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Executives

Ivan Donaldson - Director, IR

Mark Durcan - CEO

Mark Adams - President

Ron Foster - CFO & VP, Finance

Mike Rayfield - VP, Wireless Solutions

Brian Shirley - VP, DRAM Solutions

Scott DeBoer - VP of R&D

Analysts

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David Wong - Wells Fargo

Vijay Rakesh - Sterne Agee

Jim Schneider - Goldman Sachs

Adeline Lee - Citi

John Pitzer - Credit Suisse

Srini Sundararajan - Summit Research

Sundeep Bajikar - Jefferies

Rajiv Gill - Needham and Company

Micron Technology, Inc. (MU) 2013 Summer Analyst Conference August 9, 2013 10:00 AM ET

Operator

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 the presentation to conform these statements to actual results.

Ivan Donaldson

Thanks everybody for coming today. We really appreciate you coming out; packed house, this is great. So, I’m just kicking it off real quick and give you the format for the day. We obviously are pretty short on time; we’ve got two hours, so we’re going to try to really focus on the keys that we think investors are most interested right now. And actually, we’re doing in basically a fireside chat, Q&A sort of format based on questions that we receive from everyone here in the audience. We solicited feedback for questions of what is really important to you as investors, as analysts, and that’s the basis for the presentation today. So, we hope you enjoy it. We’re going to have Mark Durcan first, then Mark Adams and Ron Foster and then we’ll also add couple of our business units with Mike Rayfield and Brian Shirley, and then Scott DeBoer, VP of R&D as well. So, that’s the flow for the day. And Mark, come up.

Mark Durcan

All right. Thanks, Ivan, and thank you everyone for coming today. It’s kind of an exciting morning for us ringing the bell and looking our pictures. But now we’re getting down to work, and I think we got a great presentation for you. I want to kick it off here and skip through that. Just talk a little bit about the value proposition to Micron of this Elpida transaction we just closed.

First of all, I’m not going to steal Ron’s thunder but I’ll tell you right now that the economics are very compelling. And in my mind that was always going to be true but obviously as things have changed over the last year and we’ve grown through the process of bringing this thing to a close, the situation has changed and I think you’ll really get to see some numbers today that drive home what a significant and beneficial acquisition this was to Micron from a pure asset purchase perspective. Now that’s not the primary reason we did the deal though, there are a number of different factors that play in here. The product portfolio itself is very complementary and synergistic, gives us a huge leg-up in the mobile market with their mobile DRAM portfolio but also a lot of strength in graphics.

So it’s happened to be two places where Micron historically is not focused. When you put that together with the things that we’ve been working on in enterprise networking, computing DRAM, automobile -- automotive industrial et cetera and that’s really very, very complementary. The R&D resources, the technology resources that come with Elpida are not to be underestimated. They have really a world-class team in terms of technology development and our plan is to leverage that for continued DRAM development and taking more of our resources and deploy that to some of the other things we want to work on. We’ve got a lot of great DRAM technology; we’ve been working on a joint development basis with them for over nine months now in the 25-nanometer node and for the last three or four months on 20-nanometer and it’s amazing what we’re learning from each other. So, we’re already seeing the benefits of that and we’ve got that technology path moving forward quickly.

There's going to be significant synergies as we bring these companies together and not only from the product portfolio one plus one leading to more than two, but also from the activities that we’re doing when we start thinking about all the infrastructure that goes into running the company, how we can take advantage of a combined supply chain, combined procurement activity, eliminate some of the overlap and common design for the more commoditized products where we’re doing multiple designs that are actually the same thing, and we’re going to recognize significant synergies. When we’ve talked about in the past back-end technology not to be underestimated the importance of that and getting that optimized for the products we want to build in the future also going to be significant for Micron.

And finally, we now have the scale that our customers have wanted us to have for a long time. So, the customers out there are rooting for Micron. We’re the world’s only global memory company with smart folks interacting with customers around the world, really understanding their applications and one of the impediments we had to-date has been we just don’t have the – we haven’t had the scale for the customers to really bet on us to be able to deliver not only niche products that are differentiated but to really work with them on their high volume applications and add value at the system level with those event products. We have that now and is no longer an issue for us. So, we put the whole package together and it’s really going to be very, very compelling for Micron.

If you think about how we’re going to execute on this thing, we’ve had a lot of history in growth through acquisition. The timeline on the bottom there you can see how we moved through time adding assets around the world from PI back in 1998 to more recently Toshiba followed by Numonyx and most recently obviously the Elpida transaction that just closed. As we did that we’ve added scale efficiently without adding capacity to the marketplace and this is just the last step in that transition. What you see from Micron now in terms of capacity is really significant growth over the last year without impacting market capacity and really distributed globally in a fashion that we think makes the most sense and it’s very advantageous for us on a go-forward basis.

So, having said we’re going to try and answer some of the questions that were submitted. I’m not going to read the questions, you can read them upfront here and those of you on the web can see them but I think the theme on the first question here is, is this industry changing and how is behavior going to change as a result of that?

And what I would say to you is this industry has already changed and it has changed for good. And there are a lot of reasons for that but I would not -- first of all, I would say there's been a lot of growth in the memory industry, there's been a lot of fantastic innovation from a technology perspective that’s driven significant productivity increases in terms of transistors and bits per square into silicon over the last couple of decades. But that trend is playing itself out and it’s – I’ll show you the data here in a little bit in terms of the addition of bits from technology migration has been going on in both NAND and DRAM over recent years and you can see the slowing of that. That has a fundamental implication on the nature of the memory industry going forward, which is that we will not have unrestrained growth of supply as competitors in the marketplace struggle to adopt the leading-edge technology in order to remain cost competitive.

Yes, we’ll still have technology migration, we’ll have introduction of new technologies and we’ll have innovation that moves the ball forward but its not an all out economic decision anymore that one must move aggressively to the new technology node in order to stay competitive.

It will play differently in the broad base of applications that we service, and that’s the second fundamental change. We no longer ship all our bits into the compute segment and even the mobile segment is while growing rapidly is not a majority of where the bits going, we’ll show you that data here in a little bit, very broad swap of end applications now being served which tends to dampen the volatility and increase our ability to differentiate our product portfolio which begins the process of de-commoditizing the industry and really I think will lead to a totally different market dynamic.

The industry has consolidated and it's been painful, and as we look back through history we’ve seen a lot of government industrial policy where governments have been active in the market disrupting what would be a normal market environment through the support of excess capacity into the marketplace. That trend has played out. We’re not going to see that anymore, and for the first time really in the industry now we have rational competitors looking at what is the best way to deal with their capacity in order to optimize the value that they are delivering to the customers. And so, our focus really for the first time is how do we tune our technology development to deliver value-added systems to the end customer, memory systems?

And what that means is more of our R&D investment is to not to advancing process technology nodes but to building the infrastructure that support those advanced memory systems that are much more tuned to the end application they are going into. And that’s a much less capital intensive business, it’s a – and it drives a much different capital spend for the industry on a go-forward basis.

So, how do we think about optimizing our returns for the future? It’s no longer about market share, it’s no longer about driving the most advanced technology to full volume production as quickly as possible, it’s about delivering value-added systems to the end customer, and that’s a very different stake.

Historically, of course, return on invested capital in the memory industry has been bad. Even as compared to the rest of the semiconductor industry here you can see a pretty good dislocation in terms of what the average return through the cycle and you can see it’s been pretty volatile, big swings from the top of the cycle to the bottom of the cycle. For all those reasons I just talked about that’s not the case going forward. This industry has fundamentally changed.

And how we’re going to run our business, we’re going to run our business by making sure that when we make investments they are predicated on a decision process that evaluates what is the long-term return on that investment through the cycle of the capital that’s invested. Are we really getting the full return, and we’re not investing for the peak of the cycle, we’re not investing in order to stay in the game so to speak, we’re going to be investing to make sure we have the capacity in place for all those applications we’re delivering. And that may mean that as we migrate technology it’s a smaller slice of the total capacity that we move in order to support a particular application.

There's another trend that’s going on and there has been a lot of discussion and one of the questions or themes or questions that came to us is well, the equipment folks are telling us you guys are going to spend a lot more money on capital, and the reason you’re going to do that is because the capital is just a lot less productive. And I’d ask you does that really make sense? If something becomes less productive in terms of what it can deliver to you, is your natural reaction well, I'll just go and buy more that? That’s certainly not how we’re thinking about our business. It is true that as we move through time we’re going to have a harder and harder time scaling and the equipment suppliers going to have a harder and harder time delivering equipment to us that will facilitate those transitions, which means one or two things, that we behave irrationally and put more and more money into a hole or that we change our behavior, and so we’re changing our behavior. And I think that’s what rational folks will do and I think what you will see as we move through time is that you won’t see as many new capacity additions because its inefficient and you will see a slowing in the rate of new technology adoption not only because the applications will demand a slower fuse in order to adopt new technologies, but also because that’s what makes the economic sense.

So, how that’s going to impact our future supply? Well, I’ll get to that in a second, but first I want to show you that it’s the change has already occurred. If you look at what’s going on relative to capital spending in the DRAM industry for four years in a row now is a significant lack or really almost a complete lack of capital spending for new capacity. It’s all going into technology migration and I’ll show you in a second that that spending was going into technology migration is actually producing a slower and slower growth rate in terms of bits supplied into the marketplace. Now, you might say well that’s going to be a problem. In my mind it’s a fantastic boon because we’re in an environment now where the demand for memory across all the various applications is really exploding and we’ve got all the business unit guys here to tell you about the exciting products that we’re working on.

On the NAND side, you can see a similar trend, we’ve actually on the NAND graph here we’ve actually taken a little bit of capital that may get spend in 2014 for new capacity and moved it into 2015 because what’s going on in the NAND business today is people are building greenfield cleanroom floor space not large scale new capacity but the spend is going on, it’s going to go on in 2014 in order to facilitate a 3D NAND transition that will happen slowly in the years beyond that and Scott will talk to you more about how that all plays out.

The capital spend you see going on here in 2014 for NAND capacity a piece of that obviously is Micron as we transition the fab from DRAM to NAND but a lot of it is cleanroom space and early pilot line for 3D NAND.

So, here is the supply situation. Even NAND which I would argue is the most rapidly growing and the most elastic piece of the memory market, we’ve seen a long-term trend now to a reduction in capacity addition and a long-term trend in the reduction of bits supplied to the marketplace as a result of those capital spend. And I would argue this doesn’t reverse, there is not some miracle that’s going to happen that’s all of a sudden going to change this dynamic; this dynamic is actually continuing with the same driving forces behind it as you’ve seen over the recent years, and a supply picture that is relatively muted, relative to the growth of demand, and again we’ll have some folks come up here later and show you what the demand picture looks like.

