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Micron Technology, Inc. (NASDAQ:MU)

Credit Suisse's Annual Technology Conference

December 4, 2013 11:00 am ET

Executives

Kipp Bedard - VP, IR

Analysts

John Pitzer - Credit Suisse

John Pitzer - Credit Suisse

Perfect. Why don't we go ahead and get started. I'd like to welcome everyone to day two of the fireside chat presentation of this year's Credit Suisse Tech Conference. It's my pleasure this morning to introduce from Micron Technology, Kipp Bedard, who is the VP of Investor Relations. We're going to go through a fireside chat. It's a large room but an intimate group. So if you've got questions please raise your hand and we'll get a mic to you and try to make this as interactive as possible.

Kipp, I'll kick things off. Setting this page especially if there is any new investors in the room, over the last several years you guys have really transformed the company to one that was DRAM-centric, PC-centric to one and now has a much more diversified revenue stream. Within DRAM you've got PCs, mobile service, you've added the NAND piece, embedded SSD, you've got the NOR piece. May be you can talk a little bit about where mix is today and as you answer that question, the question I always get is because of the diversification is spot pricing not no longer relevant as we try to figure out the quarterly trends for you?

Kipp Bedard

Sure, great -- great question. Thanks again for having us here. It's always seems to be a great timing for Micron to come and kind of talk about how the next year sets up so we always appreciate it. Thanks very much. Thanks all of you for joining us this morning. So let me take the last part of that first. The spot market question. Yes, it's becoming much less relevant today largely for a lot of the reasons that you talk about. There were so many different markets today and the types of DRAM that we ship into these markets are getting much more diverse whether it's because of the package type that's requirement or what's wrapped around it so that's part of it.

But also from the standpoint that no longer is the majority of the bit, a commodity bit just going into a standard PC or Notebook. That was pretty easy to put into a spot market and have a pretty active sales and marketing campaign and demand and supply attributes to it. That just doesn't happen in today's market. Most of the mobile applications prefer to have a three to nine month window of what their costs are going to look like for the majority of their product, server quality has to be there, and certain requirements by the big frame guys are just mandated to qualifying to their products and to service them. So I can just keep going down the list and so not only as the product type itself changed but the market itself has gotten a lot thinner because product doesn't go through that nearly as often and it just can't because of the requirements of today's memory.

John Pitzer - Credit Suisse

And then roughly the split between DRAM, NAND today and then within the sub category if you think about end-market exposure in each, how should we think about it?

Kipp Bedard

Yes, let me and so I can remove the ASP delta for you guys, so you can maybe track it on your own. Now post the Elpida, post the changes to the Inotera agreement last year, we total in our portfolio today run about 560,000 wafer capacity per month and of that we get about 180,000 a month out of the Rexchip Elpida outfit and from Inotera we pick up about 115,000 to 120,000 a month, and then we have around 15,000 16,000 a week so about 32,000 a month that come out of Virginia. That's all DRAM. So the rest of the portfolio would be NAND. So we're a little bit heavier on the DRAM side today. We are making a shift of course in the Singapore Fab that was running DRAM Singapore TECH; they were about halfway through that conversion from DRAM back to NAND.

John Pitzer - Credit Suisse

Most difficult thing for a cyclical analyst to argue is that it's different this time and clearly I think there are a lot of people in this room and involved in the stock that are trying to kind of make that assessment is what's going on here cyclical or is it structural. Help us understand kind of how you guys are viewing the structural environment and if you can differentiate between DRAM and NAND from a big growth supply perspective from a number of competitors from strategy, from mission statement would be helpful?

Kipp Bedard

Yes, I think if we could probably spend the next half hour on that easily and that would be the last question. But just may be briefly I've explained it in different forms over the last year or two, but we just -- for 30 years that we've watched this DRAM space evolve there has always been an arms race. When I go back to the early 80s and I hate to bore everybody but the U.S. had 40 companies making DRAM and there are virtually nobody else in the world. But somewhere around '83, '84 Japan decided they wanted to own this space. They went from 10% market share in that '83, '84 timeframe to 90% by the end of the decade. Somewhere to the end of that decade the Koreans decided they wanted to come in. And so they and three companies went from nowhere to 60%, 70% of the DRAM space. So what I'm headed with this is every decade we've had this arms race and even go forward to this -- to the turn of the century here we had the Taiwanese that came in and in a five, six year period they spent $20 billion adding raw DRAM capacity to the market.

