Micron Technology's Management Hosts Winter Analyst Conference (Transcript)

| About: Micron Technology (MU)

Call Start: 09:00

Call End: 12:22

Micron Technology, Inc (NASDAQ:MU)

Winter Analyst Conference

February 7, 2014 9:00 AM ET


Ivan Donaldson - Director, IR

Mark Durcan - CEO and Director

Ron Foster - CFO and VP, Finance

Mark Adams - President

Scott DeBoer - SVP, Research and Development

Brian Shirley - VP, DRAM Solutions

Mike Rayfield - VP, Wireless Solutions


Mehdi Hosseini - SIG

Monika Garg - Pacific Crest Securities

Doug Freedman - RBC

Ivan Donaldson

Okay. Thanks everybody for coming today. We are really glad to have -- it’s a great crowd for Micron’s 2014 Winter Analyst Day. We are going to get things started, right away here and those of you on the webcast; we’ll get the webcast started in one minute too. And we’re going to kick things off with Mark Durcan first, who will come up here in one minute.

Just to let you know, as usual we try to structure the presentation to address what we feel like are the key questions, key topics that we’re getting from the investment community today. So I hope we will accomplish that. We will save plenty of time for Q&A. After each section Mark Durcan, will do an internal, but he will do his Q&A at the end of the presentation just so you are aware of that format.

And with that, I’ll welcome Mark to the stage. Durcan can you hear me?

Unidentified Company Representative

Yes, 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.

Mark Duncan

Okay, great. Now we’re going to start…

Unidentified Company Representative

During the course of this meeting, we may make projections or other forward-looking statement during the course of this meeting.

Mark Duncan

All right, now I really get to talk. I guess not even the CEO gets to talk over the Safe Harbor language. Welcome everyone. Thank you all for coming. I think we’ve got a good presentation here today, which as Ivan mentioned should be responsive to most of the questions that are out there. But of course our goal is to answer all the questions. So as we go through today, you’ll get an opportunity after each of the officers present to talk to them and then I’ll come back up at the end obviously and try and clean up any residual questions or items you guys want to talk about.

So I’m just going to start off with a little bit of information about how I see the industry today and what Micron is focused on going forward and then we’ll have Ron talk a little bit about how we’re planning our financial strategy, Mark Adams on Business & Operations, Scott DeBoer on the technology position of the Company and what we’re focused on there and then some information from Brian Shirley and Mike Rayfield on our products and markets. So without further ado, let me just jump in.

2013 of course was a very busy year and a very productive year. We accomplished a lot and I don’t want to take you back and run you through all of that other than to say we did a lot of things that helped set the stage for where the industry is today and we do a lot of things internally to help rationalize our business and streamline it so that as we move forward, we can really focus on what we need to do, which is memory, memory systems and customers going forward.

So we also celebrated our 35th Birthday. I’ve been here for about 30 years of that now. It will be 30 years this summer. So I’ve seen a lot of change as we’ve moved through time and a lot of things are different today. And I think everyone wants to know, why is it different today? What is it that has structurally changed in the industry that makes it so that we can all have confidence on a go forward basis; we really are in an environment that is much better in terms of the types of returns shareholders in Micron can expect.

So let me start with, first of all, it’s different. You can see that the structure is different. There are really only four manufacturers or five suppliers that supply 95% of the world’s memory bits today, and of those five suppliers, four manufacturers, only two have the full spectrum of memory products that customers want, and only three supply DRAM at all. So, certainly a consolidated industry that has a different dynamic. When you think about what is different about the memory business, this is really just one of really three legs of a stool I think however that are making a difference.

One is that in an environment with a consolidated supply base, all with critical mass here, with enough scale to support their business on a go forward basis, it appears that it is less likely that companies will, at least Micron will be interested in adding capacity for pure margin share gain. Micron today at 22%-23% of the world memory market has more scale than it’s ever had in its history. We have adequate scale to fund all our technology development on a go forward basis and what Micron here is focused about, or on, is making sure that we take the fruits of the business and reinvest them in a way that moving forward we can continue to provide the solutions that the customers want, we don’t need additional scale on a go forward basis.

The second leg of the stool revolves around customers and what’s going on from a customer perspective. There’s been a significant diversification in end-markets and I’ll come back and talk about that. There has been a significant change in the types of customers that play in those end-markets and that really leads to a more balanced relationship when we think about how memory is delivered to the market and how Micron can differentiate and diversify products on a go forward basis. And the third leg of the stool is really all around what’s happening with supply and I’ll talk a little bit about what’s happening from a technology migration perspective and how that influences the supply and demand balance in the market moving forward.

So first of all, the nice thing about the memory business is it’s still a -- it’s a large business but it’s still a rapidly growing business and it’s a business where there’s lots of opportunity to innovate. When you look at this slide and the five sort of big trends that are driving the information of the world today and you look at the growth of those drives, it’s really a virtuous system that continues to build on itself.

So, starting at the left with networking, you’ve got a big system today that as it feeds machine-to-machine communications and those feed mobile networks which feed the cloud, which feed big data, none of these segments go away as we ripple to the light and drive more and more memory usage into the system. They all just build on each other and drive memory usage going forward.

And note that memory then goes not just in the computing segment; it goes into a whole plethora of value-added segments where differentiation can perform specific functions to make big customers and system more valuable. So whether we’re talking about computing today and the memory we supply to our historical customers and OEMs or the ability to customize and differentiate those solutions for large datacenters or for storage companies or whether we are talking about the automotive segment where core companies are building out new automotive networks to support advanced infotainment systems, navigation, crash avoidance, voice recognition, all the types of things that people want to do in their automobiles going forward, Micron can take its memory solutions and work in close partnership with those customers as we’ve had a history of doing to drive differentiated solutions.

This is very different than the memory industry used to be. It’s not a Wintel platform. There are multiple enablers across the whole spectrum of end-applications. There are multiple operating systems across the whole spectrum of end-applications, and an each customer, in each segment Micron can go in as the largest memory manufacturer to the -- non-captive memory supplier, bigger even than a Samsung, when you talk about the bits that Micron delivers to customers and doesn’t consume internally -- we can go in and clamp [ph] those solutions in close cooperation with these customers and more and more of these customers on the right are looking to Micron to do exactly that.

The other thing to note on here is that one of those three big DRAM suppliers is also present obviously in the customer base. And in many cases that presents unique opportunities for Micron then to go in and be the partner of choice and capture the ability to innovate for the future that may not be open to all players. I said I’ll talk a little bit about supply. This is a long-term trend on what’s happening to supply of bits in both the DRAM space and the NAND space. A few things to note, first of all the light blue lines are what we think the aggregate supply to the marketplace is likely to be over the next -- today and over the next few years.

I probably should have gone back in time a little bit further so that you could recognize that bit supply in the DRAM business used to be 80% per annum and bit supply in the NAND business just five years ago used to be 100% per annum. But we are clearly seeing a long-term trend in terms of the reduction of bit supply to the market. And in particular what you are seeing is a stretching out in the blue piece of these bars which is the bit supplied by virtue of technology moving forward.

So most memory suppliers in the memory space, whether it’s; NAND, NOR, DRAM want to operate at the efficient frontier. They want to have their manufacturing capacity aligned so that they can drive the competitive manufacturing operation and technology has been a big part of that. That means that in order to have a low cost per bit, you have to leverage advanced technology to get more bits per square centimeter because you are building square centimeters.

And so historically there has been a push in the industry to drive to that efficient operating frontier and that has not changed. Micron today, just like I believe our competitors out in the marketplace will probably continue to drive to that efficient operating frontier by deploying advanced technology. In fact for Micron that’s one of the things we want to focus on over the next couple of years.

But the net result of doing that is now a smaller increase per annum in the bit supply to the marketplace and that’s a different situation than we have seen historically where those bit supply to the marketplace have an easy or high probability of potentially outrunning the end-market demand. In an environment like this where we have large end-market growth, large end-market demand growth and some of the other guys will come back later and talk to the drivers of that and what we think those numbers look like, it’s very difficult for technology to keep pace with that and so suppliers in the marketplace, in order to outrun demand have to go out and add new wafer capacity. And so there’s a calculus or a decision to make there that is now separated from what’s required to be at the efficient operating frontier, is a separate calculus now, what is best for my company relative to gross margin dollars and to shareholder return, and return on investment. And that balance I believe, and I think Ron will talk a little bit more to this here in a little while, will lead to an environment where gross margins can be very good on a go forward basis and on a sustainable basis.

The other thing that slowing trend enables is products like those on the right, like the hybrid memory cube which is a complicated memory system, high-density DRAM stalked with an A6 that performs all sorts of functionality as well as a high speed interface with a CPU. Those types of products take longer to develop and to interface to customer end-systems, but they can deliver value in an environment where they are not competing with a commoditized product next year that’s 40% cheaper than the one the previous year. And so that’s why you are starting to see now an explosion in the applications that are adopting memory systems as opposed to pure commoditized memory components. We think we’ll see a lot more of that moving into the future and again and you’ll hear more of that from Brian Shirley and Mike Rayfield.

Enterprise SSDs is another example, whether it’s enterprise or client, enterprise being more complicated system. There is a growing set of end-applications for NAND Flash where true value is delivered not just through the advanced technology in the NAND component itself but in the NAND system that Micron can deliver to the customers.

So in summary, relative to the memory industry, three main changes in the marketplace today, consolidated suppliers each with sufficient scale on a go forward basis, limited new wafer capacity entering the market but by virtue of economic analysis that optimizes return for shareholders and slowing technology migrations and diversifying end-markets and customers that provide the opportunity to drive true differentiated value on a sustainable basis, all leading to the situation we find ourselves in today and hopefully why all of you are here in such large numbers to hear about Micron’s story going forward.

So what’s Micron focused on? We are really focused on three things. One is driving internal operational outperformance. We’ve done a lot of work on that. Mark Adams is going to talk in detail about some of the things that we’re doing in our manufacturing network, as well as some of the things we’re doing to close the gap in terms of advanced technology deployment relative to some of our competitors. That’s important I think. For a stable industry Micron needs to be at the forefront from a technology deployment perspective, and that’s where we intend to be. So operational excellence and deployment of advanced technology on our business continues to be a focus of the Company. And we’ll continue to make the investments we need, not only from a manufacturing technology deployment perspective but also from a product diversification perspective.

We need to be very focused on the future now because the future for Micron is about delivering differentiated solutions to all of the end-markets and more and more building in system-level functionality to those products and delivering them in a truly value-added way that becomes more intimately married with our end-customers.

And that’s what Micron is doing. You’ve read over the last six months about various incremental improvements we’ve made to our team about new capability for bringing in-house and we’ll continue to do that, both organically and inorganically in order to make sure Micron is positioned for the future and to deliver these more complicated differentiated products that the customers are going to want and need.

And finally we’re going to continue to do what you’ve seen us do here over the last six to nine months which is to manage our capital structure in a way that manages dilution while driving down debt overtime and Ron will give you a little bit more detail about exactly how that looks and what our plans are for the future.

So long-term focus for Micron and just think about this as you hear more detail about where the Company is going is really to maximize shareholder value and shareholder return and we put that at the forefront of every decision we make. And growth is a piece, differentiation is a piece, but at the end of the day we’re thinking about our shareholders and how we deliver for our shareholders by allocating our resources, both human capital and physical capital to drive that outcome.

So I’ll be back at the end of the day to answer any questions that we don’t cover in sufficient detail, but hopefully these presentations, as we move through here will give you a sense of the detail behind the big story.

Let me turn it over to Ron. Thank you.

Ron Foster

Good morning. Great to have you all over here. I’m going to cover some questions that we got from you and provide you a little perspective here to set the stage for the speakers who are coming. What metric should we use to evaluate Micron’s performance as we go forward? What are you focused on in terms of your business and operations and optimizing them and how do you think about capital allocation? I’ll address that in sort of three buckets here, Micron performance, talk a little bit about our investment thinking and priorities Mark mentioned, the priorities that how do we think about supporting that and our capital allocation strategy and what goes into our thinking there.

So first on Micron performance, clearly if you look at the semiconductor industry over the last 13 years or so since 2000, this shows a graph of the semiconductor industry, ROIC excluding memory which is the dotted line above and the memory industry over that period averaged, the dotted line, the bottom black dotted line. Clearly the memory industry has underperformed its semiconductor peers but you can see in the last year that’s substantially changed. And as Mark mentioned, we believe it’s changed fundamentally as we go forward and it’s certainly the best performance the industry has had since 2000.

And thinking about Micron’s performance specifically and how we look at it, this is the first quarter data for Micron; in terms of revenue $4 billion. We’re second only to Samsung in terms of scale of revenue. Key metrics that we look at, gross margin came in at about 32% and that is below the average of our pure play memory players part due to the nature of our business model, which I’ll elaborate on a little bit and part due to some performance improvements that Mark mentioned and people following me will elaborate on.

In terms of our business model, not all of our return to our structure shows up in the gross margin line, notably because of our joint ventures; Inotera, a notable example as well as the Intel joint venture. And it does however -- those relationships generate significant return on assets. And if you look here net income on a non-GAAP basis came in at 22% for the quarter. That non-GAAP reconciliation is available on our earnings release and I’ve got it following here just for your reference.

