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

Micron Technology Inc. (NASDAQ:MU)

F3Q09 Earnings Call

June 25, 2009 4:30 pm ET

Executives

Kipp A. Bedard – Vice President, Investor Relations

Ronald C. Foster – Chief Financial Officer

Mark W. Adams – Vice President, Worldwide Sales

Analysts

Gary Hsueh - Oppenheimer & Co.

Tim Luke - Barclays Capital

Shawn Webster - J.P. Morgan

John Pitzer - Credit Suisse

James Covello - Goldman Sachs

Uche Orji - UBS

Hans Mosesmann – Raymond James

Analyst for Daniel Berenbaum - Auriga USA

Bob Gujavarty - Deutsche Bank Securities

Atif Malik - Morgan Stanley

Analyst for Tristan Gerra - Robert W. Baird

Operator

At this time, I would like to welcome everyone to the Micron Technology’s third quarter 2009 financial release conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Kipp Bedard.

Kipp A. Bedard

Thank you very much and welcome to Micron Technology’s third quarter 2009 financial release conference call. On the call today are Steve Appleton, Chairman and CEO; Mark Durcan, President and Chief Operating Officer; Ron Foster, Chief Financial Officer and Vice President of Finance; and Mark Adams, Vice President of Worldwide Sales. This conference call, including audio and slides, is also available on Micron’s Web site at micron.com. If you have not had an opportunity to review the third quarter 2009 financial press release, it is available on our Web site at micron.com.

Our call will be approximately 60 minutes in length. There will be an audio replay of this call. You can reach that by dialing 706-645-9291 with confirmation code of 14636400. This replay will run through Thursday, July 2, 2009, at 5:30 p.m. Mountain Time. A Web cast replay will be available on the company’s Web site until June 25, 2010. We encourage you to monitor our Web site again at micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will be attending.

Please note the following Safe Harbor statement. During the course of this meeting, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions, and that actual events or results may differ materially. We refer you to the documents the company files on 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 Web site. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of a presentation to conform these statements to actual results.

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

Ronald C. Foster

Let me provide a brief summary of the financial results in the third quarter, which ended June 4, 2009. The results for the third quarter reflect an operating loss of $246.0 million and a net loss of $290.0 million, or $0.36 per diluted share, on net sales of $1.1 billion.

Cost of goods sold was just under $1.0 billion, resulting in a gross margin of $107.0 million, or 10%. No lower cost of market write-down was recorded in the third quarter and the gross margin reflects an estimated benefit of $240.0 million from sales of products in the third quarter that were subject to previous write-downs.

Cost of goods sold in the third quarter also includes approximately $30.0 million of charges from Inotera and IM Flash Singapore for the cost of idle capacity.

Total sales in the third quarter increased 11% compared to the second quarter as a result of higher sales of both memory and imaging products. Memory sales also include royalties and technology fees of $32.0 million.

DRAM sales increased 14% compared to the second quarter to $553.0 million, primarily due to an 18% increase in bit shipments. NAND sales were flat compared to the second quarter at $426.0 million as a 20% increase in bit sales was offset by a decline in the NAND average selling price compared to the second quarter. Imaging revenue was $127.0 million in the third quarter, a 53% increase compared to the previous quarter. This signals that we may have seen a bottoming out of demand in the mobile markets, combined with some seasonal effects.

Looking at NAND in more detail now, the average selling price in the third quarter decreased approximately 17% compared to the second quarter. However, trade ASPs on sales to customers, other than Intel, were up about 13%, while the ASP for products sold to Intel from IM Flash, which are on a cost basis, declined markedly with a successful ramp of our 34 nanometer [nm] technology products.

Notably, trade ASPs on component sales increased significantly more than the 13% for all non-Intel trade customers. Mark will elaborate on this is a few minutes.

This new 34nm technology node correspondingly drove down our overall NAND bit cost by 35%, well ahead of our prior projections. These cost declines exclude the effects of lower cost or market write-downs and their flow-through benefits, as well as the cost of the idle facilities of IM Flash Singapore.

The conversion to the 34nm NAND process is now complete for all wafer starts, which is providing us the lowest bit cost in the industry and has placed the entire NAND business in positive gross margin territory in the third quarter.

Q4 NAND cost reductions are expected to be in the high single digits and bit production is forecast to increase in the mid-teens range.

On the DRAM side, DRAM average selling price in the third quarter was relatively flat compared to the second quarter. Pricing for core products, as well as specialty DRAM products, each increase in the third quarter. However, the increase in bit shipments of DRAM products came primarily in core products, which continue to shift in mix away from specialty DRAM products that generally command a higher per bit selling price. This shift in mix offset ASP increases in the quarter.

DRAM production costs, excluding the effects of the lower cost or market write-downs and idle facility charges, decreased 11% compared to the second quarter. The lower production costs were primarily due to ongoing improvements in manufacturing efficiencies, including cost reductions and technology migrations.

You recall that Inotera has significantly reduced its production following Qimonda's default under its wafer purchase commitment. This triggered charges for idle capacity to Micron under the wafer supply agreement. To date, Inotera has not produced any products for Micron, however, we expect to begin taking some volumes in Q4. Micron will evaluate the volume of purchases from Inotera on a monthly basis. We anticipate only ordering products when the purchase and subsequent resale are expected to be cash-flow positive compared to the idle facility charge.

