first of all they’re a function of our overall business needs, as you know, and market performance has a big effect on our capital requirements. We had a real good fix in the company on our spending, on our CapEx and on our working capital needs. And as I think you can observe from our results, we’re managing our cost structure very aggressively. We’ll continue to monitor market performance going forward, watch it closely, and our business needs relative to our capital requirements going forward.

One thing I can tell you is we are comfortable with our ability to raise funds opportunistically as required going forward.

Operator

Your next question comes from Gary Hsueh - Oppenheimer & Co.

Gary Hsueh - Oppenheimer & Co.

First, if you could disclose what royalty revenues were in the quarter. And second question, just about the whole Taiwan infrastructure and potentially more of that capacity coming online. You know, you guys mentioned that its pretty lagging as to capacity, but I’m just wondering what kind of bit growth have you guys experienced for the same wafer capacity, and going from the 60 x nanometer node to the 50 x nanometer node? Because I think most of those guys are either at 60 x or even some of the guys are still predominantly at 70 x.

Ronald C. Foster

Gary, this is Ron. The royalty revenue for the quarter was $33 million. I’ll hand it over to Mark.

Mark W. Adams

Yes. On the Taiwan capacity, a significant percentage of it today is still what probably be referenced to 70 nanometer capacity. The difference between that and our 50 nanometer node is roughly a factor of 85 to 90%, as you go from that existing 70 nanometer capacity in Taiwan, I can’t even put wafer to bits for what we would experience on our nanometer node.

Gary Hsueh - Oppenheimer & Co.

And just let me clarify that sort of discussion about the Taiwanese memory company. You know, it really sounds like there’s no upside here to be gained in saddling up side by side with Alpeta, certainly not in terms of kicking in your IT for free, or in exchange for capacity, because you pretty much already have that agreement with Nanya and Inotera. So you know if you’re not involved in a discussion and don’t expect it to draw any kind of meaningful upside out of that negotiation, I mean, are we supposed to take away that any kind of participation in this memory holding company from Micron’s part is pretty much nil? And that for you guys kind of strategy here in Taiwan and building out your infrastructure is really in conjunction with Nanya and Inotera and Formosa Plastics?

Mark W. Adams

Yes, Gary, I think that’s a good question. The first response I have is clearly we’re focused on the relationship we have with Nanya and Inotera and we’ll continue to be because we’re in that relationship now. Now we’re still talking to what they call [inaudible] in Taiwan [mini] court. And we’re interested in seeing how that evolves. I think that everyone would admit, probably even those involved from the Taiwan government or those that are consulting Taiwan’s government that this situation has changed a lot as it’s moved through time the last few months. And it’s still pretty fluid. As you already noted, we didn’t see much of an interest or advantage for us to do what Alpeta did, because we’re in I think different positions then and with everything [inaudible] and you’d expect us to say this, but our technology is far better than Alpeta’s.

And so we think we’re in a pretty good position, and it’s not that we’re not interested at all. It’s that we’re interested in finding something that really does make sense for us. And as of yet we haven’t been able to do that, but I wouldn’t rule that out in the future. And we’re still interested to the extent that something could be developed.

Gary Hsueh - Oppenheimer & Co.

You talked about DRAM. I think it was bit shipment or bit production in the third quarter, up mid to high single digits. You know, basically I have talked to a lot of DRAM manufacturers and a lot of the PC OEMs, at least two to three weeks ago, were kind of quoting bit shipment sort of forecasts in the calendar Q2 period of up 15 to 20%. Has anything changed at the margin specifically to commodity PC shipment expectations here over the near term?

Mark W. Adams

The answer to that is no. Just in keep in mind that our reference is to production bits, not to shipment bits.

Operator

Your next question comes from Uche Orji – UBS.

Uche Orji – UBS

Let me just start by asking you about your views on inventory. I mean, in your case the inventory has gone up to 61 days from 43 and you talked about having enough inventory to take advantage of the market. What is your sense of the inventory across the China, including the module makers and the OEMs? Are we in a situation where everybody has taken advantage of the lower priced inventory and therefore your expectations to take advantage doesn’t come through?