You can see we only dropped 10 points from gross margin to net income. That’s best in the industry and although we’re a bit below average in gross margin, we are about equal to our peers on the net income line and on our way a 25% non-GAAP ROA, that is better than average among our peers in terms of overall return and obviously well above our weighted average cost of capital.

When I summarize sort of how we’re doing in strengths, in areas we’re working on improving; property, plant and equipment turns are a big strength for us. Part of that comes from our business model, our joint ventures, notably Inotera where we do not consolidate them. So we pay for none of their capital. It’s paid for Inotera, which is a separate public Taiwanese company. We have an investment in them where we get 35% of their income reported below the operating line, but very good ROA on the total business because of the low asset intensity of that arrangement. And the second piece being the acquisition of Elpida, where we got very low cost assets through that acquisition and have the best-in-class PP&E turns in our marketplace as a result. This gives us low fixed costs and a very high operating cash flow.

Also the tax structure is outstanding. We have a Singapore principle structure and not to give you all the details, you’re probably familiar with other companies that have a similar kind of structure. So we get low tax rates. We also have over $4 billion in NOLs in the United States and we also acquired and put on our books about $900 million of NOLs associated with the Elpida acquisition. What that means in combination with our Singapore principle structure is we can operate in low single-digit cash tax rates for a number of years to come.

And I’d also mention that in term of our operating expenses, you see there at 12% our SG&A costs are best-in-class. We have a very good effective SG&A structure in R&D. We have the scale and also funding in our joint venture partnership to get very significant amount of output and capability from an R&D team and to keep driving our cost down overtime. You’ll hear more from Scott about that in a little bit. In terms of improvement opportunities, we’ve got work we can do and are doing on gross margin and inventory turns specifically, not necessarily in absolute reduction but inventory turns to improve our assets turns there. You’ll hear more from Mark Adams about both those items.

And this is the non-GAAP reconciliation for your reference. Another thing I want to mention is if you look at how we are performing vis-à-vis the overall semiconductor industry using consensus estimates of scale, market cap revenue or net income Micron tends to be relatively large in terms of our semiconductor peers in scale and things such as net income using the consensus estimates for ’14 there. However, on valuation we’re below the median of our peers and we’re intent on improving the performance of the Company as we go forward and improving our overall results.

Turning now just to briefly investment priorities and talking a little bit about how we intend to support them, Mark mentioned our investment priorities as he went through that summary there. I just want to talk about how we are going to view that from a financial support perspective. This graph shows operating cash flow in the green bars at the top and it shows CapEx at the bottom in the dark blue and light blue by year going back about 10 years. First thing to observe is that our operating cash flow has been positive every year over the last 10 years even in the very difficult, probably the worst market cycle we ever had in 2008, 2009. We still generate in worse times about $1 billion of operating cash flow.

Further if you look at our quarterly results, we’ve had positive operating cash flow every quarter in contrast to most of our pure play memory peers who have had at least a quarter or two of negative results. On the CapEx side, the dark blue represents the CapEx we spend on tech node migrations that Mark talked about and also maintenance CapEx and the light blue are capacity expansions that we have invested in over the last 10 years.

As you can see, it was in the years when we invested in capacity where free cash flow which is the yellow line here was negative, notably the expansion of our -- our expansion into the NAND business, where we built the capacity up in 2007 and 2008 with our partner Intel and that took our free cash flow negative as a result of that capacity expansion notably. And then we built out the additional NAND capacity in Singapore in 2011, 2012 and you can see that on the graph. Those were the periods when we had the most significant impact on free cash flow.

One thing to note is that in our partnership we consolidate Intel results from the JV partnership. They actually fund half of the JV partnership capital. This is the total CapEx here or gross CapEx if you will. So take for example 2011; Intel funded about $1.1 billion of that CapEx, which came in as a capital inflow and is not netted against that number. So that actual cash effect to us was less as a result of our partnerships, another example of the value of that relationship financially.

Another thing I’ll point you to is that I show at the right there first quarter 2014 annualized. First quarter -- this is the first quarter have Elpida for the full quarter in our results. So I’m using that for indicative purposes. This is not a forecast. I’m not giving you new guidance but rather just taking the first quarter and annualizing it to show you the scale of operation, now that we have Elpida fully in our results and their ability to generate a significantly higher level of operating cash flow.

If you look at the CapEx at the bottom of that same bar, first of all there is no capacity expansion planned in our numbers going forward and it is somewhat larger. We’ve got plenty of operating cash flow to cover what we’re doing but we shifted some capital out of 2013 into 2014 I commented on that on earnings calls previously. We also have some incremental CapEx associated with the integration of our two companies. You can think about that in terms of being somewhat additive to the ’14 guidance and this number is the midpoint of our guidance, $2.6 billion to $3.2 billion that I show here. And that will probably continue in ’14 and somewhat in fiscal year ’15 as we integrate the two companies and then we should move to a lower level of capital spending.

Another thing about capital spending is our capital intensity is also declining. This shows a history of what’s been going on and you can again see the big bubbles in terms of capital, similar to the prior graph related to our expansion of our joint venture into the NAND business and it does not have the netting of the Intel results in here either where they help fund part of it.

But the thing to note is the trend line is down and we expect capital intensity to continue to decline as Mark mentioned, although our tech node, our cost per tech node, our investment cost, capital cost per tech node is moving up as things get more complex, that Mark referred to and Scott will talk more about, those tech node migrations, from an industry perspective are actually moving out. The net effect of those two things is we believe that capital intensity will continue to decline overtime as we go forward and continue down that trajectory.

Finally I will turn to capital allocation strategy and give you a little perspective on what we’ve been doing. Breaking it down, in terms of our strategy, the important thing to understand is our highest priority, as we think about our capital management is operational flexibility. It has been strategically critical for us to have the operational flexibility to make the moves we need to make at the time we need to make them. This for example would include things like our Inotera partnership and our purchase of our 35% equity and interest in Inotera in 2008, a very challenging year for Micron and the industry but executing that.

And then more recently the Elpida acquisition that we did in 2013, we had the structure and capability in place and did planning to manage that. That’s our highest priority. So what’s that mean? It means that we have no covenants or very few of any covenants. We don’t want those be a problem from our operational execution, operational strategy. We want manageable debt maturities and I don’t have that graph in here, but I think you’ve all seen that we carefully worked to have debt maturities that are relatively low by year and we don’t any big discontinuities in that and we’re in good share on that score and focusing on stable liquidity and balance sheet flexibility as we go forward.

Once we have got the operational objectives in place, we focus next on lowest cost of capital and that means to-date that we have gone for asset backed leases and we do CapEx on a continuous basis, we lease it up on a continuous basis, we amortize it every quarter. They’re about four year cycles and as we get new CapEx, we just roll it into the mix. So you can think of it as a baseline of standard financing that we have in place that amortizes fairly smoothly overtime.

And secondarily we’ve used convertible notes because they come without covenants and gave us the flexibility we needed and assuming you can manage your equity, they have relatively low cost of capital. I think you all know we have a high-class problem and that is that the equity has become a little bit more challenging and I’ll talk about that in a minute.

So going forward, we now as a Company are in a place where we believe that we can add some straight debt to the mix and this will give us the -- with operational flexibility we need, where we just announced on Friday and closed this week is an example of that. It was our first foray into the debt market as a Company. And we did it because the rates were in the right range in terms of cost of capital, but more importantly back to our strategy, it enabled us to have the operational flexibility we required and don’t have any constraints on our ability do what we need to do. So going forward you can imagine that we will hopefully, if things continue in the current structure, have some straight debt in our mix along with the other parts of our strategy that we’ve had historically.

And so what do we do with surplus capital? As Mark mentioned, we believe we’re in a better place as an industry and as a company going forward. Clearly, we want to maintain minimum cash levels. Now this is part of our liquidly management to support operations as we go forward in the business. And those minimum cash levels we target to be comfortably worth of $2 billion at any point in time. We focus on dilution management and dilution reduction and we made a number of moves recently here and I’ll show you the net effect of that. We want to reduce debt in an absolute sense, as well as reduce our leverage ratios overtime. So what you can expect from us is that we will drive absolute debt down overtime over the next couple of years and we want to bring the debt to capital ratio which we’ve targeted 20% to 25% long run back into that range in a couple of years. Then we obviously as part of that intend to get to net cash positive and once we do, our other options to optimize shareholder value would include -- probably top of our list, share buybacks is a consideration.

And finally I want to show you what we’ve done with the dilution reduction efforts from our recent moves. This graph shows sort of the baseline in the dotted dash line at the top there, the pre-transaction diluted share count and as you know what coverts it, it varies with stock price. So it moves up overtime somewhat. The transactions we did in November, the moves we made in January and the moves we made in this last week, all have brought us to a place where we are about 107 million fewer shares dilutive exposure including the benefit of our 950 million of capped calls that we took against our converts at a $24 stock price. So a significant move but there is still a base of 50 plus million shares there if you look at that bottom-line that we have in our dilutive exposure. We’ll continue to look at that and manage that overtime as part of our capital strategy.

And with that, I’ll wrap it up and take any questions you have. Ivan has got a mic, if you have question. Mehdi?

Question-and-Answer Session

Mehdi Hosseini - SIG

Ron you have the chart talking about estimates and evaluation and I would – like, for comparison you had SanDisk, did you provide revenue and margin guidance? Is there any way you can -- to do so and is that -- maybe that would close the valuation gap? And I have a follow-up.

Ron Foster

Well, that’s a good question. I think the challenge in our industry and our Company certainly has been that it’s difficult to project ASPs and we are certainly re-monitoring and watching as things go forward here. We believe that the industry is moving to a better place and with that kind of stability and improvement we can look at different ways of approaching the way we communicate our forward-looking views, certainly under discussion no big conclusions at this point.

Mehdi Hosseini - SIG

And the follow-up has to do with, you had the free cash flow and how should we think about the remaining payments to Elpida shareholders and to what extent is that going to consume some of the extra free cash flow that you are generating?

Ron Foster

Sure. We’ve got another good question. We’ve got a JPY140 billion installment payment obligation to our Elpida creditors as a result of the acquisition and that’s scheduled out and we set it up in our offer, such that we would stagger those payment maturities overtime to meet objective of not having unusual bumps in our debt amortization. And another thing to note is that the Elpida obligations are an obligation -- Elpida installment obligations are an obligation of the Elpida subsidiary which is in bankruptcy proceedings in Japan. There is no parent guarantee on those obligations. It’s the obligation of the subsidiary to pay them.

So you can think of it; Elpida has to pay their installment payments as our subsidiary and they have to pay their CapEx requirements. So obviously we monitor this carefully overtime. When we brought them in right now, actually right now they’ve got about $1 billion in cash in Elpida, $1.4 billion in total, if you include Rexchip. And so they’re in a relatively good cash position right now.

And as we go forward we have -- in our transfer pricing mechanisms we can modulate and monitor the capital obligations and cash requirements of our various operations through that arrangement. So I would mention one other thing that is in December we converted them to the Micron legal transfer pricing structure. So starting December 1st they are now on a cost plus basis as all our fabs and cost plus payments back to our Singapore principle operating organization and that’s the structure I mentioned about that we haven’t placed with the Singapore principle structure. So we’ve got a good balance of cash in Elpida right now and overtime that we can we’ll monitor the cash that goes in there with our cost plus transfer pricing from Elpida where they pay Singapore that cost plus payment.

Unidentified Analyst

Mike mentioned for the Inotera, I mean you have renegotiated your agreement with Inotera. Could you help us understand the new terms and how does it impact your financial statements? And how long is this new agreement for and is there any chance that you could renegotiate it again like 12 months down or 18 months down?

Ron Foster

Okay. So the question was about the Inotera agreements and we renegotiated those. We actually set in place a three year agreement but it has provisions to revisit some of those terms annually. This was the first year we started, January 2013 with that arrangement and so we had a review and reassessment of that being the first year of our arrangement. We did as they also committed and have some adjustments that were built into that structure. And those went into effect January 1st. It’s basically an ASP -- for those of you who don’t know it’s a market minus or ASP minus pricing model that has some adjusters based upon their profitability.

And so that has an effect as we go into this calendar year. As I mentioned on the earnings call, it will not have an effect in our fiscal second quarter because there is a three month averaging period and lag effect that go on that will ship that out in time. And of course it always depends upon the prices in effect, in DRAM and how they’re moving overtime, how that calculus works. But that’s what’s going on. Most of that was put in place at the beginning. We tweaked it, if you will in this latest cycle and we have the opportunity, to your question, to address it every year as part of that agreement and then renew the agreement fairly straight forward and automatically over time. So that’s something that we’ll be looking at each year as we come to the renewal of that activity.

Unidentified Analyst

Ron, so Mark has talked about increased focus on system level products. What type of investments, additional investments, new type of investments do you anticipate making to support that system level focus?

Ron Foster

Well, I may let Mark a little bit later address that if he wants to elaborate on it. But from a pure financial perspective we’re certainly looking at it as a Company in terms of our internal capabilities and having the internal resources and fitting those in our budget as we go forward and we’re doing a lot of that internally. We will regularly look at inorganic opportunities. I’ll leave it to Mark if he wants to comment more on that later. And we do that all the time. We would be remiss if we weren’t evaluating all the opportunities in our space as they come around and we do that on a regular basis.