I mean we've been perpetually oversupplied basically for 30 years and we've created these shorter term market increases by once the Tier 2 manufacturers, ASPs got below their cash cost, they were forced to back off. Well that's all gone now. There isn't one country or one company that sitting there that has that's aimed at this market that isn't already in it. The IP is locked up, the risk of trying to build a new facility and enter the market is now billions and billions of dollars and three to five years of time to do it. We're in a mode where within that timeframe more than likely the technology will change a lot. So trying to come in with today's technology thinking you're going to build the market share three to five years out is just not possible.

So I think we -- after all these years of arms races there is nobody that's chasing market share and I think we also have gotten a bit lucky in the sense that the three remaining suppliers all have a variety of reasons but we're all focused on profitability right now. It helps us to do that.

John Pitzer - Credit Suisse

So Kipp, maybe it would help quantify this is, where do you see bit growth historically in the NAND and DRAM market this year and next year?

Kipp Bedard

Yes. This year we saw DRAM supply probably low to mid 20s was setup to be mid to high 20s before the Wuxi fire so down a few percent from that. Next year we're looking at kind of in the mid 20s as well. Again the big keys are no new wafers are coming in the DRAM space. There is no idle capacity sitting anywhere and Micron itself over the next six months is yet through our transition as a TECH Fab in Singapore we're still removing 3% of the wafer supply in DRAM, so very healthy supply dynamic for DRAM.

In NAND this year I think we're going to probably end up be in the high 30s in terms of supply may be we crossover into low 40s. Next year it's setup at least with the three expansions that are planned in public somewhere between 40% and 45% supply.

John Pitzer - Credit Suisse

Can you talk a little bit about seasonality, one of the concerns I think a lot of investors have especially given how well the stocks performed this year, do you step into the stock in Q4 and what's usually a negative seasonality from a fundamental perspective going into Q1. How do you view seasonality especially in light of the fact that the Wuxi plant probably starts to re-ramp sometime in the March '14 quarter?

Kipp Bedard

Yes, let me start with the Wuxi Fab, keep in mind that as they ramp we'll be continuing to take wafers off, so it's an interesting balance that's going to occur in the next six months. In terms of seasonal stability or seasonal demand patterns it used to be pretty predictable, you would build almost always a second half mainly influenced by PC demand growing in that second half period you would usually bottom out somewhere in December, January, February, you would start to build through the spring, have a little stall in the summer, jeez we just can't identify those patterns anymore. PC is no longer the largest consumer of bits, the largest consume today is mobile handsets and those are on their own timeframe. Those are more geared around the ramp prior to a launch especially when you're talking about a new phone from one of the two big guys. There is a big market influence to that.

There is still some seasonality around retail, NAND for example; we're kind of past that. So as I've discussed with people in past conferences over the last few months as we kind of build into the holiday season we're now past that peak so we're in a bit of a void from NAND perspective on retail. So that wouldn't surprise me to see some easing in pricing here which I think we're seeing on the spot. On the other hand generally for DRAM we would have seen kind of the peak build into the holiday season mid November.

And quite frankly, we've seen very solid demand post that, which tells me the sell-through as pretty active especially in the handset market where we've seen a lot of late couple of week activity.

John Pitzer - Credit Suisse

Well can you talk a little bit about handset and how important that become. I guess one of the concerns I have and I guess from investors is you have the largest consumer of NAND on the planet during the first global launch of the flagship phone in the back half of this year with the 5S. Does that create a hyper-seasonality situation for NAND in the first half of next year right at the time where you're making a transition from DRAM to NAND in Singapore you can actually touch and feel incremental supply coming online? Does that setup for you worse than normal seasonal first half of the year?

Kipp Bedard

Yes, great question. That particular company you're referencing they are such a large NAND buyer but they are in the market all the time. In the early days you could definitely feel when they took a breath and they were getting ready to launch but they're so massive today that they just accumulate you around. So just because of that no I'm not too worried about it. I do think however there is things that play within the NAND market, we are bringing on supply. Samsung is going to be ramping some 3D product in that first half of the year. I think we are about ready to see some client SSD shakeout as well. I think we're going to see some consolidation in that market, so I expect a little bit of leaning on the client SSD space. In the meantime though, we're dropping prices -- as dropping costs as an industry. So I think all-in when I still look at the medium to longer term in NAND I think it's going to be very healthy, you're probably looking at more typical ASP declines year-over-year in the 30ish type range and costs are going to be down at least that if not more.