Mark W. Adams

So on the inventory side, we think the OEMs are probably in a healthier position at current state. On the channel side, we see a lot of activity and we see as I mentioned in our last call, we think that they’re pretty good control on the channel piece of the DRAM state. So the OEMs are in pretty healthy position. I wouldn’t say out of balance. I just think they’re in pretty flush position as far as the current demand. But the channel piece is pretty fluid. We feel pretty good about that. We don’t see too much back up on the channel piece.

Uche Orji – UBS

Just in terms of Europe, what is your transition rate right now? I mean if you can you give us a sense to what it is within DRAM and NAND? A couple of your competitors are running below full capacity [inaudible]. What is your sense of where you are and where the rest of the company today?

Mark W. Adams

So on the 300 millimeter capacity, we’re running all the Micron fabs at 100% today. The – I want to mention there is some idle capacity at the Inotera fab, given what happened with Qimonda there. And on the 200 millimeter there’s – you know, we’ve been moving through a rough phase here as we engaged in the holiday shutdown and are rebalancing relative to demand. So on the 200 millimeter side, you know, we’re taking actions in terms of taking capacity off line here in Boise, and we think that 200 millimeter situation will stabilize out in the calendar – late calendar Q3 and into calendar Q4, be stable it, essentially get balance of remaining supply online and being able to run that essentially to full utilization.

Uche Orji – UBS

And then just lastly, please, on the CapEx. On the new guidance of $650 to $700, how much is going to come from your partners? And while you’re explaining that, can you just give me an idea of how much of the term loan you intend to draw, how do you plan to reduce the remainder of the terms for the rest of the life of that? Thank you.

Ronald C. Foster

This is Ron. In terms of our CapEx as I mentioned nearly three-quarters of it has already been spent for the fiscal year, so we’ve got a really declining portion. And a chunk of that is related to payments as was mentioned earlier on some of our equipment. It’s already in place for our new technologies. So a piece of it is coming from our partners. I don’t have the guidance in terms of the exact breakdown, but there’s not a whole lot in the pipe in the second half. And can you give me again the question about the term loan?

Uche Orji – UBS

The term loan, you have a $300 million term loan, you know, you took out with [inaudible] and you drew down $150. What is the plan for the remainder of the term loan?

Ronald C. Foster

Okay. Yes. We took a term loan out which needs to be drawn down within one year of the first draw. And we took half of the $300 [same] dollar, $150 million [$10] in the first draw down. We have to get the second draw down within 12 months of the first.

Uche Orji – UBS

You need to draw that down for what?

Ronald C. Foster

The application of the loan in Singapore specifically related to our TECH joint venture majority owned facility, and our commitment to put capital in there for the new DRAM 16-nanometer technology – 50-millimeter technology. Excuse me.

Operator

Your next question comes from John Pitzer - Credit Suisse.

John Pitzer - Credit Suisse

I know there’s a lot of moving parts, but when you look at the full calendar year can you just review your assumptions now for both Micron DRAM bit growth and industry bit growth for the calendar year? And I’d kind of be curious as to how you feel that might trend half on half as well sequentially.

Steven R. Appleton

We haven’t given a year on year bit growth number for Micron. As you know we tend to keep you more quarterly focused for that. What we’re seeing out in the market is a range now of anywhere from say a low of 2, 3, 4% up to maybe 15, 16, 17% for DRAM expectations. For NAND looks like the ranges are more in the 40 to 50% range for bit growth year-over-year.

John Pitzer - Credit Suisse

Can we start from DRAM on how industry supply might grow half on half sequentially?

Steven R. Appleton

Well, we were talking a little bit about that today, and it looks like if you start with say a wafer look, we think it’s down about 20, 25% in calendar Q1. Probably down 30, 35% for DRAM in Q2. So obviously bit’s down both in the first half, with a little bit difficult refers now back to what kind of pricing scenario in the second half of the year and does any of the idle capacity come back on. So it’s a really pretty tough call right now, John, to look that far forward.