Fiscal Q4 DRAM cost reductions are expected to be in the low teens and bit production is forecast to increase in the mid-to-high-teens range. These projections exclude charges associated with idle capacity at Inotera but include any product that Micron receives from Inotera.

Turning now to operating expenses, we continue efforts to scale down operating costs as reflected in the aggressive reduction in SG&A costs, which were $80.0 million in the third quarter. Staffing levels and SG&A areas have decreased 11% from their high early in the fiscal year and they are continuing to decrease.

R&D costs in the third quarter of $162.0 million were lower than previous guidance as some new products, particularly NAND products, were transferred out of development and into production in advance of the original plan.

We anticipate SG&A expense in the fourth quarter to be in the $75.0 million to $80.0 million and R&D expenses to be in the $140.0 million to $150.0 million range. Reductions are primarily driven by the carve out of Aptina, which is expected to occur a third of the way through our fourth quarter.

Other operating expense in the third quarter includes an estimated $53.0 million loss on disposal of Aptina and a $28.0 million of losses from changes in currency exchange rates as the U.S. dollar weakened substantially during the third quarter.

Relating to the third quarter results from our joint ventures, the loss from equity method investments reflects our share of Inotera's net loss. The non-controlling interest in net loss line primarily reflects the allocation of tax loss to the minority shareholders.

Turning now to the balance sheet, the third quarter ended with $1.3 billion of cash, which includes approximately $475.0 million in net proceeds from our convertible debt and equity offering completed in the quarter.

The increase in the reported balance of inventories at the end of the third quarter is principally due to the effect of the inventory write-down at the end of the second quarter. Inventory balances, excluding the estimated effect of write-downs, decreased 8% in the third quarter compared to Q2.

Cash flow from operating activities in the third quarter continued to remain positive at $151.0 million, well ahead of competition.

The debt to capital ratio, both before and after the issuance during the quarter of the convertible notes and common shares, remained around the 30% range, consistent with our long-term capital structure target and also significantly better than most of our competitors.

Capital expenditures during the third quarter were $93.0 million, bringing the year-to-date total to $566.0 million. We estimate capital expenditures in Q4 of roughly $100.0 million. For fiscal 2010 capital expenditures are expected to be in a range similar to 2009. This range can vary based upon market conditions as we go forward.

With respect to our joint ventures, in the third quarter we made a capital contribution of approximately $100.0 million to continue the 15nm conversion at TECH Semiconductor, which was financed through loan proceeds. In addition, the third quarter had distributions to JB Partners of approximately $125.0 million, consisting primarily of payments from IM Flash to Intel.

As previously announced, we signed an agreement to sell a majority interest in our imaging solutions business, Aptina Imaging Corporation, to Riverwood Capital and TPG Capital. As part of the agreement, Micron will retain a 35% minority stake after the partners contribute significant debt-free capital to the independent privately held company. The transaction is expected to close around the first part of July.

Partially due to operating losses in recent periods and changes in the balance sheet occurring in the normal course of business, we now estimate the loss associated with the sale of the majority interest in the imaging business to be approximately $53.0 million. Since we now treat Aptina as held for sale, we are required to recognize this estimated loss in fiscal Q3 in advance of the transaction's closing in Q4.

After the close of the sale, the financial position and results of operations of Aptina will no longer be consolidated in Micron's financial statements and we will have equity method accounting for the ongoing investment. Micron will continue to manufacture products and provide services for Aptina through supply and service agreements at its worldwide facilities.

And with that, I will close here and turn the commentary over to Mark Adams.

Mark W. Adams

We experienced a strong increase in bit shipments in both our DRAM and NAND businesses during our third quarter. The bit increase was driven by stronger than anticipated demand across many of our key market segments.

Given the performance, we continue to grow share with DRAM and NAND markets. The [inaudible] environment was more stable in Q3 when compared to our prior two quarters and thus we are more optimistic about the overall memory sector heading into the back half of calendar 2009.

Our overall DRAM shipments grew 18% in bits shipped quarter-over-quarter. As market forecast suggests bit demand in personal computing to be up in the low-to-mid teens, we continue to grow share from competition in this segment. Service bits shipped in our third quarter increased 31%. Additionally, we have seen some strong upside forecast in our service base which we anticipate will bode well for us in fiscal Q4.

In Q3 we saw a shift in demand towards DDR3 memory for both server and PC applications. Bit shipment of DDR3 product increased approximately 70% quarter-over-quarter and represented about 25% of our overall core DRAM sales.

Micron's technology and cost leadership in DDR3 puts us in a unique position to capitalize on the growth and demand coming from both PC- and server-related customers.

Due primarily to some new customer wins, our networking shipments were up quarter-over-quarter as well. As large corporations and governments continue to invest in infrastructure, we see the enterprise networking segment as a growth opportunity for our specialty business through 2009 and into 2010.

The mobile business saw a decline in bit shipments quarter-over-quarter, down 12%. While the overall handset market continues to be challenged, Micron saw strong growth in shipments of our MTPs multi-ship packages where we experienced a 35% increase from previous quarter bit shipments.

We continue to feel Micron is in a unique position to grow our bit shipments into smart phone segment, which is projected to grow 15% year-over-year. Micron has a broad portfolio of products in [inaudible] specifically as a segment, including MTPs, CSRAM products, EMN and NAND-based technology, and mobile memory cards.