We are pretty regimented in how we evaluate and consider opportunities. You see what we did with acquisitions like Inotera or the joint venture with Inotera and the acquisition of a minority interest in Mnemonics and more recently with Elpida. We put pretty significant constraints on outside moves we make to justify them. So I don’t think you’re going to see a change in that behavior from a financial perspective but clearly we want to make our strategy paramount and execute when we need to do to pull that off.

Unidentified Analyst

And Ron can you talk about the yen, what’s your hedging strategy there and what’s your sensitivity to the gross margin and the net income line? Thanks.

Ron Foster

Yes, I do remember. 79.16 was the yen exchange rate. We spent a lot of time thinking about what we are going to do to manage our exposure and do since. So in terms of the sensitivity of our cost structure, rough order of magnitude for our Japanese operations, about half of the costs are in yen. So you can think of it that way, about half of those -- of the cost. But just to make sure I understand what we do with currency exposure, we fully hedge our balance sheet. Our net balance sheet today, most of it’s done with natural hedges both in Taiwan for the Rexchip piece and in Japan. So there can be relatively small income loss effects that might flow through in our hedging exposure on the balance sheet but we use natural hedges for most of it. And so we just got a natural offset and we focus on that natural offset to make that work.

So for example I mentioned about the cash we have in Elpida. We’re carrying a lot of it in yen and we can balance that against the debt exposure and that’s how we do that. So it’s a pretty good structure in terms of that. In terms of operating expenses and some of our -- the participants in our industry who have big yen exposures do longer term operational hedging, we have not engaged in that at this point. We might consider that overtime once we get a better view of the accuracy of our predictions, about those activities but also when you do cash flow hedges like that; it just delays the inevitable if you will. It doesn’t give you a fundamental economic value, just gives you a stability over some forward period of time. So we will be evaluating that and deciding if we want to hedge our operational costs. We aren’t at this time.

Unidentified Analyst

Ron I just want to make sure I heard you correctly. You said that there would be incremental CapEx for integration with Elpida? Can you quantify what that might look like over the next couple of years? And then secondly, as you think about a few years down the line buybacks and I’d like to get your thoughts on dividends. Can you help us understand, given the corporate structure cash onshore versus cash offshore generation?

Ron Foster

Sure. So in terms of our cash availability, the cash onshore, or the cash -- let me start with where our cash is. I mentioned we have cash in Elpida. We think that’s pretty well balanced and we can use that to manage those obligations overtime. If you look at our strategy and executing our strategy and our capital requirements, we have some flexibility in our structure to move capital around. In general we can be somewhat flexible. We have the same sorts of constraints that a U.S. company has that has a structure the way we have with deferral arrangements. One difference, we have significant NOLs and we have set up a structure where we have some greater flexibility there and we can preserve that very valuable asset in both Japan and the United States overtime and it gives us some degree of fungibility.

So we are monitoring that closely in terms of how we need our capital and where we need it. In terms of your question about buybacks, obviously that needs to be U.S. based cash. One of the ways our structure works is that our Singapore operation pays royalties to the United States because the United States owns all of our intellectual property. So all the IP value is in the United States and Singapore pays royalties to the United States. As they do that NOLs offset those royalty payments, if there is net income in the United States and we balance it that way and we can do that for a number of years. So we can move cash a number of different ways to do what we need to do, share buybacks for example. In terms of dividends that’s down the pathways. Once we got the cash surplus, we will focus on buybacks as our first priority.

Unidentified Analyst


Ron Foster

Yes, sorry. The comment I made about integration CapEx, I don’t have a specific number for you. It is really hard to quantify because it’s completely intertwined with the integration note of our business. For example in DRAM it’s the 20 nanometer node and so it’s real hard to sit down and try to ask our operations, well what piece of that is integration related. All I can tell you is, it’s a few hundred million effect probably in fiscal ’14 and some of that will carry over into ’15 but I don’t have a good way to quantify it for you.

Okay, thank you all and I will turn it over to Mark.

Mark Adams

Thanks, Ron, good morning. I’d like to also thank you for making the trip to the non-snowy East Coast and a very dangerous golf course for me yesterday. I hope for those of you who would stay with us, were far away from many of my [ph] drives but I wanted to take the chance today to talk a little bit about what we’re doing from a business and operation standpoint. When you think that -- Mark talked about the context and the environment in which we are operating as a Company, both in terms of the changing industry structure, changing customer relationships, as well as where the end-products are going. And then Ron certainly talked about the financial environment in which we are operating and the leverage that we have there to drive our business. But if is okay, I wanted to go a step back as I think about what motivates all the employees at Micron on a day-on-day basis.

And it is pretty staggering to think about where memory is going today and how complex a process it is. I imagine many of you have had the opportunity to tour a wafer fab. Memory technology is a complex manufacturing process and a complex technology in general. In fact if you look at DRAM for example, there is roughly 40 to 50 layers inside the manufacturing process of DRAM. And in terms of total process steps, it is close 500 process steps in memory. Now if you remove a rational government investment and if you remove their outstanding [ph] debt, and that’s all that stuff that’s happened over the last 10 years, and then you think about where memory is going. What motivates us on a day-on-day basis is, we fundamentally believe that memory market is setup to be a profitable and good return business for the right reasons.

Look at the applications today. And every one of these applications, consumer, automotive, networking, data service and storage and all of these examples in end-applications for memory, if you don’t have memory, you don’t have the applications. Memory is an integral part of what we do on a day-on-day basis. And as all the employees at Micron, as we think about what we’re enabling with our technology, we think that it’s time for the memory business to get the spoils and get the right return in our business and we think we’re positioned to do so.

We are driven to be the world’s best memory company and what drives us are basically five strategic objectives. First and foremost, we’re trying to take our precious capacity and drive it to the highest value opportunities to get the most for our investment capacity. Part of enabling us to do that is being a leader in quality and that definition in investment and quality gets to be more critical when you think about the end technology segments we’re going into today.

Technology leadership is expanding for us. In the past technology leadership, you might have thought what’s the next process node that Micron is going to? Well as you will hear from Scott DeBoer later in our presentation, technology leadership isn’t just around process. It’s around things like packaging and advanced controller development. So our business is shifting to be more than just a silicon-based business and our leadership and technology needs to drive us there.

Customer relationships; it’s an instinct dynamic which is going on as we’re evolving from more of a differentiated solutions opportunity, our relationships with our customers are shifting and I will talk to that during my content today. And finally we have to do all of this in the context of being world class in terms of operating efficiency. And I’ve got a couple of slides in terms of the types of things we’re focused on in our business to drive operational efficiency against some pretty fierce competitors.

Lot of you asked last night at dinner and yesterday, asked me, how would you articulate, what’s different in the memory business. Why is it different? And this is a pretty staggering slide. When you look at the nature of where memory was just 10 years ago. And it’s pretty concentrated and it’s pretty focused around DRAM in the bulk of memory applications mostly compute from networking. And even just 10 years later you can see the diversification not just on the technology side but we’ve grown into a flash memory presence and leadership in the technology inside as well as NOR, and emerging memory types.

But more importantly we’ve started to develop a competency to explore vertical markets and how we add value to that business. And our focus operationally and from a go-to-market perspective is driving more of that capacity to these higher margin opportunities for the Company, better return and actually places where people get appreciation for what memory can do to their end-systems. And that’s been a driving focus to get us to where we are today and we think with the combination of Elpida in the new Micron we have a lot more leverage to drive better margin into new application segments.

A lot of questions are about capacity in the industry. What’s going to happen with capacity and as Mark stated earlier we are fine with capacity. In the last 18 months we have increased our capacity 90%, slightly over 90%, of capacity that was in the industry, and has given us a model where today, we have got plenty of capacity to drive to these new segments for us. So when we think about our business today whereas you might expect a few year back when we were 10% of NAND trade and 13% of DRAM, our customers were pushing us for more capacity. That’s not the conversation we’re having with customers today, the conversation we have today is how do we use that capacity to enable our customer relationships. And this is putting us in a position where right now, we are let’s saying how do we get the most out of this capacity and that’s not just about market segments but it’s about the things we do. One of the areas that you’ve seen us focus on over the last couple of years is the manufacturing network in general.

When compared to our competitors, Micron has more of a distributed footprint and part of that openly has come from some of the inorganic activities we’ve taken over the last 10 years around consolidation and over the last two years, the team has done a phenomenal job of helping us define a blue print for what that never can look like, it shouldn’t look like going forward.

Today, this is what it looks like. We’ve centralized spaces around 3 high volume manufacturing areas. In Hiroshima, as part of the Elpida acquisition, we now have a dedicated facility for the primary focus on mobile. Now, of course we’re building on manufacturing network to have flexibility to shift with the way the market moves. But with this mobile base both from an R&D perspective and capacity perspective we’re leveraging the best of Elpida’s technology on the R&D side and being able to be closely aligned before we get out of Hiroshima.

In Taiwan with both Inotera and Rexchip we’ve got a wonderful high volume base for computing end server DRAM technology. Leading technology qualified in all of our customers and moving forward to drive a very good focus on high volume DRAM manufacturing outside of mobile and as I said, we have the ability to flex in and out of some of that capacity but again a centralized R&D focus to drive the most efficient operations in those fabs.

In Singapore that is our primary location for non-volatile high volume manufacturing. And as you know we are converting our fab 7 as we’ve talked about in the past to more -- from DRAM to NAND and that gives us a very good focused high volume geographic location tied into our R&D efforts to drive non-volatile technology.

In the U.S. presence we have basically two sites, our Lehi site as part of course the IMFT relationship and that continues to be very important for us for a part of the development of not only today’s nonvolatile but emerging technologies for us in non-volatile obligations. In our Manassas, Virginia location is a great site for us for some of our legacy businesses when you consider something like our embedded solutions group led by Tom Eby that capacity there serves that business very well and we’re able to consolidate a lot of his needs in a business like Embedded out of a site like Manassas.

What you don’t see now are three facilities that were not as strategic for us. In the last three years we got out of facilities then we made sure we exited these sites in a very strategic way for the employees then we moved to industries that were better for those sites and better for Micron. And so Israel and Italy and those types of sites for us no longer are into our network because they didn’t serve the right financial model for us going forward from a technology basis.

So, we continue to look at ways not just on the front-end manufacturing but also on the backend and how we assemble that test as that becomes more critical to our solutions that drive our business. Inventory management has been a big focus for us and you notice we don’t say inventory reduction because we’re driving in a market like today to have the best turns as Ron commented on in his section. And we’ve had some pretty good results over the last two years. Our inventory is down dramatically relative to where we were, our turns are in better shape. But the difference right now is we’re serving a much broader end-market segment and each of those segments have different behaviors. I’ll go back to the Embedded example, we don’t have, relative to commodity memory, we don’t have huge turns in Embedded because part of that is they need reliability of supply for their machine-critical applications and they pay for it.

As we think going forward in our business about how we react to industry supply and demand, we don’t think that the immediate answer is to lower price including inventory. That’s not how we think about a solution driven memory business. As we think about our business going forward. We have many options to drive our capacity to different segments and so the nature of how we look at inventory will drive us to think about, well maybe, we can move some of that capacity to better opportunities in the coming months and the quarter. As opposed to what historically has been a business that has been driven by end of quarter deals from our competitors and from customers knowing our fiscal year better than we do the change is we don’t feel compelled but we have to drive inventory down just because it’s a memory business doesn’t matter strategically we may hold inventory for better margin opportunities. So we will continue to drive optimum performance but also not feel the pressure necessarily to react by cutting prices and selling inventory, because we believe we have good homes for this capacity and that is a big shift in how the memory business can operate going forward.

A lot of what we’re doing in the manufacturing and back end and throughout the Company is trying to drive better performance in how we operate, from the time we buy materials although way to finished goods, and we have gotten some outside help in the last two years in terms of how we operate our fabs. And quite frankly the last quarter that we reported in Q1, we got a pretty noticeable benefit for us and cycle time improvements. I used a example here in NAND, both in 20 and 60 nanometer process that we’re driving improved performance in our fabs.

And that comes from taking a look at everything we do in the fabs and understanding our practices versus other peers, not just in memory but in the semiconductor industry and we have been able to distill a much harder and rigorous process in the driving performance and again not just in the front-end of our business also in the back-end of our business. Having third-party suppliers come closer to us and operate their businesses on campuses on ours to drive better performance and better inventory optimization. So you are going to see us continue to talk about these things in the coming calls and meetings such as this to let you know how we’re doing to become the world’s best memory manufacturer on the manufacturing and operational footprint.

Separate from things like how we look at the asset and capacity of inventory and how we look at driving better utilization of our fabs in terms of throughput and cycle times, it is how we are engaging with our customers. Because as you saw in both Mark and myself content earlier is when you go engage with an automobile manufacturer or a large financial institution looking for enterprise storage. Those conversations are widely different. On top of that when you have the solution as opposed to an ingredient, those conversations are entirely different.

And so one of the things we’re focused on in Micron is to continue to bring in resources who understand the markets that we’re selling our technology into and their requirements. And you can see that’s a pretty big shift from a decade ago where memory was primarily a demand fulfillment model. And as you think about our ability to go identify working relationships with large scale customers in the cloud enterprise storage, if you think about those conversations, they are more about hey what can we do together, not what is the price of your product. What can we do together to enable a differentiation for my solution. And you will hear a lot from Brian Shirley today in terms of how we look at the overall memory solutions opportunity at our customer base. And what those conversations are like, we have to be able to be set up to engage with customers that way, both in pre-sale and understanding the requirements, implementation and really post sale. And so that dynamics where we’re investing in at Micron is putting together not just a sales organization but business unit mentality and marketing capabilities around understanding requirements and how to help our customers innovate.