John Pitzer - Credit Suisse

And then guys you mentioned sort of [SFC’s], netbooks and mobile as doing the demand driver on the handsets. Can you talk a little bit about how you see the SFC market developing for the balance of this year and next? And do you think, you know, we’ve seen unusually good pricing for NAND and what’s typically a seasonally soft calendar first quarter. What do you think is driving that?

D. Mark Durcan

I think the – I think you hit on the demand side of this and certainly the supply side of this picture. But the demand thing, I think, is encouraging at the current price levels and the evolution of applications like SFPs which between even combined with netbooks, embedded in netbooks, but also your notebook applications. And a lot of work being done on the enterprise side that, you know, after about two years of development and investment in controller technology and firmware, I think we’re seeing a lot of progress at the major OEM level from the rollout of SFPs and pilots and really that category is maturing.

So from a price equation and the application side of SSDs and the growth of netbooks, and then when you kind of lay that on to the Smartphone market, which is still a pretty healthy market, I realize that the overall mobile market is – has got a revised decline in terms of overall projection, but we’re still talking about 1 billion units. And on Smartphones you’re talking somewhere in the neighborhood of 16 to 20%, somewhere in there you’ve got 150 to 200 million units. They’re going to have high demand of density NAND in there.

So you combine all that, and you look at the last year-and-a-half to two years in NAND CapEx, and certainly over the last six to 12 months in terms of some of our competitors and their reduction in supply, its combined obviously to a favorable situation today. And as I said earlier we’re – a good quarter for us in NAND and our growth in terms of our customer relationships and overall supply. And they’re really certainly endorsed and excited about the 34-nanometer.

John Pitzer - Credit Suisse

Any guidelines as to when SSDs might be 10% of your NAND supply?

D. Mark Durcan

At this point it’s hard to. A lot of our work in the SSD space has been in the enterprise space as we’ve indicated in the past. I would say that the development of relationships out of our business for our two customers around enterprise SSDs has been pretty favorable and it looks seeming to be accelerated. Hard for me to comment today on when that would take on revenue level of 10%.

John Pitzer - Credit Suisse

One last question for Steve. Steve, just given the attention to wanting to buy assets on the cheap, I’m just wondering if you could talk a little bit about whether or not you see any strategic synergies in the NOR market relative to your business?

Steven R. Appleton

Well, we look at the memory business holistically. As you know, we were in the NOR business at one time. And obviously we’re in the NAND and the DRAM. And those are all components of the memory business. I would say that, you know, we continue to look at the entire landscape as to what may make sense. And I guess I’ll just leave it at that. If there’s something where we think we can generate synergy, and overall be accretive for the company, then we’ll take a look. And if that’s not going to be the case, then we’ll probably pass on the opportunity. But I would say we’re pretty open in looking at everything that’s in the space.

Operator

Your next question comes from Shawn Webster - J.P. Morgan.

Shawn Webster - J.P. Morgan

For February, I don’t think I caught it, but what did your DRAM production do sequentially in bits and NAND production?

Mark W. Adams

It was down mid to high single digits, Shawn.

Shawn Webster - J.P. Morgan

DRAM was down?

Mark W. Adams

That’s correct.

Shawn Webster - J.P. Morgan

Mid to high single, and NAND did what?

Mark W. Adams

NAND was down about mid single digits.

Shawn Webster - J.P. Morgan

And what did your wafer production do sequentially?

Mark W. Adams

It was down about 20%, and we should be up a percent or two this quarter.

Shawn Webster - J.P. Morgan

And then for the NAND landscape, what are your PC OEMs telling you to expect for DRAM bit demand in calendar Q2? And maybe even further out, if they’re giving you any visibility that far.

Mark W. Adams

The visibility question I’ll answer first. They’re hedging a lot right now, based on coming out of their holiday quarter and then reconciling kind of the new environment, if you will. So I would say that’s a little bit tougher longer term. In the short term, the bit demand is up. But again it’s up reduced from our original plan on some [que] OEMs. As I mentioned during my opening comments, its not been a bad thing for Micron to be able to capture some share at these que OEMs, so I think they’re bit demand is certainly down from where they might have called it going into the calendar year. For Micron we feel pretty bullish that we’ll be able to capture some decent share given the competitive landscape.