On the DRAM side again capacity actually coming offline over the last four years, part of that Micron’s fab again, but generally speaking you’ve seen a long-term trend in terms of supply to the market from technology migration continuous scale down as the process just becomes more difficult.

And where we sit now, 2014 is going to be in the low 20s and the long-term trends probably under 20. So, we have to wait and see how that plays out but generally speaking these dynamics are in place and they are here to stay for a while.

So, given all of that many of you are talking a look at Micron saying this is a different company. And if we’re really going to have a situation where its not quite as capital intensive what are you going to do with all that capital and we sort of what’s your approach to how you spend it. Well I want to let Ron come up and sort of frame up the situation with Elpida and give you guys a better sense of where we’re going and it maybe a good question to ask a little later in the presentation too if you want additional detail but I think you should think about our thought process on a go-forward basis relative to allocation of capital is. We’ve got some debt we need to pay down, it’s very manageable but we want to get that back into a more normal range.

We’ve got some investments that we want to make prudently in building our system level businesses which are very muted in terms of their capital demand compared to what we experienced historically relative to new equipment. And then beyond that we’ve got money available to return to the shareholders. And what we’ve done historically has been first to go after the converts, I think that’s something that is a strategy that makes good sense for us, but beyond that there are other ways we can think about using that capital and hopefully it will be at least as long as I'm CEO will be focused on our shareholders. So, I want to stop there and obviously I will be around on the stage here for quite a while actually and available for Q&A as we get some more information out in front of you. So, can I invite – are we going to bring some chairs up, Ivan? Let’s see if we can have Mark Adams and Ron Foster come up and join us. And we’re going to go to I think we’re going to go to Ron Foster next because many of you want to see what he has got to say Elpida.

Ron, can I give you the clicker?

Ron Foster

Sure. Okay, we're all set, good morning. I’m going to start with a question that judging from the request we got in the conversations last night it may not be a whole interest in but I thought I cover it anyway. Let me give you a little -- it’s so hard to see, let me give you a little perspective on hang on a second, reorganize things. So, let me give you a little perspective on the Elpida financials. As you know, we closed the transaction on July 31. Look at the balance sheet and there is some steps we’ve to go through. One is we have about completely pro forma financials and historical financials for Elpida. That’s about a mid October timeframe. As we’re beginning our work on that to get those financials ready to go we also are started on our purchase accounting activities as opposed to figure out what the purchase accounting effects are for Elpida. But what I do want to do is give you some perspective as best I can on current run rates, I can address most straightforwardly those items which are not materially affected by the GAAP adjustments or the purchase accounting, but I’ll also try to give you some perspective on that in a bit.

So, these are per quarter run rates first the P&L and so these are examples of their current performance, if you will, not represented necessarily of any particular timeframe, but roughly what they are running right now. That’s the way to think about it. We still have to do all of our work to get their financials into our GAAP statements but this gives you a view of it. So, on the revenue side, they are running about $1 billion to $1.1 billion per quarter. The cash gross margin, and I’m giving you that one because it’s important our business and two because depreciation is harder to calculate but I’ll comment on that in a bit, 47% to 53% kind of range in current performance. OpEx is running 11% to 13% on the Elpida financials currently and one important thing to keep in mind is that our total Yen-based cost structure with the Elpida acquisition with a 1% change which was approximately a ¥1 change today will move our cost $5 million to $7 million in a quarter. So, that gives you some frame as you are looking of what happened to the exchange rates going forward to our total cost structure obviously that affects both COGS and OpEx.

And the operating cash flow their current run rates in the range of $500 million to $550 million. So, very good performance on behalf of Elpida and you’ll hear more about that with some of the following speakers. Balance sheet a couple of pieces I can give you with some degree of accuracy. One, the cash was probably the most accurate estimate I can provide about, it’s about $1 billion that we are picking up on a closing balance sheet. The debt is about $1.3 billion. This is the GAAP number, estimated GAAP number after our initial $600 million purchase payment which pays down some of the debt, so about $1.3 billion.

In terms of purchase accounting, let me address the elements of that but I can tell you about, as I mentioned, we’re just starting our work now but I’m going to try to give you some ranging views of that and make sure that we all understand what it’s going to look like when we report our financials at the end of this fiscal quarter which ends at the end of August, end of this fiscal year for that matter which ends in the end of August.

So, looking at some key items that are affected by purchase accounting on the left, I’ll just walk through them. I’ve go the estimated impact with each one ranging and then additional comments. So, on an inventory side let me be clear about purchase accounting so we’re all on the same page. We’re required to value everything on the balance sheet at fair value, assets and liabilities. So, that’s the fundamental requirement, is a fair value measurement of everything that goes on those financial statements.

If you look at inventory it will be book to fair value for everything that was on the books, on the balance sheet as of the date of close. So, that means that any value that was in the inventory at that time will flow through our financial statements effectively as zero gross margin. They have about three to four month flow of inventory, so it’s going to take three to four months for that to flow through the books. There is one month we’ll be reporting in the month of August for Elpida, so you can expect to see Elpida in the single digit gross margin in terms of what’s reported on the GAAP effects with purchase accounting. And we expect the flow-through of this written up inventory to normalize after Q1, after our fiscal Q1.

On the depreciation side, depreciation per quarter, it’s the most difficult thing to estimate right now prior to having all of our purchase accounting done. So, I've provided a fairly wide range here; it could be between the range of $15 million a quarter of depreciation expense for the acquired Elpida assets or up to $75 million a quarter. It’s affected by the valuation, the fair value exercise on the PP&E, and obviously the PP&E relates through that number; and we also have to estimate the depreciation, the depreciable life of all the assets which we estimate will be somewhere between an average in four and six years. That work is also going on, but to give you a ranging estimate it’s somewhere in that range.

Taxes, so we also have a significant effect on our taxes as a result of NOLs, net operating loss carry-forwards that Elpida has, and those have to be valued also at fair value. So, we will likely have a deferred tax asset that we will put up on our books for Elpida’s NOLs. And because of that our GAAP taxes will be running close to their statutory rate of close to 30% but the way to think about taxes as cash taxes Elpida’s will be running with significantly lower, low single digit tax rates for sometime because of the NOLs. And to give you another benchmark there in the comment section Micron’s total cash taxes we estimate for fiscal year '14 to be in the range of $20 million to $40 million for the year. So, we have very efficient tax structure and Elpida comes in with a nice NOL structure but the GAAP number will be higher because of the DTA we will put up in purchase accounting.

In terms of acquisition intangibles and goodwill, any impacts here will be minimal not material to a discussion as near as we can tell. And just to summarize the debt situation the face value of debt that’s on the closing balance sheet for Elpida includes initial payment of $600 million that we will pay down with our initial purchase price in October. So, it will be in our year end close numbers. Future installment payments of $1.4 billion, these are the scheduled payments for the Elpida acquisition, and other acquired debt from Elpida and Rexchip of about $300 million.

So, it’s about $2.3 billion, $600 million of it will be paid with our closing acquisition purchase and of that $2.3 billion the book value or GAAP value that’s going to be about $1.9 billion. And the reason for that is the future installment payments of $1.4 billion. The book value will be about $1 billion, and the reason is they’re at zero interest. So, we impute interest at our weighted debt cost of debt capital rate. And that flows through a GAAP interest expense which shows on here, we are estimating it will be about $15 million to $25 million per quarter but less than $5 million of that is really cash taxes it will be imputed interested from our purchase accounting just so understand that.

For total Micron, we already reported of about $28 million of non-cash interest related to our converts. So, when you look at our interest expense line you’re going to have the vast majority of our interest expense is actually non-cash.

In terms of gain on acquisition, we have to go through all our purchase accounting work to figure this out but a number of circumstances of chain since our last published pro forma financials on Elpida back in February when we did our financing. Obviously the business are performing better, FX rates have moved significantly favorably for us and Elpida has significantly more cash on their balance sheet as you saw $1 billion. When you add all that up we have to go back and reassess if there is a gain on the purchase, if there is a gain it will be a one time non-operating gain in our fiscal fourth quarter that we are currently in. So, more to come on that on earnings release which will be in our early October. We’ll obviously break all this out for you and give the proper pro forma so you can understand the flow of the business.

So, in terms of Micron and the acquisition what’s our long-term capital structure and financing strategy and do we need to raise capital. Let me first address capital requirements as a important variable obviously when you thinking about capital structure. This graph shows CapEx dollars per wafer out per year on the dark blue line and the dotted line is just the trend line of the dark blue line so that’s the CapEx dollars per wafer out. The bars behind there is our average wafer capacity per calendar year and obviously we’ve been increasing our wafer capacity as you can see over time but you can all see also see on the blue line that our dollars per wafer our of CapEx has been declining over the last decade.

And the peaks that show here in our history when we were building out new Greenfield capacity in NAND Flash at IM Flash Technologies in Utah and IM Flash Singapore. So, if you take that out the CapEx run rates are fundamentally lower as Mark already commented we don’t have any plans for capacity expansion and you can see the trend line go in a significantly lower in calendar year of 2013. As you may recall in our last earnings conference call I commented that we were deferring out some capital out of fiscal year '13 an anticipation of the integration with Elpida. So, we are actually projecting to come in just below the bottom end of our guidance of about $1.5 billion of CapEx in fiscal '13. Some of the slipping in the fiscal 2014 and you can see on the line on the curve here that we expect the capital intensity to be in the same general range as we’ve been running in recent years. So, we are guiding our 2014 CapEx to be about $2.6 billion to $3.2 billion in fiscal year 2014.

Now, let me turn to capital structure. Now that you see the view of sort of what our capital requirements are comment on three areas. First liquidity and then debt management and debt to capital ratio. Our fiscal third quarter close for Micron we reported about $2.9 billion in cash. For your information this excludes about $400 million in undrawn revolvers that are available to us if we need the liquidity but that’s our starting point pre-close.

We are targeting to keep a near term cash balance comfortably exceeding $2 billion as we go through our integration of Elpida over the next year and a half or so. So, that’s the range we have planned to stay in. And on debt management we are always focusing on a staggering debt maturities and avoiding any large maturities as we go through there. And on debt to capital we are targeting the 20% to 25% debt to capital range; we were 31% in the third quarter and we are going to be in the mid to high 30s we bring in the debt I just showed you from Elpida. But commenting on each one of these on the liquidity side there has been no adverse impact on our liquidity of the Elpida acquisition. We received about $1 billion on the balance sheet of cash and the purchase price of Elpida plus Rexchip was about $1 billion. So, net neutral on that.