As Ron mentioned, due to a mixed shift in our business, our overall DRAM pricing was relatively flat quarter-over-quarter. That notwithstanding, PC-related DDR2 pricing saw an increase in our fiscal Q3. In addition, we saw a strong increase in DDR3 pricing towards the end of our quarter, driven by a surge in DDR3 demand.

It is important to note that as of today, Micron is one of only a few suppliers of DDR3 memory. We are leading in DDR3 technology development with 1GB and 2GB products based on our 15nm process.

In the third quarter our NAND shipments were up 21% from the previous quarter due to stronger than expected demand from the mobile, USB, mp3, photo, and FT markets.

This quarter we shipped in excess of 90% of our MLC products based on our industry leading 34nm technology. The 34nm conversion is now completed and we believe this technology gives Micron a sizeable cost advantage versus our competition.

Our retail business, which includes our industry-leading e-commerce site, Crucial.com, made strong contributions of Micron's overall operating performance. We had a number of significant wins in the retail channel with Lexar and Crucial branded products.

We continue to gain global market share growth leveraging Micron's NAND technology and a strong brand portfolio in the consumer markets we serve.

Shrink component compression for NAND was up significantly in the quarter. As the industry continues to migrate to higher density chips, we feel bit consumption will continue to grow and the demand market will be in fairly balanced supply and demand position throughout our fourth quarter.

We remain optimistic that the market segments, such as FSDs, notebooks and NANDs for mobile phones will continue to drive strong bit consumption. Overall we were very pleased with our NAND performance in Q3.

As we suggested in our last call, the environment in both DRAM and NAND did in fact improve in Q3. We remain hopeful that almost two years of capital expenditure cut-backs and a reduction of supply in the industry will improve the profit potential for Micron. We feel Q3 was a good step in that direction.

With that, I will hand it back over to Kipp.

Kipp A. Bedard

We will now take questions from callers. (Instructions)

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gary Hsueh - Oppenheimer & Co.

Gary Hsueh - Oppenheimer & Co.

It seems like the biggest variable in my model for you in fiscal Q3 was NAND pricing. What is the expectation in the August quarter for Q4 in terms of NAND ASP per bit?

Steven R. Appleton

Right now, in the market today, we expect to be kind of flat to mildly up in the quarter until we see what some of our customers and all look like going into the holiday season, which normally we get a good sense of in August.

Gary Hsueh - Oppenheimer & Co.

I guess my question is, you know, this is just guess work here, but if you're rolling off of Intel heavy Q3 and maybe lightening a little bit up in terms of the mix in terms of Intel in Q4, does that effect have any impact on our assumptions for ASP per bit in Q4?

Steven R. Appleton

I'm not sure the assumption that we're rolling off Intel in Q4 is correct. It's basically a flat stick. That doesn't change quarter-over-quarter.

Gary Hsueh - Oppenheimer & Co.

So the Intel content in your NAND Flash business is basically roughly flat quarter-over-quarter as a percentage of the mix?

Steven R. Appleton

On a volume base, that's right.

Gary Hsueh - Oppenheimer & Co.

And I just kind of look at the royalty business, I think with Nanya projected to start kicking in sometime I guess next year in terms of their production, I was just wondering how should we be modeling basically, or thinking about that royalty and licensing revenue stream in 2010? Should we expect R&D kind of sharing part of that revenue stream to start declining or does that start picking up because of the units coming out of Nanya in 2010? What's the directionality and what's the magnitude of that in 2010.

Ronald C. Foster

We have got some technology agreements that are already in place and that's showing in the revenue numbers that I mentioned were at $32.0 million this quarter, roughly the same last quarter. And that continues forward.

Then also, as you point out, when volume picks up with product volumes out of Inotera, there will be licensing royalties associated with that capacity as well. At typical market rates, you might say. We haven't specifically called it out.

Gary Hsueh - Oppenheimer & Co.

Just in terms of your capex spend in 2010 being flat with 2009, what are some of the assumptions that you have for production for DRAM and NAND?

D. Mark Durcan

For DRAM bit production I think we would expect to see bits up in the mid-to-high teens in the first quarter. And NAND bit growth in the mid-teens.

Gary Hsueh - Oppenheimer & Co.

How about fiscal 2010 on that?

D. Mark Durcan

Longer term, I think the NAND bit growth will depend a little bit on our QX node migration as we intend to start late in the third quarter or in the calendar fourth quarter of 2009. But overall I think you could look for something in the 10% range quarter-over-quarter, in line with the normal shrink path for the NAND on a go-forward basis.

For DRAM, a lot of it is going to depend on the timing of the Inotera ramp, and as you know, we are bringing that capacity online now. If the market grows 40% next year we will be well in excess of that.

Operator

Your next question comes from Tim Luke - Barclays Capital.

Tim Luke - Barclays Capital

If your ASP[?] were to remain stable from here, what should we be assuming with respect to DRAM for the fourth fiscal quarter?

Steven R. Appleton

Quarter-to-date we've got DRAM ASP pretty flat and quarter-to-date we have the trade portion of our NAND business down about 5%.

Tim Luke - Barclays Capital

And could you talk a little bit about how you perceive the licensing opportunity associated with the coming fiscal year, particularly as Nanya may increase production. And could you also just remind us of the framework for what we should be thinking about in terms of minority interest loss levels associated with Aptina or what that might have been in the fiscal third quarter?

