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Executives

Kipp Bedard – VP, IR

Ron Foster – CFO and VP, Finance

Mark Adams – VP, Worldwide Sales

Steve Appleton – Chairman and CEO

Analysts

James Covello – Goldman Sachs

Glen Yeung – Citi

Venkaiah Phulkari [ph] – Oppenheimer

John Pitzer – Credit Suisse

Daniel Berenbaum – Auriga USA

Tim Luke – Barclays Capital

Vijay Rakesh – ThinkEquity

Shawn Webster – Macquarie Capital

David Wong – Wells Fargo

Lauren Stoller – Lazard Capital

Kevin Cassidy – Thomas Weisel

Hans Mosesmann – Raymond James

Bob Gujavarty – Deutsche Bank

Micron Technology, Inc. (MU) F2Q10 (Qtr End 03/04/10) Earnings Call Transcript March 31, 2010 4:30 PM ET

Operator

Good afternoon. My name is Healy and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technology’s second quarter 2010 financial release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session period. (Operator instructions) Thank you. It is now my pleasure to turn the floor over to your host, Kipp Bedard. Sir, you may begin your conference.

Kipp Bedard

Thank you very much and welcome to Micron Technology’s second quarter 2010 financial release conference call. On the call today is Steve Appleton, Chairman and CEO; Mark Durcan, President and Chief Operating Officer; Ron Foster, Chief Financial Officer and Vice President of Finance; and of course, Mark Adams, Vice President of Worldwide Sales.

This conference call, including audio and slides, is also available on Micron’s website at micron.com. If you have not had an opportunity to review the second quarter 2010 financial press release, it is available on our website again at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of this call, accessed by dialing 706-645-9291 with a confirmation code of 63044542. This replay will run through Wednesday, April 7, 2010, at 5:30 PM Mountain Time. A webcast replay will be available on the company’s website until March 31, 2010.

We encourage you to monitor our website again at micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will be attending. Please note the following Safe Harbor statement.

During the course of this meeting, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially.

We refer you to the documents the company files on a consolidated basis from time to time with the Securities and Exchange Commission, specifically the company’s most recent Form 10-K and Form 10-Q. These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward-looking statements. These certain factors can be found in the Investor Relations section of Micron’s 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 no duty to update any of the forward-looking statements after the date of the presentation to confirm these statements to actual results.

And now I’d like to turn the call over to Mr. Ron Foster. Ron?

Ron Foster

Thanks, Kipp. Our press release is available on our website. Let me start off with a brief summary of the financial results of the second quarter of fiscal 2010, which ended March 4, 2010. The company reported net income of $365 million or $0.39 per diluted share on net sales of just under $2 billion. Again, each of our convertible notes are included in the diluted share count using the if-converted method, as they are each diluted at the current level of income.

Combined with our first quarter, year-to-date net income is $569 million or $0.61 per diluted share on net sales of $3.7 billion. You may note from the financial summary on the slide that both our aggregate equity method investees, primarily Inotera, and our consolidated ventures, principally TECH Semiconductor, were profitable in the second quarter as a result of generally improved market conditions.

In the second quarter, we entered to a new solar joint venture where we own a 50% interest in the development stage company. Our initial non-cash contribution consisted of manufacturing facilities and equipment, intellectual property, and a fully paid lease for Fab 1A at our Boise site. No gain or loss is recognized on the contribution, as our initial contribution was valued at $65 million, which was equal to the carrying value of the assets.

We will account for our interest in the venture using the equity method of accounting. Recall that several new accounting announcements were effected from Micron at the beginning of our 2010 fiscal year. Prior periods’ results and presentation have been recast to reflect the presentation comparable with the current period.

Now let’s move on to discuss other specifics for the quarter. Total sales in the second quarter increased 13% over the first quarter. Compared to the same quarter of last year, total sales increased 97%, reflective of recent improvements in market condition, in our business and industry, most significantly for DRAM products.

Our joint venture relationships, particularly with Inotera and IM Flash, are improving our leverage to take advantage of this upturn. DRAM revenue increased 24% compared to the first quarter. This increase resulted primarily from a higher volume of sales, of gigabit density DDR3 products on advanced process technologies and from a higher volume of sales of DDR2 products from our Inotera venture.

Revenue from sales of NAND Flash products in the second quarter was roughly stable compared to the previous quarter, yet we are 32% higher compared to the same quarter of the previous year. This increase was primarily due to increased bit production of products on our 34 nanometer process technology.

Memory sales in the second quarter include royalties and technology fees of $34 million, which is roughly flat compared to the previous quarter. The total DRAM average selling price increased 7% in the second quarter compared to the first quarter, while total bit shipments increased 17%. The selling price increase is a product of a 10% increase in selling prices for core DRAM products and a 13% increase in prices for specialty DRAM products.

These increases were partially offset by the continued mix shift toward core products from the relatively higher priced specialty DRAM products. The greater mix of core DRAM products comes mainly from production of higher density DDR3 products and from increased volumes from Inotera.

DRAM production cost per bit, excluding the effects of the lower cost of market write-downs, decreased 7% compared to the first quarter. Micron’s cost per product supplied by Inotera is determined using a margin sharing model where increasing market selling prices achieved by Micron increases Micron’s cost of product from the joint venture. Consequently, cost per bit increased on Inotera volumes purchased in the quarter while cost per bit on Micron produced volume declined greater than the 7% average.

Micron’s participation in Inotera’s net earnings is included on our income statement on the line Income from Equity Method Investees. DRAM cost reductions and bit production in fiscal Q3 are both expected to be relatively flat compared to Q2. Micron produced products will again show cost per bit declines, while Inotera cost is expected to be flat to up, as it varies partially based on market price trends.