In terms of debt management, there has been no adverse impact on our debt structure over time because we have staggered the payments the zero interest payments over the next six years. So, we are $ 1 billion per year amortization and less than most years, as you look at our debt maturities. And on debt to capital there will be a short-term increase at the mid to high 30s as we bring that debt on but we are expecting given our current performance and our debt amortization schedule that we will be back to our target range within two years.

So, to answer the last question, any plans to raise capital, it is clear from our perspective given the current status of our integrated balance sheet the business performance that we are in good shape and there is no need to raise any significant amounts of new capital, and we have no plans to do so.

We will continue, as we always do, to engage in asset-backed financing as we amortize off our existing asset-backed financing and roll into new ones. So, that will continue. And as Mark commented his early comments just to summarize, as we go forward in terms of our capital structure planning and use of cash. Our first priority will be de-leveraging the balance sheet, debt repayment. The second priority will be managing our dilution most notably with our convertible bonds.

So, with that, I’ll turn it over to Mark.

Mark Durcan

Thanks, Ron. The first question I wanted to address this morning was around the integration. How do we navigate that and more specifically around technology transition. I’m not going to get into a lot of detail on the technology roadmap, I’m going to leave that to Scott but when you think about technology and the Elpida business case for us way back at the beginning of the process, Micron’s portfolio at the time rough run rate of $8 billion, $8.5 billion was very similar to our largest competitive at the time was probably in the range of twice as big as us with twice in R&D budget. With the Elpida acquisition, on the DRAM side, we’ve now got it integrated team that Scott will discuss able to advance us further and at a faster pace in the 25 nanometer volume manufacturing as well as accelerate our development in 20 nanometer technology. So, on the technology side integration is pretty strong.

One thing we don’t talk a lot about in terms of beyond the economics beyond the technologies, over an 18 month process, on the integration side, we’ve got to know these people really well. And it’s a good group, it’s a solid organization of people and talent and we are decided to have this team on board at Micron. When you look at R&D specifically, you’ve got a core group that is right inside of their Hiroshima facility on the DRAM side as well as pockets of engineering around the globe around Rexchip. And so, from a R&D perspective, very solid integrated approach for us in DRAM and we are pretty pleased there.

From a manufacturing perspective, it actually aligns pretty well with our overall manufacturing network. If you think of some of our announcements in the last year you’ve got now Singapore positioned as a non-volatile geographic location for us in manufacturing. He’s got Taiwan in terms of high volume compute and some mobile in Taiwan, you’ve got high volume mobile in Hiroshima. So, our network is pretty trued up and then integrated pretty well in the Micron as well.

On the BU structure, if you think about Micron’s current structure on BUs you’ve got a DRAM business and NAND business is got a wireless business and you’ve got an embedded business. Well, the best way to think about how that will fold into Micron is to think about a mobile business integrating and merged in with Micron’s mobile business, and Mike Rayfield will be up shortly talk about the scale and the opportunity there, but you got a pretty sizable business for us of Elpida folding their business unit into Micron’s mobile business for the new mobile WSG Group with Micron. And the compute business at Elpida will fold nicely on the BU structure that Brian surely runs under DSG.

From a bank end perspective, Elpida Akita was a pretty strong packaging group that supporting the mobile portfolio and that will continue to do so under the supply chain in operation and packaging group that we have in Micron that works under Brian Shields. So, I think the message here is that their organization fits pretty well into Micron, and the timing that we’ve had, yeah, is a longer process but the timing of integration allowed us to get a much further head start on what it will day one to bring these two companies together. We are pretty optimistic there.

And lastly, I’ll just comment on the customer side. Elpida’s business are primarily mobile and computing. On top of that, what we know it was a pretty cost relative to Micron’s business a pretty concentrated set of business. We do all -- we do business with all their customers and the overwhelming supports there from the customer base has been very positive. From the accounting standpoint, we’re just going through the process of identifying where the relationships are stronger and how we'll serve the customer but again we’ve been I’ve gotten a lot of support from our customers on this and feel pretty good. So, the net of the integration discussion is we’re pretty excited about it and pretty comfortable that the preparation in the last 18 months has positions us well for a smooth integration.

Next question was around current supply and demand environment both DRAM and NAND. I’ll start off with the NAND. You can see the numbers over the cycle here over the last about five years or so, and you can see what the industry is forecasting somewhere in the mid to low 40s. Micron is going to go slightly more with the more slightly above the industry growth projections for 2014 and a lot of that has to do with what we announced in our last earnings call with the conversion in Singapore. And quite frankly, we see it pretty robust demand picture to support this primary categories of the growth demand obviously are SSDs both in the client side and the enterprise side, as well as mobile DRAM.

We are also seeing strong growth in the smaller categories but higher value categories things like automotive, good business for us, a very strong business in terms of market share and starting to use both DRAM and NAND in this case the growth for the new market is pretty, Tablets is strong. So, we remain very bullish on NAND and we think the supply balance NAND and DRAM -- sorry, NAND supply and demand are pretty well lined as best we can see.

On the DRAM side, again, lower bit growth and you see the trend and we are looking at kind of low 20% range on the bit growth and we are going to be slightly below that obviously with conversions driving not only growth but, as Mark talked about in his opening, differentiation for us and then how we go to market with package solutions that get us away from the commodity business and more of a unique customer engagement model where we are delivering products that are proprietary to their own platforms, and that’s kind of where we want to be, take this business over the last three to five years.

There has been a couple of different ways we’ve talked about capital intensity in the business and I just want to talk about relative to sales and kind of history in the business. And if you look back over time, Ron alluded to it back in the 2007 for the Flash manufacturing and our answers in the Flash and what that did to this ratio of CapEx versus sales, and for all the reasons Mark talked about in the lithography and maturing of the business and evolving to more of a systems play with less capital intensive investments as well as, let’s not forget, over the last 18 months we’ve increased our total capacity roughly 90% of all existing capacity that was in the industry at phenomenal economic value. And when you look at that that takes our ratios we marked to Rayfield one brought a question on.

Mike Rayfield

Yeah. So, I think the question is okay so what would change all of that. When would Micron step back and say, hey, you know what, this market looks pretty good and there is robust demand, and let’s go ahead and make some significant investments in order to grow our overall profitability. And I think you should think of us as reasonable, rational business people. Hopefully, we’ve demonstrated that over the last number of years, and our approach is really pretty simple.

We need to have good visibility over the life cycle, and I’m not going to give you a gross margin number because that’s not the answer. The answer is we need to have good visibility if we invest in capital that is an water on the bridge so to speak and we need to make sure that we are going to get the return over the useful life of that equipment which is growing, and I have to have good visibility that I’m going to get a return on that invested capital that’s significantly in excess of my WACC, my weighted average cost of capital, because there is uncertainty, first of all, and secondly just putting that additional capacity is going to impact all my existing assets.

So when I go and put -- when I look at a new invest I’m going to have certainty of the return to some level and I’ve got to have a return on invested capital analysis that says not only is this incremental investments positive to me from an economic profit perspective but also significantly well above that threshold that I have confidence I’m not disrupting rest of the assets I have working for me and for our shareholders in the market place. And so, it’s a very high hurdle that we have to get over.

What are the things come into our decision making process in particular, would we ever look at the business more carefully in terms of the supply and demand balance and actually take capacity offline if the market warranted it or run our manufacturing plans a little bit a leaner optimize it in a different way. Well, of course, our job here on a go forward basis we have the manufacturing scale we need. Our job on a go forward basis is to deliver value added solutions to our customers. We don’t want to be the biggest memory company. We’ve got the scale we need. We want to be the best memory company. And that means thinking about our assets and our whatever kind of asset that might be in a fundamentally different way and that’s how we intend to approach the business on a go forward basis.

So, I think at this point we want to stop and take some questions because we covered a lot of ground and I’m sure in particular you’ve got questions for Mark and Ron, but I’m happy to answer any as well. And we’ll get a couple of shots at this as we go through the day but Ivan will pass the mic and you can address him to any of us or just throw it out there and I’ll try and direct the question.

Question-and-Answer Session

David Wong - Wells Fargo

Thanks. David Wong, Wells Fargo. Two questions I guess primarily one question. So, first one is you are coming in with a great asset purchase but then you have to put in CapEx to upgrade capacity and so on. Did your cost per bit actually rise over the next few years because you are coming from a lower base and then you are having to invest? And the second question I think, Mark, you talked about extending life of equipment so did your depreciation cycles stretch out because you expect to stay on note for longer time?

Mark Durcan

So let me give you a high level answer and then maybe Ron wants to jump in with a more specifics. Absolutely, we are looking at what’s the useful life of our -- of all the various components of our business and that could stretch over time. I think that fits with the discussion I gave you earlier. In the short term, will our depreciation load the Elpida assets go up? Absolutely. There is a high likelihoods that as we continue to upgrade that equipment the depreciation load, we'll increase we have to wait and see what the purchase price accounting sorts that out but that non-cash expense will likely go up a little bit. In terms of the overall cost per bit, is not going to go up? No, I don’t foresee that happening given the ongoing muted rate of technology expansion or a change as well as the ongoing depreciation of the existing assets. But Ron, do you want to add anything to that?

Ron Foster

I think you covered it pretty well but obviously we are getting -- we have to complete our purchase accounting but we believe we’ll have a pretty low PP&E value. In fact, the numbers I showed you the high end of that depreciation range is roughly the PP&E that we use back in February so, it’s going to be at or below that kind of number in terms of PP&E we think, we have to go through the work. So, the depreciation on the existing assets will be pretty low. As Mark mentioned, we got to layer in CapEx as we migrate but that is why I showed you that capital intensity graph, and it’s not fundamentally changing. As we go forward, it’s more akin to our normal technology node migrations; we just have more capacity that we acquired at the very low base cost in terms of the depreciation.

So the cost or bit should be declining both for the reason I showed you of the trend over the last decade as well as the well-priced asset we brought in and our plans to convert which are, as Mark mentioned, pretty well architected already because we’ve been working on this for a while. We’ve been working with them for a quite few months. We have a fairly good view of that roadmap and what is takes to do the conversions, both on the technology side as well as the equipment side and the fabs, the team has done a great job. So, we see a pretty consistent trend and that’s why we are communicating that message in terms of cost CapEx per wafer trend lines continue on the trends that we’ve done -- been doing historically and in the recent past and low cost bit acquisition as base depreciation and then adding the capital on top of that. So, that should do nothing but help our cost per bit.

Vijay Rakesh - Sterne Agee

Hi, Mark and Ron. Just a quick question. This is Vijay from Sterne Agee. When you look at the whole CapEx for next year, how do you split between NAND and DRAM?