Ronald C. Foster

In terms of the licensing, sort of as I mentioned earlier, we've got ongoing technology agreements that will be roughly at the level we've seen and there will be, as I said, typical royalty levels paid on incremental volumes where our technology, our stack technology is being applied in Inotera. We haven't called out those specifics but there will be some expansion of that in the future as the stack technology gets adopted in Inotera, which is, as Mark mentioned, is scheduled out in the coming quarters.

In terms of Aptina loss levels, that of course depends on their financial performance on their P&L going forward and so we can't exactly call out what that would look like or our share of it, but we would be taking a 35% share of whatever that financial result would be on a quarter-by-quarter basis, with a slight lag effect on the timing.

Steven R. Appleton

Let me jump in while we're talking about Inotera. You know, I think it's fair to say that we view Inotera as historically one of the most efficient and forward-looking, probably the most efficient, DRAM manufacturers. They do a lot of 50nm technologies. So when I talk about bit growth here just a minute ago, there is bit growth obviously associated with the volume coming back on line, but I think with a lot of our 50nm technology, moving into calendar 2010, we think that they're going to be a very, very focused and very efficient producer, leading the industry from a cost perspective.

Tim Luke - Barclays Capital

If I may also, you talked about your capex being flat for the coming fiscal year. Could you just remind us what level that is off and could you just outline, as you move forward, what you guess to see to be the key variables now in terms of improving the gross margin dynamics from here.

Ronald C. Foster

In terms of the capex, it's the level similar to 2010 which was $650.0 million to $700.0 million kind of range, is what I was taking that at and that's based upon our current assumptions relative to our expansion plans. But I will turn it over to Mark, who can elaborate a little bit on our sort of thinking of our competitive position vis-à-vis our capex investments.

D. Mark Durcan

First of all, let me say on the capex that we plan going forward, it's a relatively small number we believe, primarily because we've been pretty thoughtful about how we deploy the capital as we rolled off what is a pretty efficient new 300mm capacity. And I will give you a couple of examples.

As we rolled out 300mm capacity it all came out with Damascene copper processing so we don't have that home in front of us as we move to advance shrink geometries. We also deployed NAND technology at 300mm for large expandable, with double patterning toward we need to apply well below 34nm now.

So we are well down the path in terms of having all the tooling in place and that's why you see a relatively low maintenance capital spend for Micron on a go-forward basis. Obviously if there are significant changes in the marketplace we will take a look at whether or not there are additional things we want to do from a capex perspective. But we think we are in great shape to continue advancing our technology and driving down costs with a relatively small capex spend.

On a gross margin, relative to the gross margin question you asked, we feel very good about our road map on a go-forward basis. You really haven't seen much of the impact yet from our 50nm DRAM. In fact, that's all in front of us on a go-forward basis on the DRAM side.

There is still some follow through as we look to fiscal Q4. In fact, from the 34nm ramp is now complete and as I mentioned earlier, we are well positioned to roll on into our QX nanometer NAND mode.

So we think we are in a good position. Keep driving costs down, we've demonstrated some good success here over the last three or four quarters and we don't plan to change anything relative.

Ronald C. Foster

I was just going to add that the NAND gross margins I mentioned in a positive territory, even excluding the effects of inventory write-down carry through, we're still in positive territory in NAND margin and it's on an operating basis for the first time. So a significant accomplishment and as Mark mentioned, I think there will be more to come as we continue out our 34nm ramp and right on the heels of that will be the 2Xnm technology.

Operator

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

Shawn Webster - J.P. Morgan

What was your bits production sequentially in NAND and DRAM?

Steven R. Appleton

We saw DRAM up mid-teens, and we saw NAND production bit growth up over 30%, quarter-to-quarter.

Shawn Webster - J.P. Morgan

And then you said your cost reduction was down 35% sequentially in NAND, is that correct?

Ronald C. Foster

Correct.

Shawn Webster - J.P. Morgan

And does that track precisely with what you sent to Intel in terms of pricing per bit? So your Intel pricing was down 35 as well?

Ronald C. Foster

It's approximately the same formula. It's on a cost basis, so yes, that's essentially correct, although there are some minor variations based upon timing.

Shawn Webster - J.P. Morgan

So I think that one of the things I'm struggling with is when we observe the spot pricing and even the spot pricing market, they would suggest that you would have had better DRAM pricing and better external NAND pricing. Can you help us understand why there is a difference there?

D. Mark Durcan

The issue that's really driving that is some of our specialty markets have lagged in terms of demand and that's had a little bit more price pressure in the current quarter. And when the core commodity markets, both in DRAM and NAND, rebound, those prices lag and the demand is starting to pick up.

We have seen some favorable uptick, as I said earlier, on the server market, for example. While it wasn't strong throughout the early part of the quarter, the last month of the quarter was very strong. We're seeing good demand going into the back half.

So a lot of it has to do with mix, as we look at that. And then our 32GB bit part on the NAND side was out of the market earlier through some customers trials and what have you and we just started to get that established in the marketplace and we started to see a better take on the demand in pricing there.

Shawn Webster - J.P. Morgan

As far as what your PC OEM customers and maybe even your consumer electronics customers are saying for calendar Q3, what kind of bit shipments are they guiding you for in terms of DRAM consumption on the PC side?

Steven R. Appleton

What we're seeing on the DRAM side is somewhere in the mid-teens and the NAND side, slightly lower than that.