And finally in the past you hear a lot about modules and industry standards and Jet Tec and what have you. In each one of our segments you see unique product configurations, if you take a look at mobile for example, you have got DRAMs and NOR, DRAMs and NAND and packaged together in a solution. That solution is unique to a customer. I can’t take that solution and give it to the next customer, that’s coming from an environment where you could literally take a module from customer A and if they didn’t want it they could buy -- customer B could buy it. And so the shift in how we engage with our customers shows up in terms of our product development and it’s a core focus we have to continue to invest in to drive our ability to bring products to market with our customers. The opportunity is differentiation, developing eight products for eight customers, and more of a one-to-one relationship.

And beyond that what we’re developing? It’s no longer about just in a standard model configuration it’s about things like controller technology, firmware, software and even far down the path of developing storage appliances for example to enable our customer base. So the shift in our business is driven by the demand for memory in these unique application segments. The opportunity for us is to take the capacity which used to be primarily what we bought to the market and add value to that capacity through higher value capabilities on top of the silicon. And as we do that we think we can drive better returns for the Company and we feel very optimistic we think we’re in a good position to take advantage of that. Again Brian will talk more about that as it relates to how we see all of the memory solutions going into our customer relationships.

So with that would like to stop and take any questions on what I presented here or just general operational questions for the Company. Hi Monika.

Monika Garg - Pacific Crest Securities

In order to kind of order to kind of incent the sales force to think in the same way that you’re thinking in terms of inventory management, have you changed the way they’re incented i.e. are they given gross margin goals, are they given volume goals, are they given this percentage of your business needs to be system sale?

Mark Adams

So, there is definitely a change in the motivation incentives of really the whole company. The issues that you’re talking about is related to, in terms of a lot product mix for example too, how we’re trying to incentivize market share opportunities in the higher margin segments as an example. So that is very well aligned with what we’re trying to drive the behavior of the team and not just in sales by the way, in the BU marketing teams and trying to drive relationships that enable us to grow our share in high value segments is an area that also beyond sales is driving behavior.

Unidentified Analyst

And just as a follow-up to that, the very last slide you had, where the solutions would enable you to offer higher margin products, of the five points you have there, five solutions, one of the keys solutions that you think you have a core competency inside the company and whether or so with the areas that you think you can benefit by growing into the market and making acquisitions ?

Mark Adams

Well I think suffice to say the way we listed these from the base upwards becomes areas that we’re going to continue to invest in more and more. So if you think about components that’s kind of been our core capabilities in company. We’ve got a good control over technology in the company as well, although in certain applications, primarily commodity based applications, we may look to leverage third parties where we don’t add a lot of value to control the development but we have pretty strong controlled organization within Micron. As you get up the stack here, we’re looking to both organically build out these teams and then see if there are other opportunities that we may look to acquire. But these are definitely -- each of these elements are definitely critical to succeed to advance this down in the food chain.

Unidentified Analyst

Two questions, if I could. One would be on your 3D NAND strategy, as an operational -- from an operational standpoint, how big do you think 3D NAND is going to be for Micron over the course of the next one to two years in terms of your own capacity, how much you allocate on planar versus 3D? Then I have a follow-up.

Mark Durcan

Okay, I’ll come back to the follow-up. We’re not set to talk about that for a variety of reasons, one of which is we don’t want to present any more competitive impression than we need to in our 3D NAND strategy per se. I would say that we and I’ll let -- Scott is going to talk to you a little bit, we feel pretty good about what we’re doing around 3D. We’ve made some choices in the technology level around the architecture of our 3D NAND. And we think the technology we’ve developed and where we’re going from an end segment initially will be pretty successful relative to what know our competitors are doing.

Unidentified Analyst

That’s helpful, thanks. And then as a follow-up. I think Mark laid out some overall supply growth forecast for the industry that you see for 2014 and 2015 and beyond, impact you’ve said where Mircon is going end up relative to those industry targets. So could you maybe share with us those?

Mark Durcan

I don’t think we’re prepared to talk about that, other than what we’ve shared with you so far around fiscal year this year. I think the message that I would like reiterate that Mark stated is, we’re going to be awfully careful about how we look at that. We don’t feel in the current industry structure that this is a market share gain, this is a return gain. I think that’s about the message that both Ron and Mark would try to hit you with is and I was stating other, if we just check our current capacity and as we execute moving those to better value segments, we’ll a much healthier business without trying to nail the number per se on supply and demand in terms of that. That’s been a tough challenge.

Unidentified Analyst

Can you talk about how you think about the speed that 16-nanometer NAND or the nodes you’re ramping right now would depreciate overtime? And how that the speed of that depreciation impacts your desire to hold inventory and then in addition to that, how long you think that planar NAND will be sold into the marketplace? Is that something that will be sold in 2016, 2017, 2018 or would it be supplanted by a different technology? Nothing specific but just how is that playing into your desire to hold inventory? Thank you.

Mark Durcan

Maybe the best examples are to think about markets like NOR that have been a pretty successful market for a lot longer than people might have forecasted and when we think about planar NAND and then the 16-nanometer platform, which does drive what we think, in the inventory perspective of the old days where people were running fast and process migrations for every12 to 18 months and cost -- that’s one set of parameters. Today where there is longer metagrophy [ph] curves and in fact 16 nanometer looks like very mature technology relative to anything in planar after that.

We have options. In businesses we require that. We have options that look to meet product support for three to five years at a minimum, even longer. So as we think about the behavior in NAND, we think the planar NAND does have some long-lasting opportunities in the marketplace, and as I showed that chart earlier about certain parts of our manufacturing network, we’re set up to drive legacy performance that way because quite frankly the business warrants it, it’s justified. Not everything is a dollar per gigabyte model and we the business evolves, we think there will be more of that.

Unidentified Analyst

I have a question about the way you’re talking about managing inventory little bit differently. Can you put that into context of NAND this quarter where you had a bit of incremental NAND supply? And it looks like you’re hitting the price a little bit as you move that out. How do you balance in a way doing that versus holding inventory and kind of looking for a better price once you get new customers quality?

Mark Durcan

So essentially in the past in the memory business you’d say well over time memory pricing is going down, so you’d better get rid of it early and get out, right. That’s the kind of the old memory model. As we look at our business right now we don’t see that. We don’t think that way in terms of our business. I mean there are end markets that can consume that memory, maybe not in the current quarter, and that’s our -- maybe it’s not in component form or maybe it’s not in USB form or maybe it’s not in mobile in this quarter. But maybe that there is a high demand for another product that we will move into the following quarter. So we look at our overall inventory perspective a lot more on the demand side of where can we move this capacity rather than just dump it per se and I think that’s a behavior that’s consistent with the rest of the memory industry. Because of these end markets segments, it might not be ready in the current period, whatever that period might be but we feel pretty confident that we can move these to other application segments without putting lot of this inventory out just to move it from our inventory.

Unidentified Analyst

Quarter where you have some incremental NAND supply coming on and you’re moving it out like why not -- I mean you talked about on the call the sort of getting new customers [indiscernible]?

Mark Durcan

So I think that issue is -- the issue you’re talking about just in the current is more driven by the material that’s coming out of a new fab coming online for us. And those parts aren’t yet qualified. I made a comment on the earnings call but whenever you bring up a new fab in that capacity the customer qualifications have to going to come in at a certain time as lined up. There is always a little bit of an early pre-ramp material that we have to get rid of in some way, shape or form. I think that’s more of an exception in the norm moving forward.

Unidentified Analyst

Thanks. Ron had mentioned one of the areas of improvement were gross margins. Wondering if you could talk a little bit about the path the gross margin improvement, broken by -- on the DRAM side as well as on the NAND side. On the NAND side it is little bit below some of the competitors. What tailwinds do you see on that side and then on the DRAM side, if you include the equity income from Inotera, your DRAM -- your non-GAAP DRAM gross margins are higher. So maybe you could talk a little bit about how you look at the DRAM gross margins as well?

Mark Durcan

Sure. And I think both Brian and Scott will get into more detail but let me just make up a comment on that question, which is around gross margin performance. On the DRAM side, we’ve had a pretty good history of driving our capacity in the segments and when you look at some of the performance in server and networking, in automotive mill segments, we’ve already got products and customer relationships that drive us to leadership position there. Where we are on the DRAM side is Elpida and Micron in parallel are trying to drive process technology to be the best in the industry and I think that’s where for us, in addition to continuing to grow our share in some of these segments innovating and leading us to a leadership position in DRAM process it will be critical. So that’s one more of technology investment. And I think one of the hidden benefits of Elpida is as we have now two R&D teams coming together as one and accelerating our path to faster technology migration in DRAM.

On the NAND side there are a couple of different issues that I would say that we’re working on right now. First of all, a number of our competitors have done a fairly good job migrating their capacity to TLC, Triple Level Cell. In the past our philosophy and we think it worked well was the Triple Level Cell, while it did allow for a cost reduction in comparable per gigabyte opportunities when you’re selling these components, it also came that a price tag relation because the products didn’t warrant it.

Today we’re finding out that our competitors have done a better job at enabling Triple Level Cell. That is not something we can’t do. As a matter of fact we’re in process, it’s not new news, we’re trying to catch up. We think that adds some capabilities. We think that in different -- we are investing heavier to grow our mobile share in NAND around e-MMC for example, a market that we had not participated on as well because of our kind of legacy Numonyx relationships brought us into more of the future phone market and we related to the smartphone business and we’re playing catch up there and the business I think you will hear Mike talk about little bit later, Mike Rayfield, we feel pretty good about our business there. So we actually think that the issues that drive the NAND margin GAAP are more around how we go to new market and product and technology roadmaps. And we think we’re -- it's correctable and we’re on a path.

Yes, time for one more question.

Unidentified Analyst

Just as a follow up to that, I mean 50% of your NAND bits goes to SSD market, right. So could you maybe talk about how much is enterprise SSD part of that and what do you think you could mark [indiscernible] enterprise SSD market could be over the next three, four, five years?

Mark Durcan

Well, there is two issues going on. In any SSD sector, obviously there is client and enterprise. We’ve seen some pretty aggressive competitive pricing on the client side and this is a good example of could we have taken some material and maybe thrown some more in the client market? Yes, but we think it would have been bad from a margin and overall return perspective.

On the enterprise side, we continue to develop and grow and we had another good quarter in Q1. The client business is an interesting one because we want to see how that behaves because yes, it’s a higher ASP business but there is obviously about our cost going into and in a scenario that you have a large competitor trying to gain share, we want to be careful about moving our capacity to an environment like that when there is other alternatives.

So we think in the short-term we are going to continue to drive Enterprise but we think the client one has to be watched, because we don’t want that to become just another commodity memory business, that’s just not what we believe is in the right interest of the company. Now, long-term in memory around solid state storage, we fundamentally believe that you have to have access demand. That’s get in the game. If you look at today’s business, people in the business trying to grow out, they just have [indiscernible] feed. There is number of customers, both early companies and even a couple of public companies who haven’t made it because they didn’t have access to the core technology and they are buying technology and basically integrating into an SSD environment.

We don’t think that works both from a scale perspective and we also don’t think it works from the technology perspective because when you think about enterprise storage and things like reliability endurance, performance and all the metrics that a financial institution earns, large insurance company, these companies are driving enterprise storage applications. NAND has to be enabled to perform at that level and that enablement comes with deep sell technology level, understanding and mapping with controller-informer technology, there is got to be access to the technology. And we think in the enterprise space specifically if you are not going to have access to the NAND, forget the fact that you just can’t build as much as you would like because you don’t have the capacity necessary, you don’t own it, you need to have the technical knowhow to actually enable that NAND to be world class in storage and we think that’s pretty important over the long term and that’s really why we like our position over the next three to five year horizon in the space.

Okay, thanks very much.

Unidentified Company Representative

Okay. We are going to take about a 15 minute break now. So, if you want to go -- use the restroom, grab yourself a refreshment -- that puts us back here at about 8:40 to restart the next section. Thanks everybody.


Unidentified Company Representative

Okay, if everybody can please take your seat, we need to get started and keep get things rolling here, so please take your seat. And next section is going to be Scott DeBoer, our Vice President of R&D.

Scott DeBoer

Okay, first, I’d start off with a little review of some of the progress over the past year. That kind of leads in to some of the questions that we’re going to be going through and trying to address and then also big challenges of our focus effort of the next year. On the DRAM side in 2013, really like the rest of the company, from a technology development point of view, it was all about how we put together one R&D team out of the talent in Hiroshima and other parts of Japan along with our R&D team around the rest of world. And generally, I will talk quite bit in detail about what the plan is but I am really happy with how this has come together. I think the focus has been great and I think we’re in a really strong position now.

Coming out of the year, we’re in a solid position on 25-nanoemeter DRAM with the node reaching maturity and ramping fast and also on a 20-nanometer effort on yield ramp is well underway and we’re in solid position there. On the NAND front, we’ve had a really successful story on planar NAND over the past year from a development point of view on 16-nanometer and that’s now doing great and ramping and manufacturing and I’ll give some more detail on that. I think that’s really the picture or the story of NAND technology for 2014 in terms of volume manufacturing.