In addition, Micron is incurring additional cost per bit from Inotera, as it prepares for qualification and initial production ramp of Micron’s 50-nanometer stack product, which will begin in the third quarter. Both total NAND and trade NAND selling prices decreased slightly in the second quarter compared to the first. Total NAND bits shipped in the second quarter was flat compared to Q1 in part from fewer NAND purchases from third-party suppliers in support of our retail channel.

NAND production cost per bit in the second quarter decreased 6% compared to the previous quarter. NAND bit cost reductions in the fiscal third quarter are expected to be in the high-single digit range and bit production is forecast to be up mid-to-high teens.

SG&A and R&D expenses for the second quarter came in at 5% and 7.5% of revenue respectively. SG&A expense in the second quarter includes costs associated with our pending acquisition of Numonyx. As a result of recently effective account rules, it requires such cost to be expensed in the period incurred as opposed to the old rule where they were capitalized as a part of the purchase price.

R&D expense in the second quarter includes a higher level of development costs for our 25-nanometer NAND process. As we have accelerated the introduction of this industry-leading technology, which is nearing its initial production ramp. We anticipate SG&A expense in the third quarter of fiscal 2010 to be between $95 million to $105 million and R&D expenses to be in the $140 million to $150 million range. Other operating income in the second quarter includes a credit of $11 million in receipts from the US government in connection with anti-dumping tariffs collected from certain of our competitors.

Now, the balance sheet. The second quarter generated over $600 million in free cash flow to end the period with $1.9 billion of cash on the balance sheet. Our strong operational performance in the second quarter generated $804 million in cash from operating activities. Expenditure of property, plant and equipment in the second quarter was $180 million. Our IM Flash Singapore fab is moving forward with startup activities, including placing purchase orders and preparing the facility for tool installations, most of which will commence in fiscal 2011.

You may recall from prior disclosures that $70 million of the convertible notes mature on April 1, 2010. These notes have a conversion price of $11.28 per share. These are convertible notes we acquired with the Lexar purchase. During our second quarter, Inotera sold equity securities to its partners and the public, in which Micron invested $138 million.

Micron’s total ownership interest remained approximately the same at 30%. With this additional capital and their planned debt offerings, we believe Inotera has the capital necessary to fully execute the conversion to Micron’s stack process technology. With respect to our consolidated joint ventures, distributions were made to JV partners of $84 million in the second quarter, which consisted of distributions from IM Flash to Intel, our partner.

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

Mark Adams

Thanks, Ron. Demand for Micron’s memory products remained strong across nearly all of our customer segments in our second quarter. DRAM bit shipments were up 17% quarter-over-quarter and our NAND trade bit shipments were up 5% over our first quarter. The latter illustrates the strength in the NAND market where we have historically experienced a seasonally slower demand cycle during this time of the year.

Revenue from our personal computing business, which includes desktop computers, notebooks and netbooks, was up 34% quarter-on-quarter due to a strong ASP environment and an increase in bit shipments. Quarter PC demand has gained strength in calendar Q1, which when combined with continued solid growth numbers around our retail, just the PC business looks pretty healthy in 2010.

Our core DRAM market, revenue from our server business was up 22% quarter-on-quarter. Bit forecast from our server customers have ranged between 80% to 100% growth year-over-year. Our networking and storage business achieved a 24% revenue increase in our second quarter. This was primarily due to a quarterly increase in ASP for (inaudible) 20% reflecting continued strength in our specialty products as well.

Demand from our networking customer base has strengthened, as infrastructure investments continued to drive the need for equipment purchases. All in all, demand for Micron DRAM product remained robust as we remain challenge to support our strategic customers growing demand.

We continued to see a shift in demand in bit shipments toward DDR3 memory in Q2. Bit shipments of DDR3 product increased approximately 28% quarter-over-quarter. It is worth noting that this growth has after the previous two quarters posted 40% and 50% quarterly increases respectively. Even when considering the increased DDR2 offer from our Inotera relationship, our DDR3 product mix increased from 40% to 45% of our total core DRAM revenue in Q2.

Despite this market transition to DDR3, DDR2 bit shipments also increased up 11%. In terms of the Inotera output with Micron’s 200 million capacity that primarily supports our specialty products, we feel Micron is in a unique position to take advantage of our strong opportunities in both the core and specialty DDR2 markets going forward.

From a pricing perspective, the weighted average ASP for all of our DRAM products were up 7% quarter-over-quarter. We are seeing sustained strong demand for our products and price increasing so far quarter-to-date versus the weighted average ASP in Q2. DDR3 price remained solid throughout Q2, and we are encouraged with the continuing strength in our DDR2 ASPs as well.

DDR2 spot market pricing went dramatically from late January on 1 gigabit equipment component. In fact, the recent spot market pricing is showing that DDR2 has basically reached ASP parity for light density with DDR3 at this point (inaudible). In total, our aggregate DRAM ASPs are up mid-single digits quarter-to-date from our Q2 average. And occasionally from our OEM contract price negotiation for April, that prices will remain trending higher.

Demand for Micron’s Flash memory products remained unchallenged and continued to be strong throughout our second quarter as well. We continue to ship primarily all of our NAND products based on our industry-leading 34-nanometer technology. In addition, we’ve begun the qualification process with major OEMs in our Lexar business on our recently announced 25-nanometer Flash memory technology. We anticipate first customer ship to be later in this current quarter. We feel the 25-nanometer flash technology will further strengthen our cost leadership position in Flash memory.