Shawn Webster - J.P. Morgan

In terms of demand for calendar Q3?

Steven R. Appleton

Yes.

Shawn Webster - J.P. Morgan

How about the channel inventories? Can you give us an update there on both the DRAM and NAND side?

Steven R. Appleton

Yes, sure. I've read a lot about people suggesting that the first half of the year was a lot of inventory replenishing the channel. We're not seeing that. We're actually seeing fairly robust demand, albeit at pricing in DRAM, which we like to do higher. But we're not seeing an inventory build-up in the channel.

I think people primarily—I said this in the last call and I still believe it—I think people in this current economy are so focused on the cash flow operations of their business that they are not allowing themselves to take these inventory positions that are above and beyond what they can manage.

Shawn Webster - J.P. Morgan

And then, what did your wafer production do sequentially?

D. Mark Durcan

It was up a couple percent.

Operator

Your next question comes from John Pitzer - Credit Suisse.

John Pitzer - Credit Suisse

If DRAM pricing were to stay flat from these levels, what would be the expected under-utilization charge you might have in the fiscal fourth quarter relative to Inotera?

Steven R. Appleton

I didn't quite hear all that question. Could you repeat that for me, please?

John Pitzer - Credit Suisse

If DRAM pricing were to remain flat from current levels, what would be the expected under-utilization charge in the quarter for the Inotera JV?

Ronald C. Foster

The Inotera charge is an idle capacity charge. It doesn't have anything to do with pricing, so if we are not utilizing the capacity, then there is a charge that comes through related to that. But it's not related to pricing in the market per se.

Now if you're asking what happens if we do or don't take wafer volume, as I mentioned, that will be predicated on whether we have incremental profit contribution that we get out of taking the wafer supply, in the near term, out of Inotera vis-à-vis the idle capacity charges.

John Pitzer - Credit Suisse

I guess that's my question. Are we at a price level in DRAM where we would expect those idle charges to decrease, stay flat, or go up quarter-on-quarter?

Ronald C. Foster

The way I would say it is, right now we view we're in a place where we can take supply of their trench capacity and make incremental contribution out of it at current pricing. That's why we're taking volume, but we will make decisions on a monthly basis whether to start wafers based upon our view of the economics going forward.

John Pitzer - Credit Suisse

And then getting back to the capex being flat going into fiscal 2010, can you give me a sense of how much of that is going to DRAM versus NAND and is any of that going to Inotera to help transition from trench to start, or are they beholden to support themselves on their own capex needed to do that transition?

D. Mark Durcan

It's slightly more DRAM than NAND and I don't have the numbers in front of me but probably roughly 65 DRAM, 35 NAND, something on that order. And relative to Inotera, there's nothing in that capex number to support Inotera. Our view is that we will be able to have a successful financing figure, their capital independently.

Steven R. Appleton

And to be clear, we have a minority equity interest in Inotera so it would not show as consolidated capex for us anyway, it will be some kind of capital contribution that would be required if that were to happen, which is not at all contemplated at this time. Inotera is planning to take care of their own technology transition through their own financing.

John Pitzer - Credit Suisse

You commented in the prepared comments that enterprise demand was looking better going into the calendar third quarter. I'm wondering if you could elaborate on that a little bit. Is that just all based upon the demand you're seeing here on DDR3 for servers? Are you seeing a pick-up in corporate PCs as well, or what's giving you confidence that enterprise is upticking here?

Mark W. Adams

The networking sector for us is more on the networking server and [inaudible] equipment that we are seeing some uptick on. We've had some new customer wins. Primarily a lot of this is over in the Asia market. And for us, my comments were really around our business in our growth net segment versus the overall industry's direction.

John Pitzer - Credit Suisse

Relative to your views of the soap opera that is the DRAM industry around consolidation, we've gone through another quarter now with rumors, speculations, and some hard facts around Aptina and TMC and I'm just kind of curious as things sit now how you view the consolidation in the industry relative to more players being shaken out, or if you could give me a sense of from peak production in Q3 of last year to where you think things finally shake out, how much capacity do you think will permanently exit the industry?

Steven R. Appleton

It's difficult to know at any given moment where it stands. My perspective is that it's stalled here for a little bit, that effectively Qimonda is factually being liquidated and there is no return of that. And that the DRAM pricing is such that on the margin, I think, some of the Taiwanese are making a bet that it's going to get better but at the current level it's not helpful for them.

Maybe equally important is to look at the debt structure that they're trying to deal with and it probably gives you a little more insight into what are the real alternatives that they have moving forward. I think that the probabilities of them going out and doing anything in terms of new capacity is essentially zero. The probabilities of them actually even really being able to upgrade much of their current capacity is pretty low. And they're all struggling with trying to deal on how to deal with the debt.

And by the way, that's also something that we have to encounter in the event that we have any kind of consolidation discussions with any of those players. So when you look at the debt repayment structures, they are pretty heavy in the next twelve months. That's where Micron also is advantaged because as Mark Durcan already described, we have spent a lot of money, we're in a pretty good position, we don't have to spend much more money to advance our cost structure.

But these guys do. And they don't really have it so their cost structure is getting much less competitive. There is lots of speculation as to what will happen. You know, it's really, at the end of the day, there are three major facilities that exist in Taiwan. It's the Inotera facility, which I would say you heard about [inaudible] facility which is state-of-the-art and it will be low cost. And then the facility, there's the benchmark facility.