Mike Rayfield

Mark you want to take that one.

Mark Durcan

On the CapEx NAND, DRAM CapEx, we are marking in our plans for our fiscal year 2014 as we speak here. My suspicion is this is probably in the two-thirds of that spend will be on DRAM conversions, I think closed to one-third it will be in the NAND conversions as best we see right now.

Vijay Rakesh - Sterne Agee

Got it. And this just a housekeeping question the $1 billion to $1.1 billion that you gave for Elpida, is that the May quarter or the July quarter?

Mark Durcan

You mean the $1.1 billion I mentioned of PP&E?

Vijay Rakesh - Sterne Agee

Yeah.

Mark Durcan

That was the base PP&E value that we produced in February when we rolled out the first set of the financial statements for Elpida yeah.

Vijay Rakesh - Sterne Agee

Got it. Great, thank you. Well, yeah, you actually rolled the revenue here.

Ron Foster

It will actually go in the revenue line.

Mark Durcan

Yeah, what I’m saying is that it will be at that number or likely lower given the depreciation scale I showed you $15 million to $75 million a quarter. $75 million will be more towards that and $15 million obviously a lot lower.

Vijay Rakesh - Sterne Agee

It's revenue. That’s why it (inaudible) --

Mark Durcan

Oh I’m sorry what is that?

Vijay Rakesh - Sterne Agee

The revenue you showed on the, at the current run rate.

Mark Durcan

Oh I’m sorry, I thought you were talking about the comment I made about the PP&E. I apologize. So that is roughly the current range they are running. We haven’t done their historical performance and we also aren’t giving you a forecast but I just say that if you look at the recent months that’s about what they are running.

Vijay Rakesh - Sterne Agee

Got it. Okay. And if you go back to the NAND and DRAM forecast that you gave any thoughts on how you see mobile DRAM within that how do you see that growing next year for the industry or for Elpida?

Mark Durcan

I’m going to let Mike answer to that because it’s just playing out as we speak for kind of the 2014 numbers.

Vijay Rakesh - Sterne Agee

The spending, let me start again the CapEx projection you provided does that include some of the catch up CapEx associated with Elpida, Rexchip that were highlighted in the February filing or is that separate spending item?

Mark Durcan

The range that Ron gave you is that all the number that’s what we expect to spend in fiscal 2013.

Mike Rayfield

2014.

Mark Durcan

Sorry in fiscal 2014 for Micron and Elpida.

Mike Rayfield

So that includes some deferrals out of 2013, as I mentioned, they actually came in below our guidance for 2013 and everything we’re planning to do on the 2014 to get the conversions done in that year.

Jim Schneider - Goldman Sachs

Thanks for taking the questions. Jim Schneider from Goldman Sachs. Just one question. First of all, on the capacity transition you talked about from at the tech from DRAM to NAND. Can you tell us over roughly what time that’s going to be completed? In other words, if we look out into Q1, Q2 of next year and you can expect that the transition to be complete? And then I guess the second question is, as you look at the rest of the factory network are there other places like (inaudible) or elsewhere, where you can contemplate the future transitions either way?

Mark Durcan

Yeah. So, first of all, relative to the tech transition that’s obviously something that we’re going to continue to monitor and dial with market conditions. We could complete that as quickly as late this calendar year if we so chose to but we’re going to, we’re going to reserve the right to change and modify that as we move through time, but still heading in that general direction of complete conversion or almost complete conversion at some point in the future. That’s how we get the best capital asset utilization.

Relative so would we go and do that one way or the other at some point in the future, I think absolutely that is a possibility for us. I’ll say also that even relative to compute DRAM and mobile DRAM there are some slight differences in how we align our capacity and we’re planning to have flexibility in our network to dial that to optimize for market conditions as well because as you know when you have got the growth that we’re seeing in low power DRAM are relative to what’s going on in the PC segment, we want to make sure we get that down appropriate. But for the longer-term stuff, yes, I can see depending no how the markets play out that we might want to move capacity one way or the other. And my guess would be that’s more likely that we would move more to NAND versus DRAM over the long haul but we don’t have any plans to do that today. We think we’re getting it in about the right spot with the move we’ve got in play and we’ll take a look at it and see how it plays out.

Unidentified Analyst

Thanks for taking my question. Could you maybe talk about what are the DRAM pricing trends you are seeing in the market, and if you could address both like PC DRAM side of the market and mobile DRAM side of the market?

Mark Durcan

Sorry, I didn’t get the second half of it?

Unidentified Analyst

Both in the PC DRAM side and the mobile DRAM side?

Mark Durcan

Sure. So, there is a little softening in the DRAM market but we think that’s pretty contained just excess capacity from some of the Tier 2 players in the business are looking in this to generate some cash and get through a technology process, the liquidation process of their inventory. We don’t see that and, by the way, our exposure in the spot market, which I’m referring to is pretty light. Our OEM contract pricing has remained pretty strong and stable. We haven’t seen any pressure on that.

So, we feel pretty strong about our own performance in that and we think that there is just a little noise in the system. We didn’t get – we don’t need a lot of volume driving this of course that there is small volume out there that’s the current price of the day. So, we’re not at this point, we’re not overly concerned that this is a trend we think this is more of an inventory movement through the flows and summertime here.

As far as PC and mobile, mobile of course was pretty strong for most of our fiscal year and had a pretty sizable gap between where the PC business and mobile was. Mobile then has been relatively stable during the second half of our fiscal year and yet PC has improved dramatically. And I think part of that is because a lot of folks looked at the opportunity and directed some capacity chose mobile and there has been some pretty good evening out of the capacity and of course the PC business, which on the demand side has been flat, less than flat. The alignment of supply and demand has been pretty good and the pricing improved.

Adeline Lee - Citi

It’s Adeline Lee for Glen Yeung at Citi. Can you sort of describe in more detail what’s your end market exposure before and after Elpida? And then the follow-up is also on pricing, what is your sense of the overall pricing volatility after that industry change?

Mark Durcan

For that I have a slide a little bit later in the presentation to address your first question was market exposure. When we think about Elpida, as I mentioned in my earlier comments, primarily think of Elpida as a mobile business and roughly around two-thirds mobile. And if you think about the rest of that was, it was kind of the commodity PC, computing business and that’s the opportunity for us, which is pretty exciting. We have the opportunity to take some of that capacity and drive it into Micron's profile, which I’ll show here shortly on a different segmentation. So, when you ask about exposure, we’re inheriting a business that was mobile and computing and we’re going to have the opportunity to take some of that capacity and put it into some of these segments that we’re market leaders in, the server, the networking, automotive and those types. So, we’re pretty positive. There is good value there for us long-term and our transition there.

The second question was?

Ron Foster

I guess around pricing trends wasn’t it, overall pricing trends?

Mark Durcan

As I mentioned in the last question here there has been a little softness on NAND, DRAM and we think that’s just kind of again low volume stuff (inaudible) spot market, which we’re not very exposed to as a company. And on the NAND side, it’s actually interesting. On the higher density NAND side, it’s pretty tight and that’s going into the client SSDs and non-SSDs, we’re seeing some softening on the lower density products that go into the cars and USB stuff and even some of the feature phone business. But again overall in NAND, we’re very pleased with where it is today and it continue to be pretty tight for us given that a lot of our capacities in the better segment tied into this segment.

Ivan Donaldson

Okay. Unfortunately, we’re going to go ahead and stop the Q&A there. There will be more Q&A though but later on. So, hold on to your questions and there was still some more, and we’re going to bring up the other presenters now. So, maybe before we kickoff, I introduce Brian Shirley here from our DRAM Solutions Group, Scott DeBoer runs our Technology Development, and Mike Rayfield from the Wireless Products Group.

Scott DeBoer

Okay. I'm going to start off and Mark has covered a lot of this very well already on the synergy and the first question is around on the benefits of Elpida from an R&D and technology and development overall point of view. Certainly, the big message is around the scale. The two pieces that I would add to some of the things that have already been said today are really around our combination of Micron’s previous expertise in mobile technology and low power technology -- sorry, Elpida’s previous expertise in mobile technology, the low power technology and the combination with the inherent high quality products we have right now on the server side.

And when we put those two things together the combination really makes us into a very strong technology company on the DRAM side. And a piece of the DRAM strategy that fits together very well for us overt this period of time is Micron’s previous strategy, and I talked about it in previous meetings, really was to go straight to the 20 nanometer node. And we have had our R&D resources focused very strongly on the 20 nanometer node over the last two and a half years preparing for a strong position on that node.

During that same period of time, Elpida had all of their technology resources primarily focused on the 25 nanometer node, which is now positioned and starting to ramp. So, the synergy of how the development was done even pre-close is has been really good and its fit into something that’s going to put us in a strong position from the DRAM point of view.

Mark and Mark talked about technology slowing. The scale and the resources we’re bringing in through this acquisition really position us to deal with a difficult technology scaling path on DRAM and a highly complex roadmap going forward to support the whole product base.

Okay. The second question here is around what we think our roadmap position is across all of our products. And some of this has been alluded to the 25 nanometer technology, which is now yielding well and ramping in Hiroshima and Rexchip is the current leading edge production on DRAM for us. In the second half of 2014, we’ll be introducing the 20 nanometer node, which will be a joint product where we align our technology roadmaps between previous Elpida and Micron so we come together with one technology.

I’m going to talk quite a bit of detail about NAND, I have a couple of slide on this. I know there is a lot of interest on where we are at in NAND technology. I’ll just say right now our leading technology that we announced about a week ago is on 60-nanometer. We view this as the most cost effective NAND technology in the world right now and we’re very pleased with where that positions us both from a cost per bit point of view and also from a performance point of view over the next year.

Our 3D NAND, this is big topic right now. Our technology on 3D NAND this is a 256Gb density that we’re going to be sampling in the first quarter of 2014. This technology and the mixture of how it comes in relative to our 60-nanometer technology is part of the story that I’ll be explaining to you today. But because of the strength in our planar NAND we really can be very critical of where we introduce 3D NAND to make sure it come in at a cost and a performance point of view that continues our industry leading 3D NAND technology position. Across our other technology right now, we have, we have solid position in NOR and in PCM with the 45-nanometer product, and then we are in development on a 20-nanometer node for PCM that will rollout probably in the 2015 timeframe.

Okay. So, now I’ll go into some details really on the, on our view of what 3D NAND means to the industry and then explain the strategy that we have for NAND technology that I think puts us in a position to be the leader in technology and performance through this period of time and really into the foreseeable future with the way we’re going to scale.