On the SSD front, we began shipping our award winning C300 RealSSD beyond our OEM customer base into our distribution channel during the second quarter. Initial demand for SSD product is very strong, and we are currently on allocation for our channel customers and we sold out on our crucial.com and it is first we are being offered online.

Our retail business had an outstanding second quarter. The Lexar brand and Flash memory chart and USB products coupled with our Crucial branded SSD and DRAM module solutions have continued to capture impressive share gain globally. At a time of tight supply in both DRAM and NAND, our retail customers increasingly realized the value that Lexar and Crucial offer as a vertically integrated supplier to their critical demand requirements.

Given the price stability in NAND end markets, our retail channel continue to positively contribute to Micron’s operating performance. Trade selling prices for NAND memory was relatively flat quarter-on-quarter. This was compared to the quarter-to-date reference of down 10% we gave on our last call. Due to seasonality, one might have expected potential for total to softening in the NAND market. This clearly did not materialize, and NAND quarter-to-date pricing has remained stable.

While there are signs of 3-bit to sell NAND for (inaudible) in the market, we are pleased that pricing for Micron 34-nanometer 2 bits per cell, high performing Flash memory available to maintain the premium in the markets we serve. We feel the market will trend to higher density (inaudible) and the bit consumption will continue to grow throughout 2010. We remain optimistic about market segments such as mobile, consumer electronic devices such as electronic readers and SSDs will continue to drive demand and that the NAND market will remain in the favorable condition in the course of 2010.

As we entered the second half of our fiscal year, we are encouraged by the strong demand signals across most of our channel segments. Inventories are high, the distribution channels remained lean, and we have no reason to believe that this will change in the foreseeable future. We remain challenged to meet the upside forecast from our major OEMs in both DRAM and NAND, and that will continue to focus on driving our available capacity to customers that deliver the most business value for Micron.

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

Kipp Bedard

Thanks, Mark. And now we’d like to take questions from callers. Just a reminder, if you are using a speakerphone, please pick up the handset when asking the questions so we can hear you clearly. With that, please open the question lines.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question in queue comes from James Covello with Goldman Sachs. Your question, please.

James Covello – Goldman Sachs

Great. Thanks so much, guys. Appreciate it. Congratulations. Couple things. I guess maybe the first thing relative to the discipline that we’ve seen so far this cycle in the memory space, which has led to this very, very healthy supply/demand dynamic, one of the things I think you guys have been rightly focused on has been the second and third tier DRAM players didn’t have the capital to invest. How do you think about that dynamic changing as the cash flow for the industry improves and there is a little bit more capital availability? No, not everybody is going to have the cash flow that you guys generated. But relatively speaking, better cash flow across the industry.

Ron Foster

Hey, Jim. It’s obviously a little hard to predict what they will do, but when we do our own competitive analysis, we – in answer to that question, we primarily I think focused on the debt structures. And if you look at cash to short-term debt, at least to what’s in the balance sheet right now, I think you will find that (inaudible) in all different categories so they don’t break it out in front of us to measure. But we feel fine that Micron (inaudible) has all other colors out for sale with cash on the book right now where it kind of (inaudible) in the next 12 months.

The other guys all have challenges around that. So I think it’s true that – the two things I think, Jim, you ought to consider when you think about how this plays out. One is they have pretty big debt structures to deal with as a result of what’s happened over the last two, three years. And then secondly, when you think about where most of them are under technology migration, in particular the ones that have several more significant debt structures relative to their capital size, have some pretty big challenges in terms of migration in terms of technology node.

So I still find it interesting that I made this comment on the last conference call that we had, earnings call that we had that it still remains the fact that there is no new memory fab under construction right now anywhere in the world. And that is the first time that’s ever occurred in my lifetime in this industry, and it’s still that way obviously several months later. So when you think about what can happen moving forward, clearly as you get into probably later 2011, 2012, it’s a little early to tell and it’s hard to predict what will happen with capital deployment.

But from everything that we see right now, there are a lot bigger issues facing those companies and simply building new fabs. And it’s both the requirement that the – first and foremost, you will see companies try to advance their technology if they can do it beyond what they have to do in terms of debt repayment. So I don’t think there is anything in the near-term, Jim, that’s going to change that equation.

James Covello – Goldman Sachs

Very helpful. Thank you. And if I could just ask one follow-up, I know there has been some concern from folks with maybe some of the second and third tier OEMs about de-specking DRAM, given the acceleration in pricing. I wouldn’t imagine that’s much of a problem with the larger OEMs. But anything you’ve seen there or any just broader comments on kind of outlook on content box. Thanks again so much. Congratulations.

Mark Adams

Hey, Jim, this is Mark. We haven’t seen though, are we getting forecasted along with that. We kind of hear from the press and analysts that there might be that potential that we have not seen it. And I’ll tell you what; it’s using to take it off a lot of that to swing back into a supply problem.

James Covello – Goldman Sachs

Great. Thank you.

Operator

Thank you, sir. Our next question in queue comes from Glen Yeung with Citi. Your question, please.

Glen Yeung – Citi

Actually just to ask a clarification on that last question, which is – as opposed to de-specking per se, what’s your sense on the rate of bit per box growth in 2010? Any sense that they may be different than your original expectations a quarter ago?

Mark Adams

So as we’re sitting today, if we look back about a year ago that you were asking the same question, everything is going to [ph] go only higher. It’s going to peak out about 2.5 gigabytes per system. It looks like it’s going to be about 30% more or less. Right now, it’s in the mid-threes. So – and you can – if you look at kind of just pick up a Sunday paper and you look at the inserts, there is a lot more fours and eights than they used to be. And so I think constant to our opinion a year ago what might be in front of us is actually the reverse of what is being projected and that’s the only thing that’s changing now today.