Then you have Promos, which probably again, just anecdotally from what I've heard in the industry, had their output number down in the 80% range, so you have a facility that could produce, you know, call it 100k a month and it was producing something closer to 20 and you know, maybe it's inched its way back up to 30 or thereabouts, I've understood. So it's still way, way under-utilized. But that capacity is aging at actually a pretty rapid rate now because it's just getting less and less cost effective.

And then the other big producer, of course, is Power Chip. And you will probably continue about the saga between Power Chip and LPN, Rexchip and so forth, but what Power Chip had also, I think, cut their production down in the 80% range, but then they are probably closer back up to 40% of 50% of the capacity now, trying to figure out where this market is going.

And Rexchip, by the way, never did cut its capacity that much and neither did LPN, neither did Micron. So the output numbers are relatively stable.

In aggregate, the total capacity that came off line we think was in the mid-30% or 35% of the lower capacity per diem, came off line. You can do the math yourself, but essentially maybe 5% of that is thinking about making a throw back on the line. You could even argue as high as 10%, with what Inotera, Power Chip, and Promos have all been in combination. But it's not a lot.

And even from our perspective on what's going on with the Inotera capacity, the pricing has to get a lot better than it is now to provide much incentive for a whole lot of this capacity to come back online. Until it gets converted or until the pricing gets a lot higher, we're obviously got our own plans on Inotera. But you know, there's just no dollars involved for anything else to do and so we think that there's not a lot capacity to come back on line here. And actually we don't think at the current pricing, there's only a couple of us where the structure looks pretty good. So I don't think it's really been [inaudible] at this level.

Operator

Your next question comes from James Covello - Goldman Sachs.

James Covello - Goldman Sachs

Just to clarify one follow-up from the answer there. You said 5% or 10% of that capacity could come back on line. Is that 5% or 10% of total industry capacity or 5% or 10% of what was taken off line in the first place.

Steven R. Appleton

Well, no, it's 5% to 10% of the total industry capacity.

James Covello - Goldman Sachs

What are you seeing in terms of trends in content per box?

Steven R. Appleton

On the PC side it's relatively flat through Q3. The net book impact in the overall PC segment had a modest negative hit on it but it's modest and so it's relatively flat, up until today. And we see better things down the road as Windows 7K gets out in the marketplace.

James Covello - Goldman Sachs

And could you just comment on that for a second relative to Windows 7. I know there is some concern from people that there is going to be destacking around Windows 7 because you don't need as much content to run it. But you obviously have different thoughts on that?

Steven R. Appleton

We do think there is an upside from an application perspective as more of these applications come online and get over to the Windows 7 platform. So when you look at some of the third-party analysts who are looking at this, they are thinking the same thing, that content per box will continue to go up, probably through the holidays, assuming how things go in October. Things go well through the holidays and through 2010 and so we're pretty positive on that.

Operator

Your next question comes from Uche Orji – UBS.

Uche Orji - UBS

Let me just go back to the answer you gave about [inaudible] inventory and you said that it's going to be a level inventory. What is the rate mix of how many weeks of inventory held in the channel and held by your customers?

Steven R. Appleton

If we understood the question, it was about memory in the channel, is that correct?

Uche Orji - UBS

That is correct. How can we quantify, if you could tell me how much of the inventory, in terms of weeks, and if you can just compare that with what is it historically. Just for me to be able to quantify the answer that there wasn't much channel inventory.

Steven R. Appleton

We don't normally release that information because a lot of customers prepared the information that we have that we have been using on our own internal data. But as I said earlier, we don't see any abnormal from kind of current state and what we expect in the channel. We haven't seen any inventory build up. We are kind of reluctant to give data that is customer-related to answer that type of question.

Uche Orji - UBS

In terms of NAND, what are you seeing in terms of—can you just give us any update as to what your developments are on that [inaudible] for NAND.

D. Mark Durcan

So obviously as with all participants in the NAND space, we have active programs and [inaudible] on other. We will have 34nm for competitive reasons right now in the marketplace, late this calendar year.

Uche Orji - UBS

Later this calendar year.

D. Mark Durcan

Yes.

Uche Orji - UBS

Would that be volume or would that just be for the [inaudible]?

D. Mark Durcan

Well, it's not going to be a huge piece of the volume because we don't see that it really addresses a large piece of the market. So I don't think you should think of it as [inaudible], in this time frame at least, to see what's the impact on [inaudible].

Steven R. Appleton

And to follow-up on that, when you look at where we're selling our NAND application, there is not a lot of it will take to [inaudible] in the near term, so our application base, our customers [inaudible] as well as our OEM customers, we don't think there is a utilization at a value premium to the current technology we have.

Uche Orji - UBS

And just in terms of the Inotera, what is the migration pattern then for Inotera? When should we expect 50nm production to start to ramp based on the plans you have? And just financially, what kind of funding requirements do you think Inotera would need to be sure that they can meet the other part of the funding as you migrate the stock.

D. Mark Durcan

Let me take the first bit and then maybe Ron can talk to the financing. On the technology deployment, we have equipment on order now to support the introduction of 50nm technology. We will see first silicon out late in the calendar year. But you should expect volume of a significant amount in late calendar Q1, early calendar Q2.