So to start with, at 20-nanometer we made a technology decision that was unique in the industry that to change the NAND cell and to position it for high performance process technology that would scale rapidly and with good cost structure to the 16-nanometer node. And part of our strategy that’s playing out right now is this 16-nanometer node is going to be the most cost effective technology in the market in volume ramping up right now and in volume through 2014. One of the big pieces about our differentiated planar technology is really the CapEx per wafer for this conversion the structure. This is I believe unique in the industry from things that have been put out. We really positioned our 16-nanometer node to be exceptionally low in CapEx for this transition relative to all of our previous nodes. So, this technology that enables it and this cost structure are something that we’re very proud of and things put us in a very strong position over the next year.

The other thing to look out on this graph, which tells part of the 3D NAND story, sorry I know you can’t see past me. The tough part of the 3D NAND story is the CapEx relative to transition of planar node to a 3D NAND node and it tells you part of the story around how you make the decision on 3D NAND relative to cost structure, number of wafers you get out of the fab and bits per wafer, and I’ll talk about that in more detail in the next slide.

So, this is, this is our non-volatile strategy as we focus on 16-nanometer as I have discussed maturing right now. We have 3D NAND technology. We have made a business decision that the right time to come in is that a cost per bit point of view where it makes financial sense. When you weigh the capital costs to transition the number of wafers you get out of a given fab on 3D versus planar NAND and the performance which we believe we’ve the highest performance 3D NAND solution available right now, we understand that the right strategy is to run planar NAND through big part of 2014 and introduce this and then ramp it up over probably over a significant period of time as Mark mentioned earlier rather than a rapid switch to 3D NAND overall.

Beyond that we have a scaling path it’s already well down the road on scaling to a higher density of vertical NAND. We believe this technology is the position for bulk storage. It won’t be touched by any other technology in our view for that SSD application, and I’ll talk a little bit about that in the next slide. We have a lot of focus on emerging memory for higher performance application at a cost point not quite to the NAND space but significantly better than the DRAM space. We have major partnerships with strong partners and we’re putting a lot of focus on this next memory technology but we believe these two things coexist going forward in the future.

Okay, so the last topic here is around our emerging memory strategy. So, when we look at across we’ve shown the stoplight chart in the past of all the memory technologies that exist in this space and we spend a lot of time understanding with our partners, with our global infrastructure what the best technologies are that actually fit into good memory applications in the future. And we really narrowed it down to a few key partnerships and a few key technologies.

What this graph shows really is the performance and the density between the different types of these memories that we are focused on on this page. If you look at the far left and the far right it shows our belief that the DRAM space really can’t be touched from a peer speed point of view into the future relative to these other memory technologies. And the far right of this is that NAND goes on and we believe in our scaling path for NAND technology to maintain a position that really can’t be touched by any other technology for that piece of the application.

The middle part which fits in between the two in performance and density is where we’re putting a lot of focus on new memory technology, on 3D memory technology, and we believe that’s a space for the future of that really enable some kinds of memory system technology and new kinds of application.

One thing that to highlight here because we’ve talked about PCM, Micron has a lot in the past, and we PCM is the only emerging memory that actually emerged. It worked. We have products on it. But it isn’t our primary focus going forward as its something working on but we believe PCM is a platform that we’ve gone through to enable system products to really understand the technology requirements of a new memory. And we think that just to having the platform of PCM has moved us into a pretty strong position as we look at all these other kinds of memory technologies and evaluate which ones are going to work.

Okay. So, that’s the technology section. I don’t know, if we’re doing questions on this right now or if we’re going through all through this.

Unidentified Analyst

Scott, jut to be clear on, you have said your 16-nanometer process technology do you think it will be the lowest cost, is that for the segment you are targeting you mean, high performance or even compared to three bit per cell?

Scott DeBoer

Well, the 16-nanometer inherently can be MLC, SLC or three bit per cell, so it’s a technology platform. We believe that technology node of 16-nanometer given the cost structure and the bits per wafer will be the leading edge at each of those segments.

Unidentified Analyst

Quick question, how far -- how much development do you think you need for going to somewhere in the low teens beyond 16-nanometer in terms of development or capital thing that you might say maybe its easier for me to switch to 3D or do you think that planar has still some more legs to go before you start to see 3D starting to happen?

Scott DeBoer

Right now, the last products that we’re developing on our planar roadmap are 16, and from a peer technology assessment point of view there's capability cost and performance overall performance tradeoff. We really think 16-nanometer is the last node that makes fundamental sense before the transition to 3D, but it’s physically possible to build something smaller than the 16-nanometer.

John Pitzer - Credit Suisse

Scott. Hi, this is John Pitzer with Credit Suisse. A lot of this is focused on 3D from manufacturing yield ability standpoint. I’m kind of curious if you can give us some insights on the ecosystem around 3D NAND specifically on the controller side because clearly as we think about how quickly 3D NAND can ramp into the supply environment controllers are going to be pretty critical around that and I’ve got mixed views when I talked to people. So, is there a stable controller technology out there that going to gain or slowdown the adoption of NAND and 3D NAND in the marketplace would be helpful?

Scott DeBoer

Jason, if you can?

Brian Shirley

Yeah, thanks. Brian Shirley here. I’m going to go ahead and field that one. Both in NAND and DRAM, we do see an increasing use of controllers coming both for the interfaces as well as what we could call the media management. And as we bring 3D into production both in SSDs, in mobile, as well as we bring new DRAM technologies into production I think you are going to see areas, where really understanding the physics and getting some layer of logic management of that memory taken care of really is critical. And frankly, to do that well, you have to be the memory company that understands the physics as well as the fabrication behind it. But yes, that will be a piece of the game going forward.

Srini Sundararajan - Summit Research

Srini Sundararajan from Summit Research. The question that I have is on 3D NAND. What will you be doing to make it more ROI friendly in the next two years for 3D NAND?

Scott DeBoer

So, from the point of view of what the cost structure is of 3D NAND, we’re targeting a position and our belief is that it has to be above 30 tiers for it to be cost effective relative to especially to our planar NAND solution. But when you look at the overall cost structure of 3D NAND you get, you get to a scaling point, where you get a lot of bit density increase per wafer and the financials of it are you offset the extra cost to capital and what we call wafer trade ratio, which is especially as you scale can be anywhere from 1.5 to 2.0 on number of planar wafers you could get out of the same space as you get of a 3D NAND process flow. But certainly the bit density increased tradeoff there gets us to where the ROI on it it’s very positive.

Srini Sundararajan - Summit Research

Yes. Do you have any packaging synergies between what you do in mobile DRAM, Elpida and what you have in-house with NAND/either different types of the packages or things relating to EM, MC for smartphones and tablets?

Scott DeBoer

One of the big strength of Elpida’s technology especially in the mobile area is their packaging technology. It’s definitely a synergy that we’re really happy with. I think that like all the parts of R&D right now, there is a definitely a blend of technology expertise. It’s going to make us stronger both on the NAND side and the DRAM side. And just, I think a really good situation for us in the packaging technology side through .the combination.

Mark Durcan

Let me, let me add a little something there. Clearly so the types of products we want to deliver to our customers going forward sate of the art packaging technology is key enabler. We’re very happy, as Scott said, to have some of the expertise and capability that came with Elpida imported into our, into our bag of tricks sort to speak. But you will see that as we move forward and as we probably spend less money on advanced capital for bits per square into silicon, you'll also see investments that goes to facilitate those system level solutions and advanced packaging that’s demanded in all the end applications we’re targeting for the future.

Unidentified Analyst

Thank you. And one follow-up question, Scott, did you say that you are going to sample 3D NAND Q1 of 2014?

Scott DeBoer

Calendar Q1.

Unidentified Analyst

Calendar, okay. And then on DRAM I if you are going to be migrate into 20-nanometer next year then what would happens to technology roadmap beyond 20. Two, follow-up on that, would you need EUV to migrate below to 20 and does the cost benefit change?

Scott DeBoer

Sure. On there is a node below 20 that we’re on working right now. It doesn’t absolutely require EUV and some of our technologies benefit from EUV above a certain ct point on the EUV infrastructure. So, when the, per hour of an EUV tool gets to a certain point if not necessarily a technology enabler buts absolutely from a cost point of view the right thing to do.

Unidentified Analyst

But if EUV is not available with double or triple patterning how that adverse impact on the cost of structure?

Scott DeBoer

No. If, well if my default if EUV comes out and can run 150 wafers in hour it will be a benefit to our cost structure. Our plans right now don’t assume that EUV is going to be available for 20-nanometer or whatever the 1x nanometer notice on DRAM. So, the other piece of that is our fab or the infrastructure in our fabs is facilitated for double and triple patterning already. So, those things are built into our DRAM and our NAND fab now and they are already part of our cost structure.

Unidentified Analyst

Would there will be other types of cost savings to offset the increased capital intensity of double, triple patterning?

Scott DeBoer

So, in my view at least, the cost of for us with the technology we use of double and triple patterning is sometimes over-emphasized in the press. I think we’ve a very cost effective methodology for doing double patterning and it’s been in mass production for us especially in the NAND side for ever since the 50-nanomater direction. So, we’re very experienced with it, the tools sets are very mature and now EUV is the thing with the hurdle to get over it to be cost effective, not necessarily double pattern.

Unidentified Analyst

The different NAND manufacturers are all taking different strategies for the timing of 3D relative to planar of that migration. Which is the more important driver for each for the competitors, is it their planar technology running out of gas or is it their 3D technology being superior?

Scott DeBoer

I think a big piece of it is really the quality of the planar technology and in the end the timing for real volume manufacturing on 3D for the competitors may look very similar, the front end of this may be look different because the timing of or the quality of the planar NAND technology. But certainly if you have a strong position in planar NAND technology and your performance is meeting the spectrum of need for your highest performance products then the cost structure planar NAND is superior through the next year.

Mark Durcan

Let me add a little on this 3D NAND topic. We’ve said we’re going to sample early in 2014 and others are talking about sampling at point, as Scott has already pointed out, potentially for different applications. We don’t believe that there is any significant impact on the NAND marketplace from 3D NAND in 2014. We think it’s a much slower boil in terms of when this becomes volume manufacturing technology, but there are, there is socket enablement and work to be done with the customers so smooth away and that’s why we see the sampling earlier in the year.

Mike Rayfield

Okay, and we'll talk a little bit about the mobile business. So, the way I want to talk about it is, it was five years ago or so we started talking about our phones becoming computers, and there were doubters, they just assume that they were sort of high end calling devices. They have become computers, there is really no argument both from a processing capability and what we try to go off and do with them. The diagram here a couple of years ago would have shown servers and workstations and may be some laptop tied to the cloud to do processing. If you just take a look at some of the things we do with these mobile devices now.