John Pitzer - Credit Suisse

Okay. But you mentioned 3D NAND, vertical NAND in that answer. A couple of things when you think about the big growth for next year, how much are you guys baking in your forecast for the Samsung ramp and I guess more importantly you'll continue to move down a planar shrink through 1Y. Help us understand where you guys -- when you start to make the tradition to 3D, should we expect pilot lines from Micron sometime in calendar '14?

Kipp Bedard

Yes, you bet. I think publicly Samsung has talked about 20,000, 30,000 wafer ramp in the China Fab kind of going into the summer timeframe. I think it's going to be a little bit more difficult to build that than may be I think the market thinks it's going to be same for us and we're going to be introducing 3D NAND in calendar Q1, '14 and we will expect some sort of a small ramp in the second half of the year.

Keep in mind there is a whole infrastructure that has to happen around shipping NAND bits in order to ramp, you got to get controller technology meshed with your NAND, you got to get Firmware written and that's got to get qualified into products. So it's quite a lengthy supply chain to get these things ramped especially in NAND.

John Pitzer - Credit Suisse

One of the biggest differences between the DRAM and the NAND market is the participants in DRAM don't feel like that's a growth industry anymore. And so no one is adding capacity and they're shipping over each other telling us how they are moving capacity way in fact I'd argue that you're going to get higher return on DRAM today and yet you are moving DRAM wafer starts over to NAND?

Kipp Bedard

Yes.

John Pitzer - Credit Suisse

Looks like the NAND as people are being more practical about capacity adds, but there is still this view that if you built it they won't come?

Kipp Bedard

Sure.

John Pitzer - Credit Suisse

And I think one of the concerns out there on the demand side is if you look at the embedded part of the NAND market.

Kipp Bedard

Yes.

John Pitzer - Credit Suisse

We haven't seen densities in the handset market go up in four, five years et cetera, 16, 32, 64 bit configuration. And so I guess what the question I get is one, do you think that changes within embedded; and two, is other opportunities like SSD big enough to soak up the capacity that's coming online if not the first half of next year, the second half going into 2015?

Kipp Bedard

Yes, great question. And you're right especially from the top two players in cell phone manufacturing, we've kind of seen this peak at 64 may be that -- may be one or two 128 gigabyte phones that are out there today. That the key in the phone business anyway has been that mid to low end has now started adding NAND. And so that's kept a pretty healthy all-in mobile view so that's pretty good. Then I'd like to see the high end guys go may be one more time, which I think we have some opportunity to do within the next couple of years but quite frankly they've been concerned about overall NAND supply.

So they've been hesitant to do that and you've seen more options where many more of the phones are adding in an expansion slot so that a producer of phones can't take some of the risk away of not having enough NAND. So that being said we are seeing that low-end double content every year now. So that's pretty healthy, pretty healthy backdrop.

And in terms of kind of the overall drivers, SSDs are clearly the one that with only a few percentage penetration move has dramatic impact. If you talk about going from 10% penetration of a decline in SSD in a laptop or a desktop to even 15% that's more supply than we've got. So that's the market and that in the enterprises storage space is where the growth opportunities really are outside of the mobile handset.

John Pitzer - Credit Suisse

You mentioned earlier your view of a potential shakeout in the client SSD market. Can you elaborate on exactly what you're talking about?

Kipp Bedard

Yes and I think we've hinted to it from time-to-time. We ultimately think and of course I'm probably talking my book because we are one of these guys about to say, but the guys that home and NAND supply long-term have, they know it the best, they should be able to make it perform better than anybody. And I just feel like at the right times we will exert that pressure in the market and we can sell that product even for a lower price than current SS client -- SSD suppliers are selling it we can sell it in at a more competitive price and still have better margins for it. So I do think you're just going to see some of that, and that those have ramifications by the way for those people that are providing firmware for those independent controller companies that are servicing those sites. More and more of the controller technology is going to move inside of the NAND suppliers.