And then the other big thing from kind of a milestone point of view in 2013 was really around the enablement of system technology in the form of HMC, Hybrid Memory Cube, and in addition to Micron delivering products that Brian’s going to talk about in a little while on the memory cubes to key customers, a lot of the technology story is around the infrastructure maturity that’s occurred from our suppliers and from the overall technology base that supports 3D integration and TFC technology. So we’re really pleased with those.

The upcoming year and all these we’ll talk in more detail about, but the coming years all about ramping 20-nanometer DRAM, the rollout in the year on 3D NAND where we’re still intending to sample some product in the first half of the year, but the real story then happens beyond that in terms of manufacturing enablement and then the continued push into the space with real products and commitments to customers on system mobile technology around HMC.

So jumping into some of the key questions that have come up, first is all about what do we look like in the DRAM world following Elpida acquisition and then lot of questions about what is our view of what happens to DRAM after 20-nanometer technology? So I’ll try to touch on those. First a discussion around what our view of DRAM technology development looks like following the Elpida combination, and I think this is a really good story and I think it’s going to continue to play out over the next couple of years in terms of our technology position overall in the DRAM space.

One of the key pieces to how we put this together was we did have a joint development program with Elpida that we put together prior to the closing of agreements. So we did it about five or six months ahead of time. And what really enabled us to do is combine the teams and come up with a strategy so that we hit the ground running at close with a real execution plan. Certainly I’m sure if you can appreciate when you put two big entities like this together there is a risk for missing a step on technology execution while you try to figure out how you’re going to work together. And I think the pre-closed JDP really allowed us to hit the ground running and not miss a beat.

When we look at the technology component, the components of our organization now to drive this DRAM roadmap, there is some real interesting dynamics around the, not just the bandwidth which is of course very important what the Elpida acquisition brings to us in terms of technology bandwidth, in terms of fab infrastructure and characterization and all the kind of hard asset type things related to technology development, but also a team of very talented development people in the Elpida organization that come over and really bring a different perspective and a unique experience base. So the combination I think is exceptionally strong and really positions us well going forward.

When you look at how we’re going to do technology development, I think it really brings the best of both worlds from Elpida and Micron together where we make use of the final development in manufacturing model that Elpida has talked about prior to acquisition for a long time. So we have the nodes rolling out and ready to ramp up in a big volume manufacturing fab as soon as they’re ready and that’s a key piece to the model going forward. And they’re currently focused on 20 nanometer yield improvement.

And Boise still have the capability to do some of the more disruptive technology developments that can required as we face these difficult nodes coming up. And we can do some new materials and maybe more little riskier development invoicing without risking our manufacturing base in Japan. So it’s a great combination and I think it’s going to us position us really strong.

When we look at our technology evolution path right now, so our 20 nanometer focus right now is the hard [ph] technology development, it’s going well, it’s completely in Hiroshima. The two nodes behind that in my view are still difficult but relatively evolutionary. So I think we see a clear path to how we’re going to what we call a 1x and 1y node but really the two -- the next two nodes on DRAM behind are 20 nanometer. I think we have a clear path on those and I think the node behind that is the one that is potentially very disruptive and is going to require some more innovation. A year from now we may talk about the fact that we think it’s another evolutionary node and certainly we’re going to work very hard to make that happen. But I think we’ve got some other ideas for how we have to come in on the 1V node in a little different way.

Okay, on the NAND strategy and I know there is a lot of questions around 3D -- some of them waking up this morning. So I’ll talk a little bit about how we transitioned from planar to 3D and kind of what the status of that looks like right now. So on planar technology overall our 60 nanometer node is looking very strong and it’s ramping in manufacturing at this point. So when we look at a couple of the key aspects of the 60 nanometer technology, first one is that I’ve talked about at previous meetings is the way that we’ve designed it – it’s a very effective capital efficiency node for us. So when we look at the cost of transition for Micron from our 20 nanometer node to our 60 nanometer node, it’s one of the lowest in our history at least and it was designed in a way to come in with minimal fab impact.

So that’s looking really good still. The other thing that’s really good is through a bunch of kind of strategy adjustments we’ve also managed to really improve the quality early on in the ramp of this technology. And if we compare on this chart the performance of the yield improvement from the time we introduced it into manufacturing this is by far the best NAND technology introduction that we’ve had, the green one is the previous one from time. So planar is looking pretty solid. And we have our first SSD product qualified on the 60 nanometer node as well. So we’re feeling very good about this.

What this does is set a very high bar for 3D to come in as a more cost effective solution. So we have an aggressive time on technology enablement for 3D and then a little different timeline when we talk about where it becomes cost effective and really a real cost advantage over this what we think is an excellent 60 nanometer node. So the 3D is on -- its progressing nicely. One of the things that I think is important -- when we look at 3D right now and at the highest level, it really is starting to feel --like you can look at it almost as just another stream, when you model how it’s going to work out. In terms of almost comparable to historical basis. If you look at the bit per wafer, obviously they’re very significant. But when you add in the complexity, the process, the process complexity, with it winds up being a cost reduction that’s relatively similar to previous mainstreams. And I’ll talk a little bit more about that in a minute on the roadmap also.

Okay, so the next big topic is around what we see as in the core technology area, disruptive technology that we have to be cautious with or understand and have a roadmap for. And some other trends where we think we need to be investing in and some of them have been mentioned quite a bit. On the core technology piece, one of the things to emphasize again when we look at the amount of bandwidth we bring in from the Elpida acquisition certainly it’s a big benefit on the DRAM side. But it also carries over to being a significant benefit on the new memory technology, on packaging development and through some reallocation of our internal resources that winds up, boosting up the bandwidth overall for pretty much every program we have in R&D right now. When you look at the roadmap for the memory space overall and for the memory solutions that are required to cover it. We still see NAND and DRAM as being exclusive coverage for certain parts of the memory business for at least the next five years and really indefinitely on certain parts.

So, if you look at the real high performance and the spectrum which is shown in this graph. The DRAM is just very difficult to display in this spot because of endurance and speed. Now the cost structure DRAM obviously doesn’t compete with memory as you go towards NAND but DRAM itself has very long life in terms of covering a portion of the memory solution space. It’s going to be difficult to display. On the other side of the spectrum, there is lots of discussion about how resistive RAM and other things fit into the picture. But on the pure cost point of view side of this equation NAND is not going to be touched over the next five years at a minimum, no matter whatever technology comes in.

So, when you look at the discussion around these new memory technologies, we believe the opportunities are really in a focused area on very performance with non-volatility and kind of a medium space that we call storage class memory which is non-volatile, a little better performance than NAND and had a worst cost structure than DRAM. So, we see the world is kind of revolving towards those two things as not replacement opportunities necessarily for DRAM or NAND but for memory performance solution enabling type of technology. So, we are putting a lot of focus into that segment of new memory technology development. And in addition to that when you look at how we keep differentiating a NAND to DRAM, we think there is a lot of room in that space also and part of that brings us back to how we manage that memory, some of the controller development, different things that Mark alluded to earlier, putting more focus on that as well as package technology which we think is a true differentiator over the next several years when you combine it with the different kinds of memory technology.

And we really think HMC is just the tip of the iceberg as we look at what unique packaging technology can enable in terms of new system. Okay, on the roadmap side for both NAND, DRAM and new technology, I will kind of talk through each of those where Micron sees the opportunity. And there is few kind of subtle points from the two that become important. We look at DRAM technology specifically, we talk about node [indiscernible] reducing and eventually that does become the case. But from a pure technology point of view, at this moment in time our focus is on actually solidifying our DRAM technology base from where it’s been. So, we have some catch up to do and we believe the combination of Elpida and Micron puts us in a strong position to get the 20 nanometer node out and really start putting us back in a solid position on DRAM.

So, when you look at the 20 nanometer timing and then the next node behind it which is 1X nanometer timing, those are kind of on a historic type pace but it’s really because we are coming from bit of a catch up position and we need to nail those two technologies to put ourselves in the strong position relative to our competition. The 1Y node beyond it then starts looking a little further out and as I mentioned the node beyond that is one with the lot of disruption to it and potentially timing challenge. On the NAND side, this shows that our 60 nanometer technology which is out in the market now and that’s going to really be the dominant piece of planter technology ramping up at Micron’s fab over the next year.

We think that’s a really solid node as I mentioned before and it is going to make it, it’s going to impact the timing of where 3D NAND really make sense. On this particular graph, I am showing where volume capability is, which, we could start with the technology will be available from Micron’s point of view to start looking at ramping up volume in 2015. Now when we look at the projection we think it’s more like a second half of 2015 story when it actually starts becoming something significant in the market place. And a lot of that is again driven by the fact that planar technology is the cost competitive.

Last thing on NAND band is beyond this initial generation of 3D NAND, there is still a couple of more generations beyond that 3D NAND cost improvement, density improvement that we see on the roadmap right now and have significant programs behind enabling already. So then down to the emerging memory technology line we rolled out phase change material technology in 2013 we produced volume of phase change. Going forward we’ll focus specifically on the two new memory technology features that I mentioned on the previous slide. One is in the ultra-high-performance contemplated with non-volatility; the other is in this medium density medium performance kind of phase.

The new memory technology we are looking to have position to roll out in 2015-2016-2017 all fit into those type of categories. And we’re not providing much detail on what those technologies are right now, for competitive reasons, while we believe we are really well positioned with the technology to come in and solve the solution space that we have identified as critical.

So, overall when we look at our technology positions roadmap we’re going to enable, the performance we’re getting and the bandwidth that we have added with Elpida over the past year. We are feeling really good about our current position of the technology we’re throwing out and also about our competitive position going forward.

And I’m happy to take any questions on those topics or other technology topics.

Unidentified Analyst

Scott, earlier there was some reference, in earlier presentation that the ability for customers to use memory to differentiate their products was more prevalent today than it has been in the past. Would you discuss kind of your perspective of how expensive it is for Micron to develop those solutions relative to the price you’re able to garner in there and just how that equation might work, and how just looking at it?

Scott DeBoer

So there’s a couple of pieces that obviously from a core component point of view, we try to build in the capability that can cover a wide space of customer application. And we try to leverage as much of our core capability across whether it is unique mobile applications or server applications or in package memory application; we try to leverage the real expensive piece which is the silicon development of the 20 nm node for example to cover the type of broad space. The second thing then is as when we go and look to the next stage of the cost around the packaging development for the 3D IpSv type things.

Then again, we look at the space of applications and we try to leverage our technology development across the bigger the spaces we can. And if you look at the stuff that enabled HMC largely also is very relevant for enabling new mobile packaging technology wide out (Ph) type application, so we leveraged at that point, where the cost starts coming into the business, business rationale relative to unique design and the product engineering infrastructure that make this happen. The additional cost -- but the big expensive pieces are -- we try to build it up front to cover the wide space of technology in general, the bottom line R&D number there is some impact but it’s not as big as you might think.

Unidentified Analyst

Scott, you mentioned on the cost of transition for 3D, that’s about twice on the graph that you showed, the cost of transition for like 20 nm. Again go over, where is the cost involved, what is effective wafer out you get when you do 3D versus that same 20 nm shrink that you showed.

Scott DeBoer

First half, where is the cost involved, I mean from a factual (Ph) perspective or -- so when we look at a transition to 3D a lot of the planar infrastructure actually is still totally usable. Most of the additional complexity from a process point of view is in Drayage film technology and CMP. And those drive as you might imagine when you are booking big stack of material, those drive a lot of additional SAP capacity requirement in those areas, from others like lithography, it relaxes the requirements. But the bulk of it is in those areas. And then when we look at a conversion to 3D NAND from a planar there is a significant impact on the number of wafers you get out of a given square footage and so I think you can think of a probably roughly somewhere between 1.4 to maybe a 1.8 kind of trade ratio in terms of wafers, so somewhere in that range reduction. Any questions?

Unidentified Analyst

That’s a 50% --

Scott DeBoer

For every wafer you would have started before on planar node. Well, for one wafer you are starting on a 3D NAND node you have to subtract 1.5 or somewhere in that ballpark further.

Unidentified Analyst

Just a question on your 20 nm roadmap, some of the NAND OEMs have talked about strengths beyond 60 nm going to 1Y, 1Z, et cetera, so from a Micron perspective should we think about 16 nm at the last point of shrink prior to 3D?

Scott DeBoer

From a Micron point of view roughly the strength to looks like a 1Y that other people talk about. And the 1Z node that’s out there from some people is a pretty marginal shrink on the 1Y node. So, it kind of depends on maybe your confidence in 3D and some other things on that node would actually make sense.

Unidentified Analyst

Just couple of questions, going back to 3D when the second generation is commercialized. Do you think it’s predominantly used for MLC or TLC or both?

Mark Durcan

From our point of view at least, when we got a vertical NAND, MLC and TLC will be enabled.

Unidentified Analyst

Okay. And how should we think about the cost CapEx difference from gen 1 to Gen2?

Mark Durcan

I think back on a more traditional kind of NAND node conversion range. So if you look at it like from a -- I it will be similar from when we went from 25 nanometer down to 20 nanometer. From first generation 3D will be to second generation 3D at least kind of net fall part.

Unidentified Analyst

Is that because you’re reducing specific steps or you’re reusing planar capacity?