A couple of years ago somebody came up with the idea we’ll upload a bunch of photos to the web that will go off and get crunched on a big machine and it will come back with a panorama, panoramic picture. Right now, we do that on our smartphones, we just go across like this, we get beautiful panoramic pictures, a huge amount of processing necessary, a huge amount of memory necessary; got a bunch of frame buffers in there, a whole bunch of crunching going on and ultimately that, that’s what is opened up this whole category we called mobile computers.

And as we talked about this last night at dinner, a bunch of you said, yeah, yeah but that’s only the high end devices and the high end devices are slowing. Well, so earlier this week a bunch of you probably follow Xiaomi in China, the little smartphone startup that did $2 billion in the first half of this year. They just introduced a $130 phone that’s called the Red Rice, it’s a Quad Core, 720p phone, 4.7 inch display, 1 gigabyte of memory and 4 gigabytes of NAND, that’s the new definition of low end phone. So, all these models that talked about low end phones and smartphones having a quarter or a half of gigabyte that a $130 that’s squarely in the middle of the low end phone, smartphone category and it belongs right here with these devices in terms of the processing capability and where it goes. And we talk about what part of the market is growing, the market in terms of its capabilities is crunching together pretty significantly.

And I think the other that we’ve seen is this architecture that is called smartphones is really the first I mean instantiation of mobile computing, it goes everywhere. If you look into what’s in your car entertainment system, what is the back of your television, what’s in your tablets, what’s moving it ultrathin, it’s architecturally all the same. And what that means is it this little smartphone opportunity about 1 billion units is really just the tip of the sphere on what mobile computing is, and we’ll see it grow in the acing amount of applications some of which will talk about here and some of which we probably can’t even imagine. So, is really does tie our lifestyle together. I watch all you folks operating these things all the time and as where we share data, is where we have amazing amount of applications running in the background and where we go often actually edit data which is something people tend to be will often do.

So, there is a whole bunch of forces driving this computer and what it’s capable of doing as well as the amount of memory in it. So, the first piece as we talked about all of these mobile devices are architecturally about the same and if you got a tablet and a smartphone and you do one application on that tablet you want to make sure that a same application runs in your smartphone, right? I’ve got a 15 year old daughter when the smartphone runs out of either memory of processing power, it’s ugly, right, so you need to go often make sure you’ve got enough could be able to do the same kinds of things you do on your tablet and your smartphone and the same things happen in the back of automobile.

The next piece is all these soft services, right. We share and edit photos, we share and edit all kinds of a content. All of these things run in the background and if you understand computer architecture in order to run all these things at background they all have a car about a memory and it just keeps adding up and we’ve got a PSP I’ve got all the applications and nobody wants to shut one down to bring another one up and it just keeps inching up. So, we’ve already talked about the low end smartphone being a gigabyte now, you saw the Moto X came out at 2 gigabyte, Samsung’s new phones are 2 gigabytes, there is 3 gigabytes and larger phones in development, and it’s all about the user experience; people want to make sure they can go often and do those same things.

Then the carriers have gotten in the mix, they wants you to run a lot of applications that forces a lot of data. You’ve seen T-Mobile very recently no contracts, they wants you to update phones more rapidly; AT&T has come out with the plan every year you can upgrade. And you start to put the forces of very affordable high performance devices with very rapid upgrades, you end up with the market that grows pretty dramatically and very high performance devices.

And then, finally, all these the personal electronics whether it’s going to be a watch or glasses or a heart monitor or a medical monitor while those all have a relatively small amount of memory all of those use the phone as the hub, and now just put a whole bunch of relatively critical application that you’re interested in running at the background on your mobile device. So, this thing is now as oppose for the cloud being the center of the universe what it is if the center of your universe, and the cool part of that is as you put more memory on that it also forces more memory in the cloud which where is where Micron has got a huge opportunity. And people want to backup to the cloud, but they don’t want to be connected all the time, right, connectivity isn’t ubiquitous yet, and this allows us to go off. And every time there is another device being sold there is a huge amount of instruction goes in place as well.

In terms of just sort of a couple more pieces of data that shows where this is going, the amount of NAND in the smartphone in two years is doubling, right, it goes over to 20 gigabytes. The amount of tablet goes closer to tripling. And again to our earlier conversation, if you can do something in your tablet, you store your information on your tablet you want to be able to do that same thing in your phone, right. I have all my books on all the phones and in all the tablets and I get a little upset if I can’t fit them on, and people go often want to make sure that’s a great experience. Cameras are another great example. When you start doing processing of images you have multiple copies of the frame buffer and you need to go often and crunch on those and keep them in main memory as camera resolutions go above 20 mega pixels, you saw Nokia is what the highest one with that 41, you put a couple of 41 mega pixel images in memory and start processing it, it’s going to take a lot of memory.

If you just look at the connectivity in video. So, LTE drives more memory. Combination initially was because it’s a higher performance device, in the end it’s because it allows you again to do a lot more processing on images and video. And then, finally, three of four years ago I used to walk around and tell people about 720p and 1080p videos on phones and they said, you’re crazy, there is no way anyone still want to do that. I don’t want if any of you are fans of these GoPro devices. So, the latest GoPro device when you take it out of the box the default video setting is 15 frames a second 4K and you see through a 64 gigabytes of data in a very short period of time, and that’s the same things that’s coming in all these mobile devices. So, the memory is going to continue to grow pretty dramatically.

And then, finally, sort of what does that mean to us, right. Obviously, we’re a memory supplier but as we put Micron and Elpida together and as you’ve heard earlier the rate of progression in technology is slowing, it’s all about having all the right pieces, NAND, NOR, DRAM, controllers, firmware, packaging and with the combined companies we got all those pieces to go often create interesting solutions, energy efficient, high performance solutions for all of these mobile devices. And I think that, as Brian that talked about earlier, the real innovation is going to be how do we put all these pieces together, how do we wrap firmware around, how do we do the right controllers, how do we control memory like we can better than anybody else and deliver something to customers to let them go often make these mobile computers all that much more mobile and all that much more powerful. That’s it.

Brian Shirley

Okay, I'm going to go ahead and finish up on the business unit side here we’re going to talk a bit about what we call this DRAM solutions group. Again, this is our computing DRAM portfolio that goes into servers, networking, ultrathin, gaming applications, and we want to talk a little bit about what, how we see Elpida adding to these segments and some of the key trends happening in each of them. You’ve heard us talk about it before, servers, storage and networking. These have been some hallmark segments for Micron over the years, lot of key products that we’ve developed such as RLDRAM going into core networking.

This is the segment that continues to grow leaps and bounds. It is insatiable demand out there and notably on the server side really for a lot of the trends that Mike talked about. You’ve all seen the figures about the number of cellphones driving new datacenter servers as well as the networking gear behind that. Folks we can’t keep up with that demand, and one of the things we’re most excited about with Elpida is a simply additive scale it taking us away from being in a supply limited situation in servers to increase our share of market in a segment that frankly has been very good to us and that we see quite a bit more room to increase further share with scale.

Moving down to ultrathin PC and tablets. This is a changing market frankly, and as you think about the diversity of memory and the diversity of platforms coming in there frankly it’s unlike the desktop and notebook markets years past. What you see these days with a variety of different SoC platforms is different memory requirements coming into that space. Really a decommoditization happening in a segment that’s frankly is still fairly high volume. So, in the space we had DDR3 coming into play, now even mobile technology such as LPDDR3, and really what we are finding with Elpida is just a perfect match both with 25 nanometer technology in production at Hiroshima and Rexchip as well as LPDDR3 capability for always on, always connected ultrathin, memory that’s getting sorted down really bringing into play much different customer-supplier relationships that we’ve had in years past. And again helping to decommoditize the space.

Finally, over on the graphics and consumers side, this is a big win for us with Elpida. Elpida has been a long time player in the graphics markets something called GDDR memory, graphics DDR, and currently they are in production with something called GDDR5. This is a product line that is perfectly complementary to our existing by 16 portfolio for mid range and low end graphics. GDDR5 really giving us the product portfolio for the game console refresh happening now, as well as advanced graphics in laptops and desktops, and frankly even moving beyond to some high performance computing applications. So, really an area that we’re pretty enthused about, perfect complementary product portfolio to what we’d already developed in the scale to execute there.

Now, in the graphics market in particular, again GDDR5, this is a picture of the 4 gigabit GDDR5 Elpida had recently taped out. This is in production as we speak in Hiroshima. This will be used for a number of upper-end game consoles as well as advanced computer computing graphics. Again, one of the things we see here is an opportunity to leverage GDDR5 into upper-end server and high performance computing applications. You don’t hear much about that, but some of the absolute column performance that GDDR5 offers is actually making it the architecture of choice in a number of infrastructure markets. This by the way is in production on 25 nanometer technology today.

Moving over to the infrastructure side, again, growing by leaps and bounds. We can’t keep server modules on the shelf right now. We have recently moved the product portfolio from what we would call 8 gigabyte registered DIMMs as really the sweet spot of the server space into what are now 16 gigabyte registered DIMMs. That speaks to the kind of content per box increases happening out there.

You can see the chart on the upper right here talking about the server unit CAGR over the last or looking forward the really amazing thing and we see this daily is the content per box of any given server. And again, that’s driven by the mobile trend, that’s driven by virtualization, more cores per CPU and more CPUs per server, and what at all needs is a lot of memory in that box. That’s again on the Elpida side is really helping us out as we increase our scale moving 25 nanometer eventually into server application and helping fulfill the needs of our key customers.

This a lot of this the market for Micron over the years past we have generated good share of market in the corporate server, the high performance computing side of the business; the datacenter growth has really been a huge volume out of here. The way those datacenter build happen though as of the customers will come in and it’s a little bit of a clumpy business; it’s something that we called the LVO phenomenon, large volume orders. The customers, and you have a good sense of who they are, the large datacenter providers, will come in and say, if you can deliver x amount of memory to me next week you can have a 100% of this business. And then, by the way, and may be dark for a couple of weeks after that or a couple of months until the next datacenter build comes along. The way you win that business is through scale, and again that sets up in something that turns into a very, very large percentage of the overall memory market going forward.

Decommoditize specialized server memory driving significant multi-digit percentages of the overall DRAM market. From a product standpoint, we’ve situated ourselves beautifully here both with standard server modules as well as optimized cloud products that really get to high density DRAM densities, you’re getting into RLDRAM3 specifically as the architecture of choice for today for upper end routers and switches, and finally moving into HMC, which is winning the battle for the next generation high performance computing and networking architectures out there.