Shawn Webster - J.P. Morgan

So your PC OEMs expect calendar Q2 to be up in terms of bit demand sequentially globally?

Mark W. Adams

Yes.

Shawn Webster - J.P. Morgan

And then can you rank for us, I guess, the strength you think that you’ll have in the May quarter for shipments by your various end markets that you ship to?

Ronald C. Foster

Sure. I guess I’ll take a shot, but I would guess, listening to Mark, probably the commodity memory has pretty good strength. We are starting to see some early signs in the handset markets for a turn there, so specialty memory could possibly take a tick out. I think it’s pretty clear that NAND is on a pretty good trajectory based on his earlier comment about density growth in almost every category; cards, phones, almost cameras, everything that uses it is going through a pretty good density jump. So it looks like we’re entering a period where several of the different segments have either settled down and starting to make a turn or there’s at least early finds that they’re starting to look better.

I would also add that we’re seeing the same thing in the imaging area, too, that it’s probably troughed and it looks like its coming back.

Operator

Your next question comes from David Wong - Wachovia Capital Markets, LLC.

David Wong - Wachovia Capital Markets, LLC

Can you announce whether you’re expecting any payment from Nanya or Inotera for technology transfers any time in the near future?

Ronald C. Foster

David, this is Ron. We have a technology agreement, and get regular payments on a quarterly basis. And that’s a significant percentage of the royalty payments I reported on this quarter at $33 million. And we’ll get those payments on a go forward basis.

David Wong - Wachovia Capital Markets, LLC

So it would be a fairly constant rate. That doesn’t drop as the year progresses at all.

Ronald C. Foster

Yes, for the technology portion of the agreement. There’s also a portion that can be related with production or shipments, which we also collect a royalty on, but that has not initiated yet.

David Wong - Wachovia Capital Markets, LLC

Any feeling for when that might begin to ramp?

Ronald C. Foster

I don’t have a projection at this point.

David Wong - Wachovia Capital Markets, LLC

Your cash balances were down something like $100 million in this last quarter. Would we expect the number something like this or less going forward? Or was there any special factors that reduced your cash flow in the current quarter that don’t recur?

Ronald C. Foster

David, there’s a lot of puts and takes in our cash balance. As I mentioned capital requirements are a function of not only our operating requirements, which we have a pretty good fix on and been very carefully managing, but also the overall market movements, price trends, etc. So I don’t have a forecast for you going forward on cash balance, but we’re obviously watching it and managing it carefully.

Operator

Your next question comes from Kevin Cassidy - Thomas Weisel Partners.

Kevin Cassidy - Thomas Weisel Partners

In your licensing discussions with PMC, is Flash IP mentioned at all?

Mark W. Adams

While we say mentioned, I think there are some parties, Intel, that would probably be desirous of some type of flash technology. And so in respect to those discussions, but it hasn’t been any part of what we’ve been talking about with them. And to our knowledge, it’s primarily all been focused on DRAM at this point.

Kevin Cassidy - Thomas Weisel Partners

And on the DRAM, if you were to come to an agreement with them, when do you think the conversion to your technology would take? Six months after the agreement or sooner than that would you say?

Mark W. Adams

Yes. We don’t have any idea because I think that thing were probably worth noting if you’ve looked at any of the recent media around what’s happening in Taiwan, even with this month’s recent announcement in Alpeta is that they’re talking about doing technology development in the next year as opposed to any technology deployment. And so I think in that context, no matter who it is, whether it’s Alpeta or Micron or somebody else, I don’t think that we’re talking about something of significance in the short term.

Operator

Your next question comes from Daniel Berenbaum - Auriga USA.

Daniel Berenbaum - Auriga USA

Since we’re on the topic of NAND IP, as you move beyond 34-nanometer and you look at charge copying versus fully engaged, is there any IP that you feel you’ll need to go out and license? Or do you feel like you have everything in house to do what’s required?