Mark Durcan

Because there is not as much new steps in a second generation relative a first generation, it’s not a bigger change. The reuse would actually happen on gen 1. So when we go from planar to 3D that’s when you’ll get some benefit from reuse.

Unidentified Analyst

One last one, back to DRAM, is there any of your capacitor issue at 19-nanometer.

Mark Durcan

Well, from a DRAM point of view I’ve been here 20 years, there is always a capacitor issue.

Unidentified Analyst

So, is this one different that last one.

Mark Durcan

The challenge that actually happens when you start going at some node, whether you want to call it 1Y or 1Z the challenge with that what’s happening is you’re getting to the point where you can’t fit the number of films that it takes to build the capacitor inside the space that you have available for the capacitor. So, you either have to come up with new films that can be substantially thinner which is the possibility or you have the capacitor from.

Unidentified Analyst

Does your roadmap account for this?

Mark Durcan

Yes. Yes, capacitor technology is one of the fundamental limiters on where DRAM goes.

Unidentified Analyst

Back on DRAM, so 20-nanometer nodes, it seems to be first node where you’re aligning both -- you’re merging the roadmaps with both Elpida and Micron. But yet you have -- I would assume fairly different tool sets for both the companies. So, I’m just curious how you’re going to manage that, I think historically both Micron, Inotera and Elpida have been pretty steady in terms of shrinking at what’s fairly cheap compared to your competitors in terms of your CapEx. Is that going to be changing 20 nanometer when you’re merging these roadmaps? And just how can we think about -- how these roadmaps going to be merged considering the different tool sets.

Mark Durcan

Yes. If you look at our base for where 20 nanometer is going we have Hiroshima and Rexchip which are historically relatively low, they’re part of the Elpida family, right. And the technology from that point of view has going into two fab, they’re pretty consistent with the new technology on the 20 nanometer node that we’ve developed. On the Inotera side, the story is a little bit different and we go through and make sure we do the best we can in terms of capital efficiency for Inotera to help them out with that and then if down to technical judgment on which tools can be used for steps so it won’t be completely matched through significant parts of the process flow critical parts will be matched and Inotera will have to go find those.

But I think the question is good one and the challenge is there but we did choose the technology node to make sure that it was most capital efficient as you say for that roll out and 20 nanometer is where we align things.

Unidentified Analyst

Thanks. Hi, Scott, can you talk a little bit about your roadmap for wide IO as an application of TSV. Also maybe talk about what timeframe you see wide IO in the industry from other players.

Scott DeBoer

Well, wide IO for us or wide IO 2 is an important direction relative to mobile and it Brian can talk about it little bit more and probably Mike also when we talk about mobile space I think its again, it’s more of a late 2014, 2015 kind of story with real enablement in 2015 for some kind of volume that would be meaningful. Did that answer your question?

Unidentified Analyst

I’m sorry if you said about service and I’m missed it but how important is EV to 1Y and 1Z, you can do it without EV.

Mark Durcan

Yes. We can do without EV. EV is important from a cost point of view and it’s an important for a several different memory technologies that we look at but from a cost point of view. Not from a enablement to the node itself. So, we have technology path for 1Y even for 1V without EV but at a cost point that EV provides an advantage than it fits in nicely to both 1Y and DRAM as well as some of the other areas.

We are assuming that we don’t have EV with the rollout of 20 nanometer technology across our broad DRAM base, we’re constantly making decisions that make EV less appealing, because we enable more and more double patterning capabilities. Every time we further down this path EV has a higher hurdle to get to work.

Brian Shirley

Good morning to everyone for those of you that I haven’t met, my name is Brian Shirley. I oversee what we call the DRAM Solutions Group which is one of our core business units. In this morning I am going to be talking to you both about DRAM as well as NAND. And I think the key question we want to try to help me answer this morning is really as we look forward what are some of the key market trends, the product trends out there, the needs for both DRAM and NAND solutions and how does that overlay our ability to put those trends into good products using the processes and technologies that Scott’s team develops. How do we get these into good high value added solutions for our customers?

And to start off the discussion I think the landscape I would like to show you is shown here essentially drawn into four segments and a pretty important segment by the way in the middle holding all of these together. Now these four segments, you have seen this earlier today, this is a pretty good proxy for how we have organized the company in terms of our four business units. Thinking in terms of computing, a lot of what happens in servers as well as frankly the networking pieces that hold it all together obviously the historical base of DRAM was PCs and now moving to ultrabooks, but also game consoles that frankly can almost be thought of as compute platforms themselves.

Moving over to storage and obviously the world moving quickly through new generations of enterprise SSDs and the world of cloud storage and making sure that the right parameters are in place for the necessary compute data coming over for persistency. Moving down to embedded, obviously, we have the world of automotive industrial medical military. Some pretty exciting applications down here, historically a little bit smaller DRAM content, Mike is going to speak a little bit more about that today; Mike Rayfield. And finally over to mobile with just obviously explosive growth. Frankly as we look across this landscape I have to tell you from someone that’s been in the memory industry for more than two decades, this is about as exciting of a landscape as we have ever seen. Opportunities across this entire spectrum for higher value added products, products that are not dictated by a particular JEDEC wide enabling spec, products start to look a little bit stickier higher value added in some sense it’s almost like ASIC (Ph) type opportunities for the customers that need the performance out the memory.

Some specifics on that, as we look at the DRAM side, our view looking at a five-year demand CAGR here of about 27%, PCs obviously not the driver there but the good news here going forward is the growth specifically in mobile as well as infrastructure is just staggering. And Michael talked further about the handset opportunities as well as tablets. But you look across the infrastructure space in particular driven by the demand of servers, not just at the unit level but frankly high content per box at the server level really giving us just a wide range of opportunities to play in here is just much more than a PC game, and I think that’s evidenced by the graph.

Some specifics on that, you think about the graphics and consumer world, we’ll show you some products coming up here momentarily. New generation of game consoles, but as I mentioned really are more computing platforms these days, these are not just graphics boxes. Using to 16 times the memory bit content of the previous game console. That’s a pretty nice memory requirement out there from a memory supplier perspective.

Networking, another huge opportunity for Micron, this has been a good historical segment for us. When you look at the next generation of gear coming forward, the networking guys are talking about platform as the disk flat can’t be done with traditional DDR type memory architectures. That’s where reduced latency DRAM or HMC frankly are not just interesting memory architectures, they are necessary to make the next generation platform actually function.

And then again getting down to enterprise, spectacular growth here that’s driven partially by the number of server’s data center applications, corporate usage, the cloud, et cetera. But probably even more importantly the amount of content per box. So for instance the industry standards server platform have moved from Sandy Bridge to Ivy Bridge. The amount of memory that could be placed inside of a server has taken some nice steps forward and the server users are responding to that, they’re filling up their boxes with a lot more memory and we see that daily having a hard time keeping with server, server modules, and stock, so some great opportunities there.

Now, what you see here is a rundown, this is actually for fiscal first quarter 2014, Micron’s revenue perspective across DRAM in total. So this is the first quarter that we were able to put together the ex-Elpida operation as well the Micron operation. And what you see here is obviously a nice set of products going into mobile and what you also see is a good specialty segment penetration driven both by the Micron networking portfolio automotive, industrial, medical et cetera as well as the graphics portfolio from the Elpida operation that was integrated.

Server in there as well, all of this server demand as we’ve talked to you in the past Micron in the past, Micron by itself doing a good job, we think getting our product server capable and a nice for the size of the company prior to integration a good percentage of our material as a server market, you will see this server percentage of our bids grow going forward as we now take the 25-nanoemter process at Hiroshima and Rexchip and move that into server capable application. And then that generally will come out of PC and mobile, so you end up with three good nice large segments with a just a ton of valued added opportunities and obviously the specialty segments of graphics, networking and automotive and AIMM applications as well.

Now turning over, talking some specifics on production line, so I want to talk briefly about GDDR5, you talk about a success story out of integration, if you would ask Micron six months ago as we close the deal, how would we gauge success of integration with Elpida from a real perspective on product introductions on technology. As Scott indicated some phenomenal progress not just on 25-nanometer RAMs but also 20-nanoemter development, from a product standpoint really the key things that Mike Rayfield and myself were keeping an eye on, we’re making sure that through this integration there were no hiccups specifically in getting some next generation graphics parts launched and on Mike’s side some new LP architectures.

Graphics just a huge success story here, since close, our new members in Japan and Germany have sample launched and ramped a leading edge 25-nanometer 4-gigabyte GDDR5 component which frankly is the backbone of some of the obvious game console boxes out there and this is just a spectacular product for us. We like it as well because when you talk about the crossover between with our new consolidated customer base, graphics opportunities as well as server opportunities GDDR5 ends up being a component that has applications involved.

For HPC opportunities, graphics DRAM is actually a pretty nice performance point being used in a lot of the upper end HPC platforms. So it’s hard to show your some of the synergies, we think, are already in execution as we go forward through the integration and just a product line that we are very-very proud of to March forward through this integration. Another product that is here in now something called non-volatile DIMM, this launched last year as a very DDR3 module. What this is?

Inside of a server, today all industry standard servers using 8-gigabyte and 16-gigabyte DRAM modules, what non-volatile DIMM is all about to the user the DIMM looks just like a memory module. You plug it in the same way, same interface, but on that module there is actually a controller and Micron NAND behind that. So for data recovery for system check pointing, the module is actually capable of persistent storage and that ends up being something very-very interesting to just about every server OEM we’re selling to. This is here in now at DDR3 getting some great traction and in 2014, you’ll see this extended up to DDR4.

An HMC update at supercomputer ’13 last November in Denver, we had demos with several leading industry OEMs out there. We are now sampling the production device, so this continues to go fantastically. HMC Gen2 here and now what you saw at FC ’13 several platforms from G2 (Ph) from several notable FPGA vendors and 18 plus design wins counting for Gen2, so very-very pleased with HMC progress. You’ll see there be a something that getting more attraction and continued to diversify in terms of variance of HMC for other applications, so a lot happening with HMC over the next two years. And then finally something that we call the Automata processor we’ve got just about every officer at Micron has a different way of pronouncing this. So Tometo, Tomato (Ph), I don’t know. But this is Automata processor and what this is all about this is something that we unveil that at supercomputer ’13 as well and this is something that’s been in development for about a good six, seven years at Micron behind the scene.

What this is an array of DRAM memory arrays coupled with processing elements in C2 to make a very-very powerful pattern recognition engine. And what’s that capable of is taking you would take this in certain applications loaded up with a large pattern if you would like to match again and then run real time data through this engine looking for matches and that ends up being a pretty powerful capability that take certain computing problems, things and like vision recognition issues, network virus detection, bioinformatics, for instance. It takes the problem and rather having it be in exponential problem as those problems get larger it makes it a linear problem. So this is getting a ton of interest.

I should caution this is not a 2014 revenue kind of product this is a long term play but we think one of the most exciting developments out there showing how memory is moving up in the system what it can really do. This will be present in high performance computing systems. You talk about a lot of the problems that are being centered to cloud today it’s all around something called unstructured data. And frankly to sort through that kind of data you need a pattern recognition engine like this. So something we’re pretty excited about.

Now moving over to the NAND side, the five-year CAGR here continues to just drop by leaps and bounds, 38% Micron view and you see how that breaks down. Really the key areas of interest here obviously on the enterprise SSD side, we see a very strong move to PCIE interfaces frankly that something Micron has been working on as well. You’ll see more on that coming up just an interface to get the most out of the NAND and make sure that in enterprise SSD applications the goodness of the NAND and the component technologies we’ve been working on comes through.

Client SSD attach rates driven by cost reductions on 20 nanometer NAND as well as 16 nanometer NAND continue to grow. We heard from a number of OEMs that at CES this year that attach rates are moving up quickly as we go through 2014, some OEMs talking about attach rate is high as 25%, even 30%. So just that we think a relatively conservative view here in client SSDs something that will be a big volume driver going forward. And then obviously on the mobile side specifically in handsets and tablets everything happening with eMMC and soon a UFS architecture to really drive the next generation memory interfaces.

This is a breakdown, same as we showed on the DRAM side fiscal Q1 2014 Micron’s position in NAND just a bit over 40% of our capacity working its way into system solutions and by that we mean solid state drive. So this is SSDs moving through the Micron channels, through our own consumer channels for instance. Obviously, a mobile piece that you will see continue to grow a nice piece of embedded the [indiscernible] is growing in ESG driven by the needs of automotive and Telenav (Ph) Systems for instance. And then obviously with our Lexar brand and something we call consumer products group, removable media and other doing well.

In terms of the SSD portfolio, very-very broad portfolio out there a lot of different needs. Working from the bottom up which you really see are the personal storage drives driven by the traditional SATA interface and generally focused on making sure that client applications have enough persistent storage for the applications in hand. Moving upwards in terms of cloud storage obviously mission critical and then you get to these I/O accelerators which frankly is where the value of NAND and PCIE in general really comes through.