Ronald C. Foster

In terms of the financial funding, as mentioned earlier there, they're a separate public company focused on doing their own financing, so we worked with them to develop the view on what the capital requirements are as they integrate that with their total business view and have communicated numbers, but be aware that they're really numbers owned by Inotera and they view, and we concur, that they can scale the build up of their capacity over time and scale the capex investments relative to the market need, their customer requirements, including Micron, etc.

So the way to think about it is that they've communicated that there can be a phase in the $700.0 million to $800.0 million kind of range and then up into a full conversion cost, depending upon the timing they want to do that, it would be around $1.6 billion to $1.7 billion. But that's numbers coming from Inotera.

Uche Orji - UBS

And lastly, on DDR3, what should we model as a percentage of DDR3 exiting calendar 2009? And then also, what kind of premium do you get on DDR3 over DDR2 and when do you think we will achieve a cross over between DDR3 and DDR2 in terms of production.

Steven R. Appleton

We didn’t quite hear the first part of what you were interested in modeling.

Uche Orji - UBS

In terms of how much DDR3 as a percentage of production we should model for exiting calendar 2009.

Mark W. Adams

I think as we exit calendar 2009, I think you would expect that at the core DRAM business DDR3 would represent less than 50% of the outlook.

Uche Orji - UBS

And then in terms of the DDR3 over DDR2 premium, what is it now? Is there any price premium at the moment with DDR3 over DDR2 and what is that.

Steven R. Appleton

That premium, as I said in the earlier comments, towards the end of our quarter, is up in the 15% to 20% range.

Operator

Your next question comes from Hans Mosesmann – Raymond James.

Hans Mosesmann – Raymond James

Going back to the 30% of the global capacity that was taken off line earlier this year and some of it that may be coming back, how much of that capacity is DDR3 capable or viable?

Steven R. Appleton

Of the capacity coming back on line, almost zero probably.

Hans Mosesmann – Raymond James

I'm sorry, that was zero?

Steven R. Appleton

Yes, essentially zero.

I just have some commentary. I think one thing that has occurred that we're thinking about is in particular, you know most of the time DDR3 design on the current, or now what I would consider to be year-old process technology. I think [inaudible] maybe spending money and going to the next mode. And since that hasn't happened, we don't really have DRAM treatments. First of all, it wouldn't be very cost effective or it might not even be fitting in the form factor for the applications given the current technologies. So I think that's one of the reasons that's the case I stated almost zero coming back.

Hans Mosesmann – Raymond James

And as a follow-up, how much would it cost them to come up with a design, just for kicks?

Steven R. Appleton

I don't think the cost of a design is really all that significant. I think it's the ability to get to the next process node to produce it on that's where you need the money.

Operator

Your next question comes from Analyst for Daniel Berenbaum - Auriga USA.

Analyst for Daniel Berenbaum - Auriga USA

I just have a question on your cash usage, other than capital expenditure, how do you plan to use your cash on hand going forward?

Steven R. Appleton

Other than capex, obviously the big cash use we have here is capex over time. But if you've noted from our quarter-over-quarter, some of the commentaries from Ron and Mark were operationally we're in pretty good position on cash. So I think we're first and foremost going to protect the balance sheet and protect the forward financial shape the company is in.

But then I think what it does allow us to do, as we noted earlier when we were raising additional money, is just be prepared for other opportunities to come along, you know in the event we wanted to take advantage of them.

And that doesn't necessarily mean, by the way, that we're going to go out and spend a bunch of cash on acquisitions, but in the event that we participate in M&A activity, and we become larger, then obviously we would desire to have a larger cash position with which to operate a larger company.

So I think that's how we're looking at it today.

Operator

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

Bob Gujavarty - Deutsche Bank Securities

Just curious if you've kind of adjusted your loadings between DRAM and NAND for the back half. Any big changes there, any preference for one or the other?

D. Mark Durcan

We haven't done anything of significance. There's always a little fine tuning going on.

Bob Gujavarty - Deutsche Bank Securities

Within the NAND market, have you seen anything in particular in terms of the different markets you may sell into, particularly maybe spots versus OEM versus kind of retail. Is there any one area that's particularly strong or are they all pretty coincidental?

Steven R. Appleton

I think the OEM market started to pick up a little bit as people start to position for the holiday, not knowing what the market will be like. You've seen some price fluctuation over the last 90 to 120 days in NAND and I'm not sure that the market quite understands what pricing will be as people start to build in supplies for their Christmas build.

So I think the OEM market seems a little bit strong. The spot market right now is sitting, watching that and waiting to see. I think we commented earlier that the market is down about 5% quarter-to-date, and that's primarily driven by the stock market.

The retail sector is kind of so-so right now. It's not great and it's also going into a seemingly quiet period, the end of June, early July, before back-to-school starts.

So that's kind of the landscape right now in NAND, heading into the back half of the year.

Operator

Your next question comes from Atif Malik - Morgan Stanley.

Atif Malik - Morgan Stanley

Nice job on the margins, especially for NAND. So I'm kind of surprised that your capex for next year is going to be more skewed toward DRAM. I would expect Inotera to take most of that burden. And so the question is how do you sustain your leadership in NAND cost if [inaudible] is going to be minimum? And what is the next milestone for Micron, beyond 34nm?

D. Mark Durcan

On a per wafer basis, if you think about the technology transition that has to occur, we need essentially to convert all of techs at the end of the year so that's why there's a slightly larger burden there as well as MTV being split 50/50.