D. Mark Durcan

Dan, this is Mark. Yes, I think we’re in pretty good shape on the technology on that and the intellectual property associated with it.

Operator

Your next question comes from [Unidentified Analyst] – Citigroup.

Unidentified Analyst – Citigroup

Can you discuss your guidance for depreciation this quarter? I’m sorry, for the May quarter.

Ronald C. Foster

This is Ron. We had depreciation around $540 million in the current quarter, and roughly speaking it’ll be in that sort of range, maybe up a little bit going forward.

Unidentified Analyst – Citigroup

And PMC has discussed their interest in mobile DRAM. Is that also include commodities DRAM as well or?

D. Mark Durcan

It probably depends on what part you’re talking about. There – just for clarification, by the way, in the mobile sector there’s both NAND and DRAM in place there. And DRAM is typically what we call low power and it’s usually – there’s a combination of low power DRAM with a NAND that is going into what we call MCP, a multi-chip package. And that is clearly – that part of the business is growing. There’s another part of the business that has to do with pseudo static RAM and neural, and as you might know we’re a producer of pseudo static RAM. I would say that the expectation is that that will decline over time as part of the mobile segment.

So we don’t really characterize it. I think what you’re calling the commodity DRAM, although I’ll just tell you it’s not that much different in terms of how it behaves on pricing. It’s just that it goes in a combined package before it gets to the wireless customer.

Operator

Your next question comes from Bob Gujavarty - Deutsche Bank Securities.

Bob Gujavarty - Deutsche Bank Securities

You mentioned a few kind of one time things that hit gross margin, the Inotera under utilization and then also IM class Singapore. You mentioned that they would go down in 3Q. Can you kind of size how big the impact was and how much improvement you can see in the third quarter?

Ronald C. Foster

Yes, Bob, this is Ron. If you look at the under utilized capacity activities, the impact on Inotera is a function of resolving their capacity plan going forward. So at current level we’re at capacity with Qimonda is not being utilized. The trench capacity is not being produced. It’ll be roughly the same dollar range for Inotera in the next quarter. And on IMFS it actually will come down in the third quarter compared to the second quarter as a result of winding down activities there, and reducing our overall cost structure going forward. So it’ll be a relatively small number in future quarters.

Bob Gujavarty - Deutsche Bank Securities

Just on a sizing side of this, tens of millions? Just could you try and get an idea of the magnitude of potential improvement?

Ronald C. Foster

Well, it’s $60 million range, as I mentioned, in Q2. It’s going to come down marginally in the third quarter, assuming that Inotera is still not running its idle capacity. That’s the majority of the total idle cost.

Bob Gujavarty - Deutsche Bank Securities

Ron, just the other question I have is just on Lexar, can you give some color on how Lexar’s doing in the retail NAND Flash demand, what you’re seeing there?

Ronald C. Foster

Well, overall that business through the holidays was down from a market perspective. The other interesting part of that is that behaviorally retail pricing doesn’t ever tend to tick up. Now what normally happens is there’s less of a price protection move coming out of the holiday, and that was true this year. In January and February there’s normally a correction in pricing downward. That didn’t necessarily take place, and so what you saw was rising component prices in the retail, and a flat ASP.

So we were less aggressive on the rebate side, and the price protection side if you review history was you know you can see [Sandus] quarterly results from the holiday period Q4, you saw some substantial gross margin pressure. So we’re being very selective in terms of growth opportunities and how we expand our channels right now because it’s a very tricky time in retail. You’ve got manufacturing supply coming inbound. That’s probably a little bit more than the market leader can deploy. As a matter of fact, I think they’re giving another outlook that they’ve used in the past to other channels. And so as we see that, we’re looking at the Lexar business to continue to grow and grow in places we can control our operations to be profitable, and not necessarily grow in markets that are really challenged in terms of emerging market applications today.

Operator

Your next question comes from Kevin Vassily - Pacific Crest Securities.

Kevin Vassily - Pacific Crest Securities

First on 50-nanometer DRAM, can you talk about what percent of your DRAM output right now is running on 50-nanometer?