Glen Yeung – Citi

Okay. Just a couple other questions. One is, what your sense is on inventory? Few of the OEMs have talked about strategic inventory builds, and I wonder if that’s something that you sensed out there. And my other question is just any update you have on the Numonyx deal.

Ron Foster

Well, I’ll take the first piece, the inventory piece. We are not seeing any of that, and a lot of that has to do with just meeting the current demand in the market today. I stretch my head when I get asked that question given that people would have to believe one thing that pricing is going up to accumulate and enjoy today if they think it’s going to be higher in the future. And we’re – it's so tight right now that it’s hard to believe anyone has got a lot of extra inventory to ship in that dynamic.

Mark Adams

On Numonyx front, it’s doing pretty well. We are clearly working through integration plans and preparing for a close. We’ve received regulatory approval in a number of countries and we are still, we think, on target – the last time we said, I think, somewhere in the next 90 to 180 days, and from when we signed, which was in February, and we are still on that track. So we feel pretty good about it. And I would just add that the more that we interact with a company, I think the more excited we are about their technology and their products.

Glen Yeung – Citi

Okay. Thanks, guys.

Operator

Thank you. Our next question in queue comes from Gary Hsueh with Oppenheimer. Your question, please.

Venkaiah Phulkari – Oppenheimer

Hi, this is Venkaiah Phulkari [ph]. Couple of questions. Regarding – the DRAM price is moving up pretty fast. And do you see this is driven by the current demand in the PC space or is it driven by the PC OEMs worry about future supply constraints so they are building up inventories? As a related question, what’s your current view on the magnitude of inventories that the OEMs have right now?

Ron Foster

To restate what I early said, I don’t think there is an inventory build going on. It’s funny, if you look at some of the recent data about retail PC growth year-over-year, it’s pretty significant. Even if you look at the last three months reported somewhere in the 33% all the way as high as 50% to 57% in December and 27% in January, these are pretty big numbers in the demand side. And then you add in the corporate growth and starting to get invest it back in the PC upgrade model. We don’t think there is a lot of inventory build, to be honest with you. We think it’s pretty healthy demand. And again, I guess one could argue that February and March are typically not great demand seasons. I think we are in exception period around this industry [ph].

Venkaiah Phulkari – Oppenheimer

That’s pretty helpful. Just a follow-up on your Singapore fab, giving US not ramping towards the end of the year, could you provide some color on how do you finance your CapEx for the next year’s ramp? And also for that new fab, are you reconsidering the Intel share for that new fab? Are you thinking about buying back some of the Intel ownership operating effect?

Steve Appleton

This is Steve. With respect to the Intel partnership, we like the partnership. It’s gone well. We’ve continued to co-invest. Whether or not they decide to co-invest in future projects, I get to – you will have to ask Intel. We will make the assumption that our partners will inform. We’re going to keep moving that business forward. You asked a question related to that. What about the financing? What we would do in terms of the mixed signal for fabs and NAND? I will tell you, if you do the math and you look at the result of the company right now, we don’t see any issue with respect to being able to finance that CapEx. I think if your question is trying to get at, do we see a need to go to the markets here any time soon, the answer is no, we don’t. We have great cash flow. And right now, it looks pretty good for our ability to just to deal with it internally.

Venkaiah Phulkari – Oppenheimer

Okay, thanks.

Operator

Thank you. Our next question in queue comes from John Pitzer with Credit Suisse. Your question, please.

John Pitzer – Credit Suisse

Yes, guys. Thanks for taking my question. Mark, you talked about the server business being up about 25% sequentially, and I guess for the second quarter where it’s been up that strong, but still not as strong as the overall PC business. I guess, we on the investment community been focused on what’s turning up to be a pretty strong server cycle. Given that DRAM bits aren’t really growing all that much in the fiscal third quarter, how should we think about your guys ability to manage mix to maybe higher ASP, higher margin DRAM after the current fiscal quarter?

Mark Adams

I think one of the limiters to that has been the Inotera conversion to our stack technology, which will open up some more capacity to serve the server business. Our growth there is limited on available performing parts for that phase. And it still ramp up what I would say is our annual plan in the segment, halfway through the year. It’s just – the big growth in servers is staggering really. And so as we get to the Inotera conversion of the stack technology, we will have more server to out of the yields to not be able to increase our top-line revenue and growth in bit shipments and with segments.

John Pitzer – Credit Suisse

So calendar year third quarter is the quarter we could actually see a positive mix shift on the DRAM business?

Mark Adams

Yes, I believe so.

John Pitzer – Credit Suisse

And then just an update on CapEx for this fiscal year and maybe some guidance for next?

Ron Foster

This is Ron. I have previously communicated 850 to 950 for the year on CapEx for fiscal year ’10 and we are still on that plat of half the IMFS plan that’s going to have some amount of facilitization capital invested at the end of the fiscal year. That was contemplated in that guidance number. In terms of next year’s CapEx guidance, we are still working on the plan of the ramp of IMFS and is that timing and rate of that ramp. So don’t have an update for FY ’11. In general, it’s – I expect to be a little bit higher than fiscal year ’10 because of the IMFS ramp. But we will get it, I don’t think once we have a plan tend down.

John Pitzer – Credit Suisse

And then guys, my last question, just with the migration to 25-nanometer on the NAND Flash front, does that close the gap on gross margins between NAND and DRAM? Or can you help me quantify how big that gap is and how that might trend to the balance of the year?

Ron Foster

First of all, in terms of gross margins on DRAM –

John Pitzer – Credit Suisse

I guess, take a look at it ex the Intel, which you sell the cost.