To that point Micron in production today with the PCIE drive this was actually an internal controller using obviously our own NAND and internally developed controller, something called the P420 and it’s out there doing very-very well today. The reviews are coming in. The graph of that, just bear with me for a second here what this is, is in an enterprise application using an SQL database. So the kind of database format that’s really used in several corporate and datacenter applications today is a good measurement. There is an open standard measurement tools set called SysBench, what this is, is an hour’s work of test points across the variety of applications measuring the different competitors across the X axis and transactions per second on the Y axis. The key thing is making sure not only that the performance level is high, getting the most out of the NAND but probably most critically that it’s consistent. And the way that you get consistency frankly is by being the builder of the NAND component as well as the controller. So, trying to get the goodness out of both the NAND and the controller, working with each other to make sure that not only is it drive a high performance drive but making sure that, that high performance comes through no matter how the SQL database hits it.

And you can see here just a really a leadership position and this has been validated by a number of the test centers out there. So, overall NAND focus going forward, we are believers as both Mark and Mark said and certainly Scott, the foundation of that strategy is really around good component technology, certainly a leadership position in 16 nanometer, getting the most out of planer and a transition to vertical here. Controller side, as Mark indicated we do have internal bandwidth. We are always making sure that we use that internal bandwidth where I can do the most good. We don’t feel like we have to do everything internally but there are several areas worth a fast time to market for critical IP you will see us using our base of internal controller designers and making sure we are in a good leadership position there.

And then using external controllers for the follow-on product. It’s a pretty diverse space here. But then moving to the drives and then obviously the software pieces as we start seeing really a bigger push by ourselves, working directly with the true end customers on the needs of their application, be it application specific software, be it around virtualization, several areas here that we believe software really will be the next piece of the value-add equation for enterprise SSDs in particular. And then as you saw with Micron in our purchase of Virtensys, working power optimize drives into the appliance space as well, pretty exciting place here. This is a long term battle more to play through.

You will see Micron keeping a close eye out there, partnerships, investments whatever we need to do both organically and inorganically to make sure that from that foundation, from the base of the component itself we are capturing the true value-add of NAND inside of the system. And with that I would like to go ahead and open it up to Q&A.

Unidentified Company Representative

Yeah, Doug.

Doug Freedman - RBC

Hello, Doug Freedman, RBC. If you could answer what do you think Micron needs to do on the product portfolio side in terms of what are some of the critical parameters or specifications that the products need to deliver in either NAND or DRAM or both to drive up the value chain. So, as investors we sort of have a hard time coming, what is the key spec or performance metric that we need to be paying attention to any for those categories?

Brian Shirley

Great question, Doug. I will answer that first looking at the DRAM side, I think the key things we are looking at from a kind of value-add perspective, it ultimately comes down to performance of the end system. And admittedly that is getting a little bit tougher to measure because it’s tough to separate as it once was, the performance of just a memory from the actual end system. So, a lot of the goodness of HMC, a lot of the goodness of what we call in-package memory which frankly on the DRAM side is where we are putting a lot of resources. It’s all about certainly the end bandwidth as well as latency figures and how we measure that internally is the, our share of the wafers of the product space going into that.

And on the DRAM side frankly we think we have done a pretty good job. We are excited taking that forward to 20 nanometer and using the core capabilities that Scott talked about. It continue to get the goodness out of the DRAM wafers. NAND side frankly I think we have more to do and really the key parameters on the NAND side ultimately what we are doing day-in and day-out, taking a look at the end applications out there, the real customers driving those end applications and looking for a share of market in those opportunities where ultimately from a true system performance view the value of NAND comes through. And the share of market we have in there will really be our indicator of how we are doing in that space.

Doug Freedman - RBC

Brian, you give us some color on the 18 design wins around your second-generation HMC, can you maybe give us some scope around revenue opportunity and how you’re feeling about the ROI on that product and then maybe if you could, similar questions around DDR5 and also Automata.

Brian Shirley

Good question, HMC as we have been saying for some time, first of all for the big picture on the design wins, when we started the program several years ago we really started it with a view around high-end computing, really driven more by the HVC, by the cloud opportunities. I would say the pleasant surprise that happened overtime was that it really ended up becoming the networking guide that came in with a view that we need HMC and unless we have it there is just no way to solve the problems that need to happen. So for us a lot of enabling horse power has moved or been added specifically, not just to target the HVC space but really after networking in particular.

And I think as we have been saying for some time, we’re not going to give any figures, 2014 there will be revenue on HMC, and 2015 we think you’ll start to see it as a needle mover. So we’re pleased with that. Automata processor frankly it’s further out. I will tell you bluntly, we are as excited about that product line from a long term view. When you’re in the memory industry you think in terms of the long-term. The developments are not easy, they take some time, and something like the automata processor it does take software behind it and really an additional layer of programming by the way we have invested a lot of resources to make that programming easy.

So there is something called an SDK, a Software Design Kit that is available at the point of launch for this processor, and a wide array of application specific tools that go around that helping us to try to get the ROI out of this earlier. Frankly by helping customers make it value added in their system, but again I would not call that anything like a 2014 opportunity. Long-term opportunity there, we think as we go through the applications that y it can uniquely help to solve, we think as staggering. But you have to be thinking kind of 10 year blocks for something like automata.

Unidentified Analyst

Brian, on the enterprise SSD side, I think two years back you guys brought Virtensys flash appliance, when do you start to see products roll out from that family, from the Virtensys, from the flash appliance.

Brian Shirley

Good question, so really looking at the Virtensys end applications, you know I think really as we started to get into 2015 you will start to see significant product opportunity with the kind of converged PCIe switch that box enables helping to really bring the network closer to the actual server CPU, that what the Virtensys architecture is all about. And as we look forward to 2015 we think that’s where it really starts to apply.

Monika Garg - Pacific Crest Securities

Hi, Brian, I have a question on the ultra DEM product, people are trying to put flash directly on the DEM BUS. So first of all how do you think that product stacks against your PCI solution or any PCI solution. Secondly would you look to bring some product like that in the market?

Brian Shirley

I am sorry Monica, I missed that, the PCIe versus

Monika Garg - Pacific Crest Securities

Ultra DEM

Brian Shirley

PCIe versus Ultra DEM. Good question. You know there are -- in the NAND space right now there is just an explosion of different architectures, different ways to try to figure out how to use NAND, and we are believers that the best place is to put it from a true storage standpoint really as you are looking at real-time caching of the data is on the PCIe BUS itself, and then for that system check pointing that we described earlier, that’s fair in the NV DEM comes into play. So NV DEM and ultra DEM are really two different ways of solving things. Ultra DEM is really looking at the problem slightly differently. And we think there could be some applications there, but generally the way these systems work, what’s been enabled up of the DEM BUS versus what’s uniquely enabled up with the PCIe BUS that’s where we are putting our focus.

Okay with that I am going to go ahead and turn it over to Mike Rayfield, and we’ll go from there.

Mike Rayfield

Mobile’s going to -- that cleanup today, so I’m going to talk a little bit about a handful of things. We will talk about how we deal the mobile market because it’s pretty rapidly evolving and how you view it, it’ll give you an idea of how we behave. I’m going to talk about what’s really driving performance requirements in Mobile because they’re changing pretty dramatically. Then I’ll talk about the opportunity itself and why, at least I think a lot of us are under calling it. So give you an idea how we look at the markets, talk about where we are focusing at Micron and mobile and then give ourselves update on the progress we’re making.

So, I guess we met six months ago or so in New York and I was talking about the Smartphone market being a billion unit a year opportunity that was just a start of mobile computing and a bunch of you afterwards came and said, a billion units a year, there is never the start of anything, right. It’s either the middle or the end but those kinds of numbers can’t be the start and I think we’ve started to see in mobile how it effects markets that are adjacent to Smartphone if you will and ultimately ends up being much larger opportunity. There was an article that came out earlier this week it was Walt Mossberg’s new site and the headline was Apple the largest personal computer supplier in the world now. That’s gets you to open that right, you take a look at it and then the reality in order to get through that all you do is you say tablets are personal computers and then if you take next step you’d say ultimately that Smartphones are personal computers, you start all of a sudden have a whole new set of opportunities opens up and they’re all based on the same architecture. So if you go and say I’ve got automotive which uses exactly a mobile architecture, ultimately I’m going to have televisions that mobile architecture. It becomes many, many billions of units and it also leverages all the innovation all the work we’re doing in mobile right now. So, where there is that amount computing, there is always going to be more memory. What happens is we’ve got all of these different form factors. We’ve got our small phone, we’ve got a tablet we’ve got one there what’s in our car that one what’s in our car and we expect the same experience from every one of those.

So what says your low cost devices have to be able to do the same thing that your high-end devices do or else you’re just not going to buy them. And so the ability to do that says that low cost all of the sudden has significantly higher functionality than any of us had factored in before. And then the last adjacent market, you think about taking your Smartphone, taking the glass off, taking the plastic off, putting an edge connector and you’ve got a server. So, now we’ve got the technology with development on mobile that expands all those market places and ultimately crosses over into the cloud. It’s a pretty exciting space.

So, what’s driving the additional computation requirements in mobile? We talk about gaming and video and things like that, you’ve heard about 4K video. It was only four or five years ago I was walking around telling people that 702P was going to be important on phones and they said for the 100 times I was crazy. The reality is 4K video is going to come to your phone and it’s not because you’re going to have full length movies, where the full length movie uncompressed will be 500 gigabytes but you are going to want to take small video clips at 4K blow them up, cut it out, I still have a 1080P video that I can go off and show people because I’ve been able to zoom in and have very high quality. So, things like that are going to start pushing more and more memory content whether be NAND or DRAM.

Larger display as the innovation is going on in terms of how pleasing the devices are to work with and how do you get that, you get a better user interface, you get more user interface, it operates more rapidly, that tends to drive more memory in all of these devices. You’ve got if you’ve seen the specials on people carrying their Smartphones over to the Olympics in Russia, they turn them on and hour a later they’ve been hacked and everything on the Smartphone is gone. So, the reality is how these things have so much processing and capability and there is so much content and they’ve become, we have to put the same kinds of security things that we’ve put on our PC our desktop computers that’s going to drive more performance as well as more memory.

And then finally all of the things I do on my mobile device I replicate it many times in the cloud. I take picture all the world, I store them in Dropbox. My wife would rather see them SmugMug the get stored on SmugMug, the whole phone is backed up somewhere else so that opens up another interesting adjacent opportunity as we put storage in the cloud, the more successful we are in the mobile business, the more business we create for ourselves in the cloud.

In term of the market, there is no argument about its big, right. And I think that the bait comes down to where are the different segments of it. A couple of years ago people said, that people going to want to carry a mobile phone use it as a computer, I’ve already got two screens, they’ve got television, I got a computer. That debates pretty much over. The devices are accessible, people own 2, 3, 4 devices, they’re comfortable with that. So, that drives pretty significant growth. And people talk about the high end of the market is slowing down and therefore that’s where all the memory usage is, the mid-range and low-end is what’s speeding up but if remember when talked six months ago, we talked about [indiscernible] had a device that was a 2 gigabyte phone for a $130 in China. That’s a new point that didn’t exist. You look more recently even at companies like Motorola, right. So, the Motorola X, a 2 gigabit phone, it’s about $320 on subsidized, you think about Lenovo gets behind that brand pushes that level of functionality at that price when that’s half of what that functionality was available for only a couple of months ago. So, what happens is when we talk about that only the mid-range is growing, that’s great. The mid-range or mid-priced devices and low prices devices now have the same amount of more functionality than the $700 devices had only a couple of months ago and it’s going to keep moving in that direction.

And I think if you just keep watching those devices look at the graph on the bottom. It shows entry level device is not going above 1 gigabit until 2017. Its racing upon us right now. And if you start to vary that yellow bar just a little bit and it starts to approach what the high end phones and tablets are automatically the market becomes significantly larger than any of us had modeled, and I think that’s a pretty exciting thing to watch happen.

So let’s talk about the opportunity, people will come and say mobile is great, it’s big but it’s about to turn into the PC market, it’s just going to be commodity and you are going to go down the same path that ultimately PCs went. I don’t believe that’s the case; there is a couple of reasons where we focus on two things. We focus on LPDRAM and we focus on managed memory or managed NAND. And we’re not trying to own the whole market, we’re going to pick those pieces of the market that makes sense from a margin standpoint. And the reason those things are stickier and make more sense is harder to do.

So when you go and get qualified on LP3 at a company, you go to the SOC or the chipset supplier, you go work and getting that qualified, making sure the system works optimally, so their end customers get production, you can’t just yank that part and out another one in. And the reason is first thing it was hard to get to that point and second thing when you do that you got to go back to the carrier and get qualified again, and a carrier qualification takes some number of months and you have all of sudden missed the window.

So the onus is on us to be a better supplier, more reliable supplier if we take that responsibility to get that design in but it is stickier, it is worth more to people and that’s why I believe that’s it’s going to have a different attribute than historically the PC market has had. As we have -- I think when we talked last time I talked about the focus being integration of Elpida and managed NAND. We now call it LPDRAM and managed NAND because Elpida has been integrated.

Our low power DRAM strategy is the Elpida product and what we have been able to do with that is that they had a relatively narrow customer base, we now take that and spread it across a much wider customer base that Micron had and it allows us to spread it across geographies and equipment different customers now I think create a much more stable and growing business than the two companies could have separately.

The other thing we’re doing is I have been told a number of times in last two days that we’re behind on mobile memories, mobile NAND, eMMC that’s right. We’re making good progress catching up and the way we catch up is again we bring some amount of value to the customers if somebody else doesn’t, what that means is we use our unique NAND technology, we add our own firmware, we work with third party controller companies to modify their hardware and ultimately at the high end we’ll have our own hardware.