D. Mark Durcan

Sure. This is Mark. It’s a relatively small piece of the outfit today, probably on a wafer start basis I’d say we’re in the less than 10% range today. That’ll move to essentially 100% of the wafer starts in Virginia, which is on the order of 25 to 30% over all Micron starts by the end of the calendar year. I take that back. I apologize. By the end of the calendar year, we’ll be running on the order of 50% on the 50-nanometer. Today probably less than 10%.

Kevin Vassily - Pacific Crest Securities

So from 10 to 50. Okay. So, can you help reconcile that with your CapEx budget right now? Because the general consensus is that, you know, 50-nm requires emerging lithographies. Those aren’t exactly inexpensive tools, although I guess maybe in this environment there’s probably some price leeway. Given the number of emergent tools you might need to do this, it seems like your CapEx budget looks a little low. Is there something else going on there or have you already done kind of the purchases there? Or are you using an alternative process? Can you help there?

D. Mark Durcan

Yes. There’s a number of different factors going on. First of all, there’s a fiscal and calendar year transition that happens in there. But most importantly we are pretty conscious when we design our process changes in a capital effective way. And so a lot of the capital that other folks have associated with their transitions to 50-nm are things like softer metallurization, for instance. We’ve already taken care of that when we put the [track] in place in the first place.

So for us, you’re right, there’s some amount of emerging stepper capacity required. It’s not that much, and part of that’s on the floor already. And other than that, we’re in equal shape. So the – I think the way to summarize it would be to say that the 50-nanometer low transition relative to Virginia is – you know, the cash flow associated with completing that transition by the end of the calendar year from a cash flow perspective those tools will be in place near the end of the fiscal year and that’s all contemplated in the forecast we’ve given you.

Kevin Vassily - Pacific Crest Securities

The question about the 200-millimeter plant in Boise that’s ramping down, were you running any specialty DRAM in that fab? Or was it all NAND?

D. Mark Durcan

Well, it depends what timeframe you’re talking about, but initially it was about 50% and if you go back nine months it’s about 50% NAND and 50% DRAM. More recently we took out a significant piece of the ML CRAM, you’ll remember, and we were running some small amount of SL CRAM and the rest was specialty DRAM and some filler DRAM. And that piece is now gone away in its entirety there as we transition on to the fiscal year.

Kevin Vassily - Pacific Crest Securities

One last question for Steve. I think you were addressing these relative to Taiwan Memory Corp. You mentioned that you’re not interested in a deal that [Alpeta] seemed to be willing to take. Can you shed any light on what exactly that deal is and why it seems objectionable relative to kind of what you guys hope to get out of some type of relationship?

Steven R. Appleton

Well, I probably ought to let Alpeta answer. I guess – let me characterize it such that you know – let me just characterize it from Micron’s perspective and not try to speak on Alpeta’s behalf. But simply getting an investment in Micron, you know, in exchange for let’s just call it equity or some other type of instrument, and then having to deploy all of our technology in exchange for that doesn’t really interest us because we’re not in a position to get – I don’t know about Alpeta, but we’re not in a position today where we need to get an equity investment from a foreign entity in order and they have to turn over our technology, you know, with other considerations. We just don’t see the advantages for us to do that.

And there may be other [inaudible] that we could achieve that could make sense for us, but that’s not one of them.

Kevin Vassily - Pacific Crest Securities

So it’s more the equity vested side and what you’re getting in return for that. Okay. That’s helpful. Thank you.

Kipp A. Bedard

Thank you very much. We would like to thank everyone for participating on the call today. If you will please bear with me, I need to repeat the safe harbor protection language. During the course of this call we may have made forward-looking statements regarding the company and the industry. These particular forward-looking statements and all other statements that may have been made on 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. Good day.

Operator

Thank you. This does conclude today’s Micron Technology’s second quarter 2009 financial release conference call. You may now disconnect.

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Source: Micron Technology Inc. F2Q09 (Qtr End 3/5/2009) Earnings Call Transcript
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