Ron Foster

Yes. So if you look at and base the trade NAND and core DRAM, the margins are pretty similar today. So that’s – I guess that’s the point of comparison. We are doing really well on the NAND side of the business with the 35-nanometer and full production and 25-nanometer out in front of us, which will give us the bit growth I commented on in the third quarter in NAND. And the technology has really given us leverage on the financial side already at 35. So in general, we are pretty close to parity between the two.

John Pitzer – Credit Suisse

Ron, just as a follow-up and my last question, could you actually see NAND – the trade NAND gross margins higher than DRAM in the fiscal third quarter?

Ron Foster

Well, that’s going to – we will have to know what the pricing is (inaudible) my calculation, and we are not trying to – we moved out of the business and forecasting pricing low long time ago.

John Pitzer – Credit Suisse

But Steve, it sounds like you have more cost downs in the fiscal third quarter for NAND and you did DRAM. Is that favor?

Steve Appleton

Yes, I think that’s a fair statement.

John Pitzer – Credit Suisse

Great. Thanks, guys. I appreciate it.

Steve Appleton

25-nanometer will be significant although it will be ramping in the third quarter, and so it will be – it will post – it would be mainly post third quarter in terms of the big effect on cost down.

John Pitzer – Credit Suisse

Great. Thanks, guys.

Steve Appleton

Yes.

Operator

Thank you, sir. Our next question in queue comes from Daniel Berenbaum with Auriga USA. Please go ahead.

Daniel Berenbaum – Auriga USA

Hi there. Thanks for taking my question. But can we just reiterate the guidance on DRAM? I thought I heard no cost reduction and basically flat bit growth. So (inaudible) how to do that correct and then we’ll talk about some of the mechanics there and then expectations for full year.

Steve Appleton

Yes, Daniel, you got it right.

Daniel Berenbaum – Auriga USA

Okay. So flat bit growth, flat cost reduction, and i.e. I guess I’m struggling to understand a little bit the mechanics of flat bit growth. Are you taking capacity offline at Inotera due to the conversion?

Mark Adams

Yes. Well, we have a couple things going on. One is, (inaudible). First of all, on our specialty products, remember that we are not driving on cost reductions for bit on those products because they are higher margin, more customized and they could not migrate on the process technologies fast. So that’s part of our business. You won’t expect to see something more. And we are giving obviously an average figure for the quarter.

Secondly, Inotera is in fact in transition, and we are currently utilizing bits out of that facility in two different range. One, as we go to states, primarily change product and it’s our normal technology, and then secondly, they are under-utilizing the facility in order to be able to prepare for the transition to Micron Technology. So even though we will have cost per bit reduction internally in Micron’s core DRAM business where it’s being counter-affected by what’s going on elsewhere. And that’s obviously a temporary effect, but that’s what we are going to experience for the next quarter.

Ron Foster

(inaudible) we are on a margin pricing model, as I mentioned earlier in my comments. And it’s a function of how the pricing is moving in the marketplace. As I commented that effectiveness in Q2 in the margin sharing formula that comes through our cost of sales and the trajectory would indicate some more effects in Q3, and then we get our share of the net income from Inotera on the equity method investment line of our P&L.

Daniel Berenbaum – Auriga USA

So you would expect that number to become more positive next quarter?

Ron Foster

Yes, and actually following as they ramp up their technology.

Daniel Berenbaum – Auriga USA

Okay. And then just last question back just on the bit growth and cost reduction, so flat for next quarter, but then how do you see the rest of the calendar year playing out? I mean, should we expect sort of flat bit growth and flat cost reduction for a couple quarters or do you resume some normal trajectory? And can you give us an idea what that is?

Ron Foster

We wanted to extend it out for the year rather than if you go back to the analyst meeting, we did put a chart up that said if you go from calendar Q4 of ’09 to calendar Q4 of 2011; we’re going to be down about 180%. But I can’t tell you the cost reductions accelerate throughout this calendar year as the shrink comes on play.

Daniel Berenbaum – Auriga USA

So they would – so maybe just help me out with the math if I were to just peanut butter that 180% across all the rest of the calendars through the end of the year, what kind of quarterly run rate would that get me?

Ron Foster

You could certainly try that, but I guarantee, it won’t be linear.

Daniel Berenbaum – Auriga USA

Okay. Understanding it won’t be linear, but in my imaginary world, if it was, what would that number be?

Ron Foster

I think you can do the math quicker than I can on this call.

Daniel Berenbaum – Auriga USA

Okay. All right. Thanks.

Operator

Thank you. Our next question in queue comes from Tim Luke with Barclays Capital. Your line is open.

Tim Luke – Barclays Capital

Thanks so much. Just to clarify then, could you just give us the bit growth that functions again on the NAND side in the coming quarter? And if we were to get it from here on in the quarter, what would your assumption be for ASP with respect to both DRAM and the NAND as of now?

Steve Appleton

Sure. I’ll take the first part of that and then turn it back over to Mark Adams. We guided that NAND production bit growth should be up mid-to-high teens and cost reductions down high-single digits.

Mark Adams

And on the ASP forecast, we typically don’t go and look out to the future (inaudible) quarter-to-date update. On the DRAM side, I commented earlier that it’s mid-single digits of our weighted average cost from last quarter, and on the NAND side, it’s basically flat quarter-over-quarter to where we are and then quarter-to-date.

Tim Luke – Barclays Capital

Okay. Steve, I was wondering if you might have any commentary on how you are seeing the industry bit growth in the DRAM side to begin to shape up as you move through the year. It would seem that having hot on industry number in the 40% to 50% range, given the strength in pricing that you are seeing some of the players begin to edge that upwards, how do you think that plays out? And you have seen some of the major players begin to analyze [ph] the CapEx. Obviously that’s more of a 2011 impact, how do you see that playing out?