John Pitzer - Credit Suisse

Now, in the past your client -- your SSD strategy is focused more on client than data center enterprise. We had SanDisk here earlier in the week talking about the all NAND flask data center. You saw guys like Facebook this summer at some conferences talk about cold storage as now being a TCO benefit over HDDs. What's your play on the enterprise side of the market?

Kipp Bedard

You bet. Well first of all I think Facebook did a great job of kind of leading us into being able to talk openly about what the spread within enterprise storage is going to look like. They're talking about just give me some really dump bits that I can write to one time but I can read a whole bunch of times. Then clear at the other end you have these heavy transactional type players who are looking for a completely different solution. That gives us opportunity to innovate within all of that in within all of that string and get solutions that fit in each one of those. It's going to be a lot cheaper bit and we have those bits available to go into a Facebook solution then your high end like we see in a say high end serve enterprise area you're going to have that hyper based solution required for those types of clients as well. So our focus on this is creating that opportunity and making sure that we have the right technology to go in and hit all of those different placements.

John Pitzer - Credit Suisse

So how should we think about your SSD mix over the next one to three years?

Kipp Bedard

You're absolutely right. We're very heavy on the client side today of all the SSDs we're shipping today we're probably running 80%, 20% mix. We now have several design wins that we will start launching in product form into the market in 2014. So I expect that's going to be a pretty fast market for us -- pretty fast growth market.

John Pitzer - Credit Suisse

On the DRAM side why aren't you more bullish as reflected in your supply growth with that planned CapEx? I mean if you think about the market you've got a similar Moore's law issue in DRAM that you have in NAND around 20 nanometer shrinks. It's unclear what materials need to go in. You've also got growth drivers in the smartphone market with mobile RAM I can make the argument you've got significant growth drivers in the data center server market as configuration builds continue to go up. Why aren't you more bullish on that market?

Kipp Bedard

I think probably what you're seeing from the industry today is just a little bit of a pause. We've had again this 30 year history of not returning our cost to capital and I think we have a period year we just got get that earned back. I do think I'm like you, I do think there is opportunity in the future that we're going to need to add some bits. I think the growth rate on the demand side is higher than this mid 20% type range. But I think you're going to have to, I think the industry is going to wait certainly we're going to wait, we're on record to say look we've got to get even higher returns here before it makes sense for us on a return on invested capital basis to go add one more wafer into DRAM.

John Pitzer - Credit Suisse

You guys have done a good job on the consolidation front Elpida was in your results last quarter for a single month. Relative to some of the targets you gave during the closing of the acquisition that one month fell a little short. Can you help us understand where you are relative to those initial targets?

Kipp Bedard

Yes, you bet, in fact, we apologize to everybody there were some confusion around that. We did not do a very good job of presenting it. Basically what we did is we had a one month snapshot that was audited from Elpida that came in just below on the cash gross margin run rates that we gave you. In the August timeframe we showed you at our New York Analyst Meeting that Elpida was running in the 47% to 52% cash gross margins when we gave you the data for that one month of August what you saw calculated to about 44%. But when we finally got the three month audited for the June, July, August timeframe they were running exactly where we have given the guidance to be in it and we just didn't do a good job on the conference call making that clear. I think we had one statement in there that hey they're running at that run rate, but it never really got communicated very well. So my apologies for that but they are running there and so and even for them publicly we have on our 10-Qs and Ks that's a deflating, if you will, devaluing yen is beneficial to them. And of course we made that comment when the yen was 97 to the dollar; I think it's running 102, 103 today. So they're going to be a pretty integral part of the earnings that are coming up here.

John Pitzer - Credit Suisse

Again, on sort of the consolidation front there is one piece of the puzzle potentially left and that's the relationship that you and Nanya have with Inotera. And so maybe you can talk both near-term and longer-term how does that relationship evolve next year, if at all, is there any changes around your wafer agreement with Inotera coming and longer-term is that an asset that's better utilized internally inside of Micron instead of a JV?

Kipp Bedard

Yes, great question. I don't want to speak publicly to kind of the plans around any additional consolidation that isn't already on the record. Obviously they've been a great partner, both Inotera and Nanya, and Formosa for that matter. Regarding the supply agreement we now by contract take all of the output out of Inotera. They're publicly on record that says there is a change coming to the mechanism in terms of there is more margin sharing when it starts into 2014. From the original agreement we had -- we had a lot basically discount to a trailing average ASP and this we do more margin sharing at certain profitability levels and so they're on record of publicly that that's going to change for them starting January 1.