When you look at NAND, why is that bill so low? Well the bill is so low by design. When we roll out, in fact it's okay to say now, when we rolled out 50nm NAND we even contemplated our strategy through 34nm and 2Xnm, doing a double-pattern strategy, and put those tools in place. So rather than having a lot of re-tooling at this stage, we will have a relatively small amount of re-tooling to do as we transition to the 2Xnm late this year. And that's the short story.

Relative to 3 bit per [inaudible], whatever, there's really not much capex associated with that at all.

Atif Malik - Morgan Stanley

Let's follow-up on the Aptina, after you sell the majority stake how should we think about the normalized revenue rate from this business and normalized opex rate?

Steven R. Appleton

First of all, as Ron noted, we're going to continue to make the wafers. So I think the way to think about it is the additional margin that occurred from the wafer making its way into the marketplace will now be picked up by Aptina and we will account for that on an equity method basis. But in terms of the revenue sale of the wafers, that will continue on as it has.

Operator

Your next question comes from Analyst for Tristan Gerra - Robert W. Baird.

Analyst for Tristan Gerra - Robert W. Baird

What was the break down between core and special PC RAM?

Steven R. Appleton

Is that a percent of revenue?

Analyst for Tristan Gerra - Robert W. Baird

Yes.

Steven R. Appleton

Core DRAM was in the area of 30%, more or less. And [inaudible] DRAM was around 17% or 18%.

Analyst for Tristan Gerra - Robert W. Baird

And you were talking a little bit about how you NAND patterning, you don't need new equipment, a lot of new equipment for that. Is that why the DRAM capex is high, is that you do need new equipment for the 50nm node and how long do you think that that equipment can last. Can that last a couple of transitions or is that going to be need to be replaced in one to two transitions?

D. Mark Durcan

I didn't mean to leave you with the impression there was no capex for NAND. There is a split because of demand. Yes, for DRAM, there is a pharmacy[?] capex required. There is also some pharmacy[?] capex required on the NAND side and at this point, the way we staged our capex, we're buying essentially end-of-the-road-map tools. So as we buy pharmacy[?] tools, they really are 1.35 on the emerging scanners and there's nothing beyond that to purchase at this time.

Analyst for Tristan Gerra - Robert W. Baird

You talked a little bit about kind of guidance relative to what you're going to be without Aptina. Do you have what the opex number for Aptina was this quarter?

Steven R. Appleton

If you look at the data that Ron had referenced earlier, in fact I let Ron comment on it.

Ronald C. Foster

If you look at our typical imaging segment, which as Steve already mentioned, will be parsed into what's remaining as we go forward, most of the opex will go away in the new construct. We will still have some amount of R&D and SG&A but relatively small percentage of the total that's there. And rough numbers, we will run around $30.0+ million in R&D and $9.0 million or so in SG&A on the total imaging segment. So we dropped to relatively small numbers on both of those scores.

And as Steve mentioned, the product will be shipped on a foundry basis, so in general we would expect to have gross margins that will be a little bit lighter and the opex is significantly lighter in the new model.

Analyst for Tristan Gerra - Robert W. Baird

And so we should expect an additional $10.0 million drop off in the November quarter to the year modeling for one month of opex in the August quarter? Is that how we should think about it?

Ronald C. Foster

No. We're contemplating closing around early July and so we have two months of the effect in our fiscal fourth quarter. And we only have an additional month of the effect in the subsequent fiscal first quarter. We have two-thirds of the effect already in the guidance I gave you for Q4.

Analyst for Tristan Gerra - Robert W. Baird

Are you currently producing both DDR2 and DDR3 above cash cost right now? And given the strong shift to DDR3 in the market, what are your expectations for DDR2 pricing for the rest of this year?

Steven R. Appleton

The answer to the first part of the question cash flow-wise is yes. And as you probably know, historically we don't try and predict the ASPs on the outward quarters. We'll leave that to you guys.

Analyst for Tristan Gerra - Robert W. Baird

What do you expect for the industry, then? You're talking about 50% of your core DRAM is going to be DDR3 exiting this year. What do you think the industry will do on that front? And what percent of current capacity out there do you think is capable of producing DDR3?

D. Mark Durcan

Just to clarify one thing. We will be 50% of our core by our fiscal year end. We think the market looks like, if you're looking at third-party data, will probably be in the 25% to 30% range at the end of the calendar year. We have a significant advantage technologically against all of our competitors in the DDR3 market, so we have led that.

As a rough guess, you've probably got a couple of competitors and their capacity that can actually make a solid 50nm DDR3 product out there. To Steve's comments earlier, there is a substantial amount of current DRAM capacity that has not been brought forward and will cost a substantial amount of money for them to get into that DDR3 market.

Analyst for Tristan Gerra - Robert W. Baird

On the 50nm and the 2Xnm for the DRAM and NAND, if I am looking at two equivalent wafers, assuming 100% yield, what's the bit growth that is just from going from a 34nm to the 2Xnm or the 68nm to the 50nm?

Steven R. Appleton

I think I'm just going to keep that one in our pocket for now. The 50nm data is actually publicly available. You can get a die size on a 50nm but I think I'll just save publishing that to anyone else who's listening in on the call. And we're not talking about the die size on our 2Xnm yet.

Kipp A. Bedard

And with that, 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.

Operator

This concludes today’s conference call.

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 Inc. F3Q09 (Qtr End 06/04/09) Earnings Call Transcript
This Transcript
All Transcripts