Steve Appleton

Well, I think the way to look at it in general is technology transitions, which is really what everybody is focused on today, primarily technology transitions, that’s been able to generate somewhere in the 40% range of the growth per year. Sometime it’s a little bit lower, sometime it’s a little bit higher. And that’s where we are focused on. Now some may – some occurrences are happening whereby as an example, we’re going from a 70-nanometer trench product to a 50-nanometer DRAM stack technology, and the acceleration might be higher in some instances around certain facilities. So if you look at kind of the industry supplied data, Gartner et cetera, you will notice that they are one of the lines of what you just said. They are all kind of running in this 40% to 50% range. And that’s probably about where it’s going to be. In order to get beyond that, you have to have new silicon. And we just still see new silicon at the normal (inaudible).

Tim Luke – Barclays Capital

How about the CapEx increases accounted by some of the larger players and some of the (inaudible) that’s going out next year?

Steve Appleton

Yes. I’d rather finish rolling up. I’ve seen a lot of CapEx forecast that had either been cutting out or don’t materialize at all. So I wouldn’t – I don’t know how to interpret in aggregate all these CapEx forecast that some of these companies have. I will tell you that there has already been known by others that the equipment industry also has its own challenges in terms of these big fluctuations in CapEx requirements. And so we are somewhat mitigating the fact no matter what anybody wants to do, go through time as a result of the strength.

Tim Luke – Barclays Capital

Right. Perhaps just the run-off of – just for the coming quarter, how should we think about the revenue contribution from Numonyx or when should we start putting in what range of additional revenue from your addition?

Steve Appleton

I don’t think – we are currently in, which is obviously our third fiscal quarter. Automatically, there will be much if any impact there. There might be some. I mean, we hopefully would get it close. But the way to think about is it would have an impact in our fourth quarter if we are able to close it before then, and we’ve already released what their prior quarterly revenue was. That is still the good numbers we have, and I think you should think about that being added to Micron’s revenue number for the fourth quarter. I’m feeling that we are able to close in that timeframe.

Tim Luke – Barclays Capital

Okay. Maybe just going forward for the year, you kept the R&D and SG&A operating expenses pretty in line with where the street models have been. How should we think about that as we go through into the August period and beyond? Are there any other factors we should be aware of, given the higher demand and also higher pricing?

Steve Appleton

Well, we think our model is pretty leveraged. As we said before, we liked where we were given that we add facilities that are capable of being optimized, and essentially we are making the investments that we needed to make in order to move the technology forward. Remember that once we have Numonyx, obviously we have additional R&D dollars that will flow through there because they have R&D budgets they work on as well. The same for SG&A. Clearly, over time we will be able to flow through that and optimize the model. But – so I think the way to think of it is, we may on the margin have some incremental SG&A and R&D. And as an example, as the company continues to perform well, we will continue to have some additional SG&A just from our incentive comp programs and things that we have to do there. So – but there is nothing large on the horizon I think if that’s what you’re trying to get at. We will note any dramatic changes from the models there [ph].

Tim Luke – Barclays Capital

Congratulations. Thank you very much.

Operator

Thank you, sir. Our next question in queue comes from Vijay Rakesh with ThinkEquity. Please go ahead with your question.

Vijay Rakesh – ThinkEquity

Hi, guys. Just a couple of questions. So you mentioned flat bit growth and flat cost in the next quarter. But if the market is picking up with solar, and obviously you have capacity. I mean, your data seems to be coming off. Won’t you see some DRAM pricing start to serve quite a bit more? Is that – go ahead.

Steve Appleton

I think your thought process is similar to others. We would have expected, as we said in the last quarter, to have our – we basically do the seasonality period. And the US economy, as you know, is kind of doing okay, but not fantastic. And I think we’ve seen strength in some segments that we didn’t expect to see. But the reality is the worldwide economic recovery and strong engine, we just don’t think happened yet. And we come through a reasonably strong seasonal period that then really turned out to be all that slow. And we are in a period now where at least historically there has been a momentum and interrupt through the fiscal season. So I will move out of speculation and price forecasting to others. But if you look at the economic fundamentals at the moment, I can understand why people are thinking like that.

Vijay Rakesh – ThinkEquity

And how as well as DRAM pricing trended so far on a branded basis for the quarter – in the current quarter?

Steve Appleton

Quarter-to-date it’s up in the mid-single digits. And as I mentioned in my comments earlier, the DDR3 remains pretty healthy. And we’ve been pleasantly surprised by a very strong DDR2 market, which I mentioned was at bit parity into the spot market versus DDR3 today.

Vijay Rakesh – ThinkEquity

On the NAND side, obviously you guys brought a 20-nanometer NAND last year, late last year, how much of the output today is on 20% NAND and what’s your mix on 3-bit?

Steve Appleton

So the NAND output today on 3-bit is relatively muted to less than 5%. The 34-nanometer NAND as a percent of total has peaked and is now starting down as we ramp a 25-nanometer NAND, and it really has been essentially 100% other than legacy demands for mobile devices, specialty devices, SOC type products.

Vijay Rakesh – ThinkEquity

And last question, Rambus, any – you want to add any color on that, anything coming up there?

Steve Appleton

Well, that trial has been delayed again, and I just don’t have any sense as to when that will occur.

Vijay Rakesh – ThinkEquity

Okay, great. Thanks a lot.

Steve Appleton

Sure.

Operator

Thank you. Our next question in queue comes from Shawn Webster with Macquarie Capital. Your question, please.