John Pitzer - Credit Suisse

Well Kipp just to be clear because there is some confusion. What happens above the line some of it gets recouped below the line, can you help explain that a little bit to the audience?

Kipp Bedard

Yes, you bet. We do own a third of the shares 35% of the shares of course we also participate in how well they've done this year but it does end up below the line and a lot of times that doesn't get captured when I talk with investors about the total economic value we see in Inotera. It's not just for us the gross margin we get from them but it's also that additive additional 35% of their profitability that we get. And when you tack on the fact that we don't provide any capital for that when you look at a return on invested capital it is a massively accretive joint venture for us.

John Pitzer - Credit Suisse

Any question in the audience?

Unidentified Analyst

[Question Inaudible]

Kipp Bedard

Good, good thank you.

Unidentified Analyst

Couple of questions. [Question Inaudible] 30,000 wafer starts and then I have a follow-up.

Kipp Bedard

Yes, you bet. Just for the audience that didn't hear the first part of the question. How much would 20,000 or 30,000 additional wafers of capacity in NAND represent? Today the industry produces about 1,500,000 wafers a month.

Unidentified Analyst

Okay. And then the second question, are you assuming that we're looking at 24 layers in terms of 3D NAND and to the extent of that ends up being higher than that let's say 32 layers is the relationship linear in terms of the amount of bits that you get?

Kipp Bedard

Yes, great question. The -- we haven't seen the Samsung product and they are -- it's the only one that's announced I believe if you read the papers they're entering the market at 24. Scott DeBoer at one of our prior analyst meetings said we'll be at 32. Until I can see the comparison I can't tell you if it's linear or not because I got to see how many bits comes out of that Samsung part compared to ours. So I don't know yet.

John Pitzer - Credit Suisse

Question in the middle over here?

Kipp Bedard

You go ahead I -- we can just repeat it if you like, or we can provide exercise.

Unidentified Analyst

So you said earlier that you expect NAND pricing to be down sort of 30%-ish and cost down 30%-ish. If that's the case how do you expand margins given your margins lag your biggest competitor?

Kipp Bedard

Well I think there is a lot of solutions opportunities within NAND, but again I'm -- I've made a purposely not or maybe I purposely survived 30 years by not predict pricing so. Generally by me saying down 30% is basically just a guy that that's what I think costs are going to be so it's reasonable over a long period of time that ASPs probably follow cost. It doesn't always happen in the same period. So first of all you're going to have to do that announce this yourself and decide if this is a period where prices are better than that like they were this year or if we entering into a little bit of an oversupply period. So I'm just going to provide the data but generally you should probably expect general market decline of ASPs over some period of time probably 30%, 35% something that matches our cost reductions.

So and then when you talk about margins there are ways to uplift margins anytime because that's just a reference to the cost per bit. But there are lot of solutions based opportunities within NAND. Almost every NAND gets shipped with a controller around it and with some firmware and sophistication can go from as little as a USB drive or a retail micro SD card up to again one of these enterprise storage hybrid systems that have a lot of intellectual property in them. So there's lots of ways along that stream to do something better than just looking at the cost per bit on ASP and the cost per bit on the cost itself coming down.

John Pitzer - Credit Suisse

Kipp, it is impossible to cherry pick a perfect mix you understand that, but may be to help quantify that answer if you had a perfect mix in NAND today from a margin perspective how much potential upside could you see so we can get a sort of a sense of the magnitude on the profitability side?

Kipp Bedard

Yes the -- we -- let me answer that a little bit differently. We venture ourselves, quite frankly, against one of the best NAND suppliers in the world today and that’s SanDisk and they are in the high 40s guiding to a 50% type gross margin, our last quarter we printed 29. We have a lot of opportunity in there to uplift our bits for sure.

John Pitzer - Credit Suisse

Probably with that, we've run out of time in this session. Kipp, really appreciate it. Appreciate everyone joining us this morning. Thank you.

Kipp Bedard

Thank you very much. I appreciate it.

John Pitzer - Credit Suisse

As always.

Question-and-Answer Session

[No Formal Q&A for this event].

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