To that point, let me finalize here with just an update on Hybrid Memory Cube. What we did roughly when we started this program roughly four years ago is we said we want to gain the upper end performance point in servers and networking with this architecture but we also want to deliver it in a way that’s easy to use, where the memory can be placed down on a motherboard, doesn’t need a silicon interposer, it doesn’t need fancy assembly technology, we take care of all of that for the user and manage the memory. Frankly, this is working out better than we ever could have planned. It’s gained the high ground and it has given a number of server and networking companies in architecture that is ready to use in these upper end systems. I'm happy to report that the production version isn’t silicon, we have sampled just outside of the company and we are on track for a 2014 production launch. So, we’re very excited about this and it continues to win more design wins in each of these spaces today.

Now the interesting thing is that in between standard DDR3, DDR4 memory and HMC, what we’re seeing out there daily is a massive number of custom opportunities coming in across the board. And this is not just true in the server and networking space this is true in graphics, it’s true frankly even in upper end standard client machines, new ways of taking advantage of DRAM memory, and that’s really changing the business for us. 10 years ago what we worried about in product development was just standard component designs, bringing in a lot of designers to cost-optimize the design, slide through high volume and really ultimate cost optimization. What I worry about these days frankly is bringing in more of logic architects, more firmware architects, even software crafting up frankly a much higher value-add portfolio something that competes on value as opposed to just a commoditized cost profile. So, a number of areas here that frankly we’re pretty enthused about the memory industry going forward. I think it brings it back around the Mark’s point from the beginning of what the R&D starts to transition like with this changing game on memory.

So, with that, I'm going to turn it back over to Mark Adams.

Mark Adams

Thanks Brian. So, when you take a look at the technologies discussions we’ve had today and well I wanted to do comment a little bit about our business model, because the vision of differentiated products sounds great and powerful and what have you, but from a vision of how we’ve gone forward if you went back five years ago you’re going to see on this chart, the changing diversification of our business. On the left-hand side is a technology discussion around our mix here with DRAM, NAND and NOR and other and if you take a look at what we’ve acquired with Elpida obviously nearly a 100% DRAM, the combined last 12 months to put you in a ratio of around 61% over 60% on DRAM and 27% on NAND.

The opportunity for us is to continue to play out this differentiation and multi-segment approach. If you look at, at the end of the day, our job is to take this precious resource with all capacity and put it in right homes. I mentioned earlier over the last 18 months we got a lot of capacity. So, I heard some questions last night about what would it take, and Mark addressed the question here is what would it take, that’s not our mindset. Our mindset really going forward and our strategy is how do we take our capacity and put it in a right higher value segments. Micron, if you went back again to five years and looked at where we’ve come from, we’ve done a pretty good job. Personal computing was down under 20% on the native Micron and now we take over Elpida capacity that will, that is much higher but again it gives us the opportunity as Brian was talking about to pushback capacity on better segments.

And so, our focus going forward from an operating perspective and from a go-to-market perspective is how do we continue to optimize that. And we’re not thinking about additional capacity we’re thinking about existing capacity and new higher margin segments and, quite frankly, the opportunities there. Our customers want us to be bigger in server; our customers are demanding us to be bigger in networking, automotive in all these branding segments. So, it’s an exciting time for us from a go-to-market standpoint to take that new capacity and continue to drive into the differentiated markets and really give us some leverage in terms of our P&L and operating performance.

Unidentified Company Speaker

You might want to read the couple of those Mark and make sure they can see.

Mark Adams

Yeah, I'm sorry, we’re blocking here. On the bottom there is this personal systems, the personal systems on the Micron, native Micron was through our last five years that kind of go in the market and then product development we got that down to a number of sub 20%. And then you’ve got mobile here in the combined mobile as the new business will be about 25%. And then consumer server, networking storage, automotive broadly referred to as AIMM as we got some industrial and medical, and then SSDs the topic of become again keep growing in materiality.

So, the shift here is as we balanced out and I guess the equation on the left-hand side from a DRAM, NAND technology mix is how do we leverage that into the right markets and we’re pretty comfortable on the scale piece we’ve got a really good story there and you’ll see us continue to drive more in these higher value segments and you can use the left-hand side as a benchmark on how we’ve done from a diversification, and then certainly we had around Elpida as we can take that capacity to do the same and get leveraging the business. Okay, thanks. So, I think we’re going to broader group Q&A.

Question-and-Answer Session

John Pitzer - Credit Suisse

It’s John Pitzer again with Credit Suisse. Just two questions here, one for Ron and one for Mark Durcan. I guess Ron real quick I’ve heard that the word scale multiple times in this presentation, and then I guess just given your new found size with Elpida how do we think about your purchasing power either with raw materials and/or capital equipment today versus what it has been? And then for Mark Durcan, Mark, you guys put out a lot of arguments as to why the industry is different today versus the last 15 or 20 years. One that I didn’t hear was the fact that your largest competitor Samsung today, for the first time in their corporate history, also has a sizable market share as an OEM. Then I'm wondering whether or not that’s allowing them to view the component business differently because clearly stable to up pricing for them now is very profitable and makes the more competitive in their handset business. How important is that dynamic to your new world view on memory, and does it open up opportunities with here competitors of Samsung to drive economics? Thanks

Ron Foster

John, I think you heard comments already in terms of relationships from the customer side that I think it will be really helpful of scale; I think that base was covered pretty well. To your question on the procurement side, obviously having more scale of the total system is going to be valuable to us and we’re already beginning to work in the last few days with Elpida. We haven’t had a chance to really even see that information until we close the transaction, but I think there will be some opportunities there as we’re moving ahead especially on the capital side.

Mark Durcan

And as to the question on Samsung being a large consumer of memory and having a obviously vested interest in maximizing their competitive advantage to how they treat their memory business, I think that’s definitely a factor in the market today. What Samsung’s corporate strategy is over the long haul I would love to pontificate on but I probably ought not to because I don’t actually know exactly what their plan is but it makes sense. And I think the way I look at this business is I think rational people are rational and they do what makes sense for their business, and I think what the dynamic you’re talking about it applies to Samsung but I think it also applies by the way to SK Hynix now with SK and maybe to a slightly different degree with one of the other big NAND manufactures. So that is a dynamic in the market place I think its real and it gives me more confidence that everyone has got the right approach to this business.

Mark Adams

Maybe if I could just add one more comment, from a customer perspective, yes, the emotional how they compete with us, we want to buy from other people and that certainly helps. But if you look at the raw availability of the out put to the non-Samsung camp the rest of the world, when Samsung takes that assumption internally we’re in pretty good shape to be the leading supplier to everyone else but Samsung just in terms of the raw capacity. And so that manifest is helping from pretty good customer relationships and these opportunities of development and higher value opportunities at all these other customers. So, just the raw capacity we have versus what Samsung has available outside of their company to other customers it puts us in pretty good shape.

Unidentified Company Speaker

I’ll add since I want to roll I’ll add one final point to that which is Samsung is actually a pretty good customer. We’re happy to have them as a customer and they’re very happy to have us as a supplier because if you think about also from their perspective and rational behavior and playing out the way one would predict. From just a technology risk mitigation perspective, even if they think they’ve gotten an appropriate roadmap internal for their own semiconductor operations, they’ve got to be concerned that, there is a lot of bright guys here at Micron they are innovating and have a lot of customer engagement all over the world, and to not be engaged with Micron for Samsung is a risk factor this makes no sense. And so, we actually have a pretty business relationship with Samsung now; we're happy to engage in that.

Sundeep Bajikar - Jefferies

Hi. It’s Sundeep Bajikar from Jefferies. Thank you for taking my question. Just a follow-up on the capital spending question that came up. So, I think you’ve made it pretty clear a couple of times that your capital intensity is trending down, and its clear now with the scale that you have more power in terms of bargaining with your suppliers specifically the equipment vendors. So, given this I guess big picture how do you think this impacts the equipment supplier industry longer term in terms of their ability to invest in technology development? I mean, clearly, this comes at a time when scaling has become increasingly challenging so any thoughts you might share on that?

Ron Foster

Yes, well, I think its interesting challenge for them. I think frankly for both the suppliers and ourselves the future lies in much closer collaboration in terms of picking the things we work on very strategically and doing them at a more deliberate way rather than a maybe more of a spray shot approach. So, there are the investments required for particular capability are probably larger and more complicated and the probability of success if you’re not working very closely with the supplier and have buy-in from the beginning that this is something that’s going to add value for them you have a very diminished probability of success at the end of the day. So, I think for both the suppliers and for ourselves that close interaction or relationship is going to be critical to optimizing our outcomes.

Unidentified Company Speaker

One up here.

Unidentified Analyst

Quick question, as the NAND players four NAND players embark on this 3D NAND how should we be thinking about what kind of differentiation that all the four players one will have against each other if at all there is a differentiation on the 3D NAND in terms of anything in terms of density or anything any other metric that you might be able to throw out so that we can better understand in terms of the differentiation? Thanks.

Mark Durcan

Well, may be I can start and Scott or Brian maybe you guys want to jump in or even Mike. I think fundamentally the large NAND suppliers all have a slightly different technology or technical approach to 3D NAND and that underlying -- that then underlies probably a slightly different strategy in terms of what the optimal timing and first application is. And the primary driver behind that is what’s the quality level of the data retention and endurance performance of the NAND technology are deploying. And that then drives a thought process around okay so then what application makes sense what kind of configuration what kind of density etcetera. And the each competitor in the market place I believe today probably has a slightly different view of what makes sense for them. The other thing is I think Scott has already pointed out kind of depends where you’re on your plan or technologies well but les important than the sort of fundamental approach each competitor is taking to the 3D NAND technology itself. And Brian or Scott, do you want to add anything?

Unidentified Analyst

Just a quick question on your the way you’re going to manage fab utilization, and just sort of historical aspect of the business has been the fabs are full until you’re going to get to cash cost. Last year kind of a watershed event when Toshiba took utilization down unilaterally in not great environment but not a horrible environment, how do you guys think about it and what are the criteria you would use to determine when you’d run the fab less than 12?

Unidentified Company Speaker

Yeah, well, I think its, is completely rational behavior from Toshiba. They had a lot of, my understanding anyway they had a lot of triple and sell product going in the market place in that time frame. And I think they just looked at it and behaved rationally to optimize their company independently. I think you can, you could assume that Micron and other competitors in market place will do the same thing. We have no interest in pumping extra memory out into the lowest value add segment in order to simultaneously pump money off our balance sheet. That’s just not a behavior that we’re interest in engaging in.

Srini - Summit Research

Hi. This is Srini from Summit Research, and this is a question for Scott. Can you show the slide where you have the 20 nanometer and the 16 nanometer side by side?

Scott DeBoer

We can have it down the way (inaudible) sorry, we’re a little crowded in here today. This one?