Shawn Webster – Macquarie Capital

Yes. Thanks for taking my question. You guys talked about what the shipments were in your February quarter and what your outlook for production-wise. Can you share with us what your DRAM production and NAND production did sequentially in your February quarter?

Mark Adams

Sure can. We did DRAM bit production in Q2, up low-double digits, and NAND was down slightly.

Shawn Webster – Macquarie Capital

Okay, thank you. And how about total wafer production sequentially for February?

Mark Adams

Fairly flat.

Shawn Webster – Macquarie Capital

Okay. And then what are your OEM customers telling you to expect in terms of seasonality as we go into calendar Q2 and calendar Q3 and versus normal for the industry?

Mark Adams

Relative to overall demand or bit growth, what’s the question?

Shawn Webster – Macquarie Capital

Bit demand expectations going into calendar Q2 and calendar Q3 that you are hearing from your OEM customers right now.

Mark Adams

I think depending on the segment (inaudible) kind of scales differently but overall on a quarterly basis, we are seeing kind of DRAM bit growth in the low-to-mid double-digit percentage, 10% to 15% in that range. On the NAND side, little bit more elasticity towards the holiday season, but still low-double digits up to maybe 5% to 20% depending on again the segments we serve.

Shawn Webster – Macquarie Capital

And that’s for both Q2 and – calendar Q2 and calendar Q3?

Mark Adams

Yes, that’s quarterly bit growth, that’s right.

Shawn Webster – Macquarie Capital

Okay. And then you guys have already commented a bit on the inventories. In the past, you’ve given some color on weeks of channel inventory. Is there any data you can share with us on that now?

Mark Adams

We have not seen any build in our channel inventory. As a matter of fact, we left our last quarter probably lower than the prior quarter. I don’t have the numbers right in front of me, but we’re right around on average three weeks, and I think we’re slightly below that in the channel from that this quarter.

Shawn Webster – Macquarie Capital

Okay. Three weeks. What is the normal level for you guys?

Mark Adams

In that three-week period, it’s well above [ph] that. And coming out of the holidays, we remained pretty lean in the channel. That’s why (inaudible) inventory still being tough to imagine right now.

Shawn Webster – Macquarie Capital

Okay. But just to clarify, you said as three weeks, but normal levels would be what again?

Mark Adams

Still in that three, four-week, that’s a little bit lower than how we are today.

Shawn Webster – Macquarie Capital

Okay. Thank you very much.

Operator

Our next question in queue comes from David Wong with Wells Fargo. Your line is open.

David Wong – Wells Fargo

Thank you very much. Are you seeing any effect from the news that (inaudible) AMB affecting several memory demand?

Steve Appleton

David, if I understood your question right, you are asking if we’ve seen any impact from the new microprocessors out of AMB. Is that correct?

David Wong – Wells Fargo

Into an AMB, yes. Are these affecting your set of memory demand?

Steve Appleton

Really we can’t discern between the two. And most of our guidance on bit growth incorporates all of those changes that we are seeing in the mix from our customers. So no particular commentary on a given microprocessor set.

David Wong – Wells Fargo

Okay. And internally at Micron and also your estimate for DRAM companies in the industry, what were the weeks of inventory?

Ron Foster

We don’t have an estimate for the other DRAM companies in the industry. What was your question, David?

David Wong – Wells Fargo

Was then on Micron – what were your weeks of inventory end of the quarter at Micron?

Steve Appleton

Mark Adams just said that it was –

Mark Adams

I certainly mean the channel – weeks of inventory of the channel.

David Wong – Wells Fargo

No, I mean, at Micron.

Mark Adams

Turns are running about five. We run about five turns.

David Wong – Wells Fargo

Okay. Thanks.

Operator

Thank you. Our next question in queue comes from Daniel Amir with Lazard Capital. Please go ahead.

Lauren Stoller – Lazard Capital

Hi. This is Lauren Stoller in for Daniel. Thanks for taking my question. So, as bits continue to increase from Inotera, should we expect to see royalties increase as well? Hello?

Ron Foster

This is Ron. Today we collect royalties on the legacy technology 68 and 50-nanometer technologies. We have that continuing to come through pretty much from our partner in Inotera and Nanya. Going forward, the arrangement is that there are payments that will term on the stack technology nodes going forward on a scale that we’ve mentioned in the past. We are evaluating with our partner how to deal with the structure of those royalty payments due to changes in Taiwanese tax law. We expect the economics will be the same, but we are working on the structure that’s more amenable from the tax standpoint. But the way to think about it is there will be a flow coming from stack technology over time.

Lauren Stoller – Lazard Capital

Okay. And that flow could be seen in royalties or in the form of the net income that you were talking about earlier?

Ron Foster

It will come in on the P&L, the landscape could be different depending upon what we do relative to the law changes.

Lauren Stoller – Lazard Capital

All right. And then what’s the timeline for that?

Ron Foster

Timeline, when the production starts, we will have to have that structure resolved. And Nanya is actually starting up on their production of the stack technologies now. So some of that is just beginning to happen.

Lauren Stoller – Lazard Capital

Okay, great. And then if I understand correctly, I understand that your costs are going to be relatively flat on the DRAM side because of all the moving part. But as bits continue to increase from Nanya and Inotera, will cost go up? Might we see a situation like that?

Ron Foster

There is really the couple of facts and the guidance on DRAM. One is that our cost per bit on the Micron bits is continuing to decline as it did in the second quarter, and we expect that to decline in the third quarter. In terms of the Inotera production, there are two factors. One is that the process is converting to our 50-nanometer stack technology. So as Steve mentioned earlier, there is some impact in terms of the startup costs, and that startup thing will affect us in the relatively short-term, third quarter namely. And then they will ramp into production and be driving that cost down exiting third quarter to fourth and onward.

The other piece is that, as I commented in my prepared remarks, we have a margin sharing arrangement with Inotera, and so when Micron is making significant profits due to high margin, that is shared through a pricing formula with Inotera that raises our cost per bit of Inotera production. It actually affected us some in Q2, and I expect it will affect us some in Q3. But bear in mind that we have a minority interest share, which shows on our P&L on the – in the net income in a different location. So we get the benefit of Inotera’s profitability on our share. Also in our P&L, it just shows up in the equity method investment line and not coming through our margin line.

Lauren Stoller – Lazard Capital

Okay. And then can we take your inventory comment to cover both DRAM and NAND?

Ron Foster

Micron inventory?

Lauren Stoller – Lazard Capital

No, sorry, inventory in the channel.

Ron Foster

Yes, very much today they are – both NAND and DRAM are currently in the same levels.

Lauren Stoller – Lazard Capital

Okay, great. Thank you.

Operator

Thank you. Our next question in queue comes from Kevin Cassidy with Thomas Weisel. Please go ahead.

Kevin Cassidy – Thomas Weisel

Thanks for taking my question. I guess maybe along the same lines of NAND, you mentioned your SSDs are on allocation. I wonder if you could tell us little more details of what’s happening there. Is it because of supply being short or is there some other bottleneck?

Mark Adams

I think it’s that coupled with demands of our product line that’s gotten a lot of (inaudible) in the press. We launched a product at CES this year. And as I mentioned, we, last quarter, Q2, began shipping to some OEM customers, and we opened some of our allocation to how to choose the channel and our online website crucial.com. The results were phenomenal. And we are a little bit strategy constraint on available NAND for that product line. So – and (inaudible).

Kevin Cassidy – Thomas Weisel

Can you give us relative – tell us how many units are shipping?

Mark Adams

We particularly don’t do that for competitive [ph] reasons.

Kevin Cassidy – Thomas Weisel

Okay. And I guess are there any other puts and takes, or I guess how much did you under-ship that?

Mark Adams

This is – again, I wanted to qualify when you don’t – you don’t know what (inaudible) on demand. We guess that we were pretty tight. Crucial.com is at one data point sold out within two business days of the allocation we gave.

Kevin Cassidy – Thomas Weisel

Okay. Maybe just one other question, do you have an idea when you might be able to catch up to the demand?

Mark Adams

Not a good picture today. I think we’re certainly increasing production, but don’t have a good sense at least to exclude that quarter yet.

Kevin Cassidy – Thomas Weisel

Okay. Thanks for taking my question.

Operator

Thank you. Our next question in queue comes from Hans Mosesmann with Raymond James. Your line is open.

Hans Mosesmann – Raymond James

Thanks. I just have one – real quick one, DDR2. What’s driving you to move up to DDR3 prices? Is it that OEMs can’t get the DDR3 or going back to DDR2 and using older microprocessors?

Mark Adams

Yes. There is really – our guess is kind of the supply and demand questions kind of playing out right in front of us. If you go back and look at DRAM exchange in late January, one gigabit DDR2 component was under $2. And as recently as I guess yesterday, it rises up over $3 in the spot market. So it really is available parts in the industry, and people are trying to get as much as they can of these A-products out of the door.

Hans Mosesmann – Raymond James

Thank you.

Operator

Thank you. Our next question in queue comes from Bob Gujavarty with Deutsche Bank. Please go ahead.

Bob Gujavarty – Deutsche Bank

Thanks for squeezing me in. Last quarter you kind of ranked profitability by – as the specialty DRAM and IDRAM and NAND. Could you do that again for this quarter?

Steve Appleton

Sure. It’s getting easier. The highest gross margin product continues to be specialty DRAM. And as Ron mentioned earlier, basically our core DRAM and trade NAND is right on top of each other in the number two spot.

Bob Gujavarty – Deutsche Bank

Okay, great. And a little clarification on the NAND ASPs, when you commented it was flat, does that include trade as well as what you felt Intel cost or was there a big diversion between the two?

Ron Foster

The comment was that both NAND trade and total NAND ASPs were actually flat in terms of change quarter-to-quarter. Bear in mind that the Intel NAND is at cost, so it’s roughly going to be consistent so that the trade numbers and the total numbers moved in parity with each other.

Bob Gujavarty – Deutsche Bank

Great. And also when you threw out the CapEx numbers for this year, 850 to 950, and also intimated for next year, that doesn’t – that's a gross number. It doesn’t include any potential part or contributions, correct?

Ron Foster

It does not – that is correct. It’s the total CapEx for all of our consolidated operations. So it does not include partner contributions for our Intel-Micron joint venture activities.

Bob Gujavarty – Deutsche Bank

And that isn’t such a high number. I mean, any contribution would reduce the net number.

Ron Foster

Yes, it would reduce – that's exactly right. It would reduce our net cash requirements, but it shows up – but it doesn’t show up in the CapEx number. It would show up as a contribution from partners in our cash flow.

Bob Gujavarty – Deutsche Bank

Great. Thanks a lot. Appreciate it.

Kipp Bedard

Thanks, Bob. And with that, we would like to thank everyone for participating on the call today. If you would please bear with me, I need to repeat the Safe Harbor protection language. During the course of this call, we may have made forward-looking statements regarding the company and the industry. These particular forward-looking statements and all other statements that may have been made on this call that are historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC, including the company’s most recent 10-Q and 10-K. Thank you.

Operator

Thank you. This concludes today’s Micron Technology’s second quarter 2010 financial release conference call. You may now all disconnect.

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