Srini - Summit Research

Yes.

Scott DeBoer

Yeah.

Srini - Summit Research

So you can clearly show here how your density is going to be much better compared to 20 nanometers and 16 nanometers. So, by using high-k, I think the high-k they are able to compare the space between --

Unidentified Company Speaker

Could you repeat the question?

Scott DeBoer

I’m sorry, I didn’t hear your question.

Srini - Summit Research

So my comment is its very easy to explain why your 16 nanometer is going to be superior and why 3D NAND is not necessary just based on this picture?

Scott DeBoer

Yeah, I think as I mentioned we did think out this strategy of how to go from 20 to 16 to 3D in great detail with a lot of thought put into this node. And we definitely believe this is the most cost effective direction for the next year and really puts us in a strong position as we transition to the 3D NAND.

Unidentified Company Speaker

Let me add I think the primary point for the benefit of others in the audiences and we said previously our 20 nanometer node here is what we call planar cell of the control gate does not wrap around the floating gate and it is just noticing from the cost section that in order to facilitate that you have to have an advanced high-k gate dielectric and that’s the approach we adopted at 20-nanometer driving a low cost scaling to 16-nanometer.

Unidentified Analyst

Hey guys, by buying Elpida you've obviously become a bigger DRAM company. And for those who have been around for 10 or 15 years in the past what we do in the morning is wake up and the first thing we check is DRAM exchange and look at the spot price. And by that is it almost gauge what mic one is doing, how well its doing and where the share price is going so and certainly DRAM has been big – operating income over the last few years, couple of years.

So my question is when we look at that DRAM (inaudible) yeah when we look at the DRAM spot price everyday does that number still have a big relevancy compared now than compared say five or seven years ago, is it still is an important gauge? I know you don’t sell into the spot, but certainly the contract follows the spot. Is that still an important number that we wake up and look at every morning?

And my second question is recently we see the spot has gone below the contract price in DRAM and that has -- that’s the first time it’s happened in a few months. Do you expect contract to follow spot and go down near term or do you expect spot to stabilize – do you expect contract at least to follow spot in the near term? Thank you.

Unidentified Company Speaker

So let me take the first part of the question and may be I will ask Mark to comment on how contract, how we think that’s going to play up with. I would say for a lot of reasons and we tried to innumerate some of those for you here today. The DRAM business going forward is going to be very different than the DRAM business has in the past, I think it’s going to be a pretty good business. And when you look at, a, where the Micron’s products go today, very few of them as you pointed out going to the spot but the spot itself is also very thinly traded and is representative not of the vast majority of the memory output today, and the quality levels that’s required for a lot of those applications is really representative of the tail-end of the quality distribution that can perform in some of the lower value-add application. So, I can’t predict how you guys are going to trade our stock. I think if you’re rational you’ll be less sensitive in aggregate to what’s going on in the spot market.

Now, relative to how is the spot going to play with contract et cetera, certainly we estimate rational decisions, and the spot to us give every thing I just said does not drive how we approach contract. And with that, I’ll turn it over to Mark and may be he can speculate on where ASPs are going.

Mark Adams

Yeah, thank you. From a mix standpoint one of the things we’ve been working on a lot over the five plus years is the diversification in the NAND segment. To address your question about the exposure to the “spot price” and the commodity type of the business, as you can see on the right hand side of that first bar the Micron last 12 months you can see we’ve done a pretty good job on the diversification of the business. And we believe that we have an outstanding opportunity to take Elpida’s business and push it more to Micron model around DRAM. So, from a diversification point long-term we don’t think that index of DRAM exchange on a daily basis, and by the way we look at it was left, but we don’t think its going to be as meaningful as it has in the past.

As far as OEM contract and their behavior versus the spot market in the here and now we don’t think that linkage is very tight. And what I mean by that is we don’t think the volume out in the spot market is significant, we think there is just some flowing through of excess inventory and we don’t see the pressure out in the contract. And as I mentioned earlier, we’re not selling lot there so our OEM spot contract pricing is where we are today has been pretty stable.

Unidentified Analyst

Hi, thank you. Historically your shrewder customers have waited until the end of the quarter for you to make decisions regarding pricing. Can you talk about that historical behavior and reconcile it with nodes living longer and slower shrinking and kind of tie together what’s going on on the technology side with how you’re running the business and how you think your customers will or should behave going forward? Thank you.

Mark Adams

Sure. One of the by-products that where we have been pre-Elpida on capacity is we weren’t even exposed to that behavior although they tried except for stream conditions where they were oversupply. We’ve been able to navigate the end of quarter, end of month buying cycle, the pressure at the end. But given some of what Brian’s team has been up on in terms of stimulating demand around server and network and what have you, our decision in that scenario is we normally don’t try to push out revenue towards the end of the quarter just to do that. Again, part of the theme of the day is its profit driven and its value driven. And so, if our decision is do we push out DDR3 inventory just to get revenue number versus keeping that for linearity for the next quarter so we can ship servers and networking, it’s a no-brainer; we don’t look at our business that way.

Unidentified Analyst

So you’re saying you’d be willing to hold more inventory as well as to?

Mark Adams

Well, yeah, assuming it economically makes sense and by the way as we’ve talked about in our last couple of earnings calls over the last 18 months our inventory is down about over 20%. So, we’re trying to mange it well and this so we’re not sitting on a lot of pressure towards the end of the quarter. And so, if we had to we look at that as just good economics, good value, and rather than dish it to a stop market customer on the 31st of the month it doesn’t do anything for our business. We’re so constrained right now in the server networking business that it’s just, it’s clear what we’re going to go and do.

Rajiv Gill - Needham and Company

Rajiv Gill from Needham and Company. Question, now that you have both NAND and DRAM capability and capacity, how do you look at trend towards multi-chip package solutions and mobile handsets, where do you see that going in terms of adoption, and then how do you think you can exploit that internal capability over your competitor who has the partner with the third-party?

Scott DeBoer

So as I talked about on the last slide, one of the pieces, one of the things to do is have all the pieces. So, when you got the NAND, you got the DRAM, you got the packaging technology controller and firmware that’s where the differentiation is going to happen. As phones and tablets get more and more memory higher and higher performance that’s where we think we can add a lot of value. And its just the integration of all those pieces doing from a firmware standpoint, as Brian highlighted, there is a piece of firmware to manage the memory itself, we’re probably better in managing our memory than anybody else and then a piece of firmware that looks externally where we can add value to whatever that application is. So, huge piece of opportunity for us.

Brian Shirley

By the way let me mention on the computing side as well. We are seeing mixed DRAM and NAND architectures come into play. As a matter of fact we’ve launched a product line with a couple of notable design wins something called NVDIMM, these are standard server DRAM modules with our own NAND on the same module, a controller and firmware in place to manage in essence of checkpointing operation in the server where everything that goes that’s run into the DRAM can be placed directly into the NAND flash for backup, for checkpoints for a variety of different applications. This is a pretty big piece of the server world going forward. So, it helps having all of the technologies in the bag right now.

Unidentified Analyst

Thanks, Steve Fox with Cross Research. So, you guys have outlined a lot of synergies that are to come from the Elpida acquisition obviously it’s too early to put a dollar number on that, but could you maybe just qualify what’s the most important synergies to watch for the time-line that we could start seeing them may be drop to the bottom-line? And then just one clarification, Ron. In looking at the purchase accounting for Elpida you’re saying the rest of this quarter and next quarter you’re going to be running Elpida through the GAAP, the non-GAAP number that is 0% margin before we see the real numbers from Elpida. Is that correct?

Unidentified Company Speaker

So let me take the first and I haven’t actually tried to dollarize the impact of any of these things. But I think the product portfolio/customer application diversification immediate impact and very significant to us. The R&D scale capability and bandwidth to handle future challenges are big wins. The ability to tune our capacity, we started on that in advance to the close and important and finally all of the various things that we can do is we run the company together in terms of marrying our product portfolios and in terms of getting more efficient relative to a company infrastructure supply chain IT those types of things, if I put that at the bottom there is plenty to be done there too. And Ron?

Ron Foster

Yeah, so in terms of the purchase accounting impact on inventory so we’ve got one moth of Elpida we’ll have in our fiscal fourth quarter. Anything that was on the balance sheet and inventory at that time we mark the fair value which means it will have a zero margin at the stage of completion it was at. So, any margin we get on Elpida business on our GAAP financials in the fourth quarter will be value add beyond the inventory that we’re shipping that was already on the Elpida books. So, that’s why I said it will be low single digits impact in the fourth quarter in terms of the margin. I’ll plan on pro forma all of this for you so you can understand the fundamental flow when we do our earnings release.

Then they’ve got a three to four month inventory flow-through so that’s gong to rush through that original inventory at zero margin over three to four months. So, by the end of the fiscal first quarter it will be virtually completely behind us and we’ll be reporting margins that are more consistent with what’s really happening with the fundamentals. Just wanted you to understand that because it will affect the numbers but we will plan on doing a pro forma of that in the other effects so you understand the underlying contribution.

Vijay Rakesh - Sterne Agee

Thanks. Last question here on CapEx. Vijay from Sterne Agee. When you look at your CapEx for the next year $3 billion not, not too high but and you have to push your own CapEx out to next year but embedded in that the Elpida portion of the CapEx is that mostly flattish year-on-year year, any color on there? Thanks.

Ron Foster

In terms of the Elpida CapEx trends from --

Vijay Rakesh - Sterne Agee

Yeah year-on-year as you look at fiscal 2014 or fiscal 2013 for Elpida? Thanks…

Ron Foster

Yeah, well, so you may know from public communications in our earnings calls that we’ve been involved with the planning including CapEx planning and we had an operating plan that we put out there with Elpida when we signed up a sponsorship agreement, they’ve been working that operating plan including capital investments they go with that operating plan pretty close. So, their CapEx activities have been going on exactly as planned and consistent with the roll out of now there are (inaudible) DRAM for example it was commented on, and now as we go into 2014 its just a continuation of that in terms of CapEx and the merged 20-nanometer DRAM that will be working together. All that’s factored into the guidance I gave you of 2.6 to 3.2 for (inaudible).

Ivan Donaldson

All right. I think with that we’ll say thank you all very much for coming. I appreciate your attendance and interest and we’ll get back to work. So, thank you very much.

Unidentified Company Speaker

Thank you.

Unidentified Company Speaker

Thank you.

Ivan Donaldson

Real quick just everybody knows there is some lunch being served if you walk out the back there to the right and if you’d like to stick around and have just some light lunch there is some back there will be kind of (inaudible) but if you want to ask us some more question so. Thanks again.

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