So we get in with the customers, we get in with the OEMs and the chipset suppliers early and go off and make sure that we bring them something that somebody else can’t and a lot of that is in firmware. And then finally I grew up in the SOC world, I spent a lot of time with those folks and the reason is as they are the only people that really know 100% what memory interface is going to ship in three years, because they are designing it right now. So if I work in collaboration with them, I get my memory to work very closely with their new interface than in three years’ time all that work I have done just turns into design wins. And so that coupling allows us to be a much better partner of their and allows the OEM to get the production much quicker.

So an example of that just before Christmas we sampled LPDDR4, the first in the industry to sample to our chipset customers and to the OEMs. And why that’s important, so LPDDR4 is higher bandwidth than existing PCDRAM now, extremely high bandwidth, extremely high performance, extremely difficult to build and extremely difficult to get integrated into the SOC, because it’s high performance. You want to get the most out of it with the lowest power. So we’re doing that integration right now and our customer, our partners are bringing up their SOCs with our parts. Our partners our bringing up their systems with that and in 1.5 year or two years with RAMs production our goal is we are the best coupled of those and we have the best solution to get to market quickly and it’s all based on the work we’re doing now.

So that’s again another reason this is much stickier than its historically been, because it’s just playing hard, we’ve got to work together earlier. And then we talked about firmware, this is the place we differentiate and we catch up in managed NAND and you will start to see the progress on that going forward. When I look at sort of how do I measure progress, I talk to customers every day and the conversations start to shift from how many DRAMs can I have or how much NAND can I have to -- I’ve got a problem can you help me solve it? And we solve that through early working with a chipset partners through early working with the OEMs and for solving some of these issues that they have got in firmware.

And as long as the conversation keeps moving in that direction I think mobile continues to be very differentiated, it continues to be stickier and the design win business and ultimately I think that’s the best way we bring value to the company.

So with that, happy to answer any questions.

Unidentified Analyst

Mike it’s pretty well known that a very large mobile customer had a contract with Elpida expired at the end of last year. Can you give some color around how you expect that relationship to progress maybe if the new contract is in place? Does that relationship move forward in the mobile DDR4?

Mike Rayfield

So without talking about specific customers, the Elpida had great relationships with a number of customers. We’ve got great relationships with the number of customers. Our goal is to fundamentally add those two together and continue to have great relationships with all those customers. It’s a pretty concentrated business, and I think that so big customers and the big suppliers learn a lot from each other and there is no reason why we shouldn’t just continue to have a great relationship with the all folks that Elpida had with.

Unidentified Analyst

Can you talk a little bit about 64 bit going into handsets and what you expect that might do for mobile RAM requirement is that driver is screen form factor a bigger driver and then with 4K did you mention when you thought we start see that in high-end handsets?

Mike Rayfield

Okay, so on 64 bit, the simple tactical challenge in short term is, is its dual channel memory so I got make sure for 3 gig I’ve got two and one half and for 2 gig I’ve got two one. I think that the real interesting thing with 64 bit is it ultimately gets a lot more capability. The GPUs on 64 bit system are going to be significantly higher performance and if living in a GPU world for a while it drags a huge amount of date. You need a lot of data. You need very quickly. So I think what it will do is drive significantly higher performance in tighter coupling of the memory which is all good that requires a lot more works to get it down that requires LPDDR4, requires next generations.

And then with that, we’ll get additional capabilities where it’d be graphics whether it’d be better UIs and it will just continue build and add I believe to the growing both NAND and DRAM need in following. And then what you had second, on 4K, so I think six months ago I think you’ve said anybody who would have 4K they would laugh (Ph) you off the stage. So it’s raging up on us. I can’t image that at Mobile World Congress, which is in about two or three weeks, somebody is going to show something with 4K and whether it’s a prototype or production or whatever it might, I mean, the people’s insatiable appetite for a great content, it’s just, it won’t stop. And so we’ll just keep clicking along, I’m convinced, I’ll buy one, of course.

Unidentified Analyst

We’re seeing some pretty significant change in the landscape and handset market you’ve got the big guys Apple and Samsung, but China Inc. seems to be on the rise, can you talk about maybe some of the geographic challenges? And how getting to be better with the broader base of customers is important to your business model?

Mike Rayfield

Couple of years ago the mobile business was pretty concentrated, two big guys and everybody else. It’s still relatively concentrated, but there is some shift over the last little while that are pretty significant, right. China Inc., if you will, has got some people they’re showing up is real technology leaders not followers. So we’ve got local resources both technical and support that live in those regions of supportive.

Clearly, the Lenovo, Motorola dealers that goes through Motorola has a great relationship with carriers around the world and you imagine the might of Lenovo behind that, it could be pretty interesting as well we could have additional big players. And what we’ve found the cost of a design win business is you got to win the design. So, we’re pretty aggressive at putting the design resources, support resources right next to the customers to make sure that the designs come quickly and they get to production quickly.

Unidentified Analyst

So talk about what you’re in terms of demand out that marketplace in terms of are you shipping wafers to these customers MCPs and how important is the broaden up for your portfolio?

Mike Rayfield

So Elpida had a great [indiscernible] business and both for support of putting memory on top of processors and modems as well as working with MCP and eMCP partners, we’ve very rapidly seen that range of the market move from NOR to MCP to eMCP. And it’s been over the last three quarters very rapidly and then it will continue to move on to eMMC. So the focus on firmware for eMCPs and eMMCs is I think got to pay up pretty quickly as those guys transitioned to that because it wasn’t long ago that region was all about low end and cost and now low cost happens to have a pretty significant amount of functionality and they’re going to have to go a more aggressive strategy.

Unidentified Analyst

You’ve touched on the opportunity with 64 bit. I am wondering if you’re expecting based on the design work going on that this upcoming 2014 holiday season could be a bigger opportunity for you in that area? Is it more of a 2015?

Mike Rayfield

So 64 bit is a here, right. It’s not everywhere but it’s here. And once the first thing falls it goes pretty quick. So, it’s going to be, in 2014, there is going to be a lot of 64 bit solutions. And ultimately that’s going to be great for the consumers, right in its snappier you can do content that you couldn’t have done before. It will be richer as you put on a large display like tablet. It’s going to be a lot better than the notebook computers most of you are using in terms of processing power right now.

Mark Durcan

Alright. Hopefully, by this point, we’ve covered most of the questions that you guys wanted to hear us talk about. But certainly I’m here to try and wrap up any sense or cover any additional ground and I’ll rely on some of the folks spoke if I need to. But let me just wrap up quickly by saying. We think this business is in great shape on a go forward basis. We think all the cogs on the wheel or all the legs on the stool area there and we anticipate a favorable industry dynamic moving forward.

We’re building, we’re continuing to build and improve on our balance sheet and planning our use of assets in a way that will not only build the company on a go forward basis and achieve our operational goals and place our product portfolio where we needed to be long-term successful but also delivered great return for the shareholders. Part of that process is going to be continuing to invest in our business whether that’s in optimizing our supply chain or making sure we’re deploying advanced technology to save the efficient operating frontier. We’re going to continue to focus internally on running our business cost effectively. But we’re also going to continue to invest in the system level solutions and differentiated products and make sure that as the future comes we’ve got all the right memory to go with all the developing end applications.

And finally, we’re targeting the value added segments and we’re making sure that not only our manufacturing footprint is flexible but we have all the right assets out in the field close to the customers to give us the opportunity to move our capacity and our output to the most value added segments in the future. And all that’s being done with an idea of taking care of our shareholders. So let me stop, and try and wrap up here with a few questions. And we’ll go for Nick.

Unidentified Analyst

Mark, there is talk of Hynix having some percentage of their capacity that can’t migrate to the next gen nodes, so they’ve got to put in some new leading edge I guess capacity but it’s supposed to be capacity net neutral. Do you have a percentage of your capacity where you can say hey this isn’t going to be able to move forward and at some point I don’t know if it’s two years down the road, or three years. You need to put in a new facility like Hynix is doing. And if so what might that look like and what kind of capital raise or, not raise, but cost would that entail?

Mark Durcan

Okay, I think there is actually, there is a couple of questions buried in there the first one is relative to Hynix and their need to add some cleaning space for the future to me that rings quite true and something that makes complete sense for them to do on a number of different plains. For Micron, we’ve been optimizing our capacity footprint over the last year. As you know we’ve shed a lot of 8 inch assets either sold them or diminished our ownership share or our obligations relative to off take of capacity relative to some of those. And we’ve consolidated our flash operations in Singapore. We’re on the roadmap to finish that out moving forward.

We have identified certain fabs where we’re going to leave capacity behind for instance in Virginia where we anticipate less capital investment there to migrate that technology because the reality is we’ve got a lot of customers that need long-term commitments for the products, the more value add and I speak to you these products become the more customers were interest in long term support and that makes financial sense to us and we’re going to do that. I think as we sitting here to-date most of the rest of our existing capacity is in pretty good shape to -- at least for 300 millimeter capacity to continue to migrate. We do have some wide space in Singapore to facilitate a 3D NAND transition not the totality of it but for the significant piece of it. And so we’re in pretty good shape there.

Having said all that, when we think about the future and the need for incremental capacity and how we might want that to come onboard. At some point, it probably make sense for Micron to have some additional cleaning space not necessarily even increase the number of wafers that we put into the marketplace but to make sure that we can continue to migrate because these technology nodes do become more complicated as we move through time. So we would, to the extent we decide we need that, we would look to do it on a cost effective basis but not necessarily with a mind of building out a big new fab we would look to have clean room space available as others in the industry are doing to facilitate our transitions and to enable maybe small incremental additions of capacity on a go forward basis. So hopefully I covered all the different angles in there.

Unidentified Analyst

Mark, could you maybe talk about the DM and NAND pricing trend. What you see in the market? And if you see [indiscernible] as any segment of the memory market steps you could to stabilize that market?

Mark Durcan

I don’t want to get into sort of updating guidance or anything like that but I think you guys can go out and look at spot market trends and so you are probably aware that spot market numbers for DRAM have been relatively flat. And that’s kind of as we thought it would be when we gave guidance, so without updating that I will just say that at least is still in alignment relative to NAND, there has been weakness in the spot market as you guys can go out and look on and see for yourselves. And that’s also kind of as we expected when we gave guidance back in January.

So the market is about how we expected it to be, at least as you look at what’s going on the spot market. Relative to what Micron is going to do with its capacity, we’re going to continue to work on those value added segments. But one of the things that hopefully came across today is that Micron structurally is different than it’s been historically. We have a relatively low fixed cost in our overall operations, and part of that is by virtue of the way we have acquired low cost assets, part of it is the capital intensity in our business has been decreasing.

So we look at our business today, we’ve got a pretty variable cost structure and we’ve got lots of flexibility in terms of how we deal with capacity to have the right market environment out there.

Unidentified Analyst

A couple of questions, where do you stand on kind of the vision next three to five years on 450 millimeter wafers. In addition is there anything that you can do on the testing and packaging side also offer cost improvements outside the standard stuff that we have been talking about in terms of capacity utilization.

Mark Durcan

On both of those, relative to 450, if that ever happens which I think is in doubt at this point and we could talk about that if you want to ask a follow up. But I am not at all convinced the 450 millimeter will ever happen at this point. But to the extent it does, it’s a long way out in the future. So I feel really good that our investment in 300 millimeter capacity is one that’s got an enduring lifetime and that there is not a lot of necessity from Micron at least over the next five years we are spending a lot of money on 450. Of course it’s something we are going to have to watch but there is a lot of investment that needs to go on in the equipment community to make that happen. And the value at the end of the day so that customers who would buy that equipment I think is dubious. So, we are not really focused on that.

Sorry, the second piece of the question was? Oh! Testing and packaging, yeah. Micron I think, we probably should put it in our technology section because there is a whole technology platform at Micron around test capability that ripples through all our various products. We design all alone testers and we manufacture them in-house and we enable our products to use those testers in clever and interesting ways that drive a lot of capital out of our backend structure as well. And so as we are migrating recently acquired capacity to advanced technology nodes we are also embedding in those products some of the things that are needed to facilitate the Micron backend test strategy. And yes we anticipate significant cost reductions as that rolls out through the capacity that was recently acquired, they didn’t necessarily have that capability before.

We actually started that as part of the JDP prior to closing with Elpida, so many of the 25 nanometer products that will roll-out here, over the next year we will be able to take advantage of that.

Unidentified Analyst

Hi, on the shareholder returns Ron mentioned about wanted some operational flexibility and mentioned about potentially wanted to get to in a cash position. I wonder if you could just be little bit more, give us a little bit more guidance on how we should think about shareholders returns. Is it going to be something that might happen this year or is it more like the 2015 type of story? And do you have in mind net debt zero or actually net cash position that you actually want to have?

Mark Durcan

Obviously, I don’t want to buck myself in relative to when that might happen. The first priority for us is to cover the operational needs and importantly to make sure that we are making the right investments to position the company for a successful future and that’s what comes first. We will of course continue to nibble away at the debt and try and do that in a way that is anti-dilutive. So, think of us in terms of, definitely continue to take a look at our converts on a go forward basis. But beyond that I don’t want to get into projecting exactly when we might take some other steps because frankly we don’t know what the market is going to look like. We don’t know how successful we are going to have with our products. We think it’s going to be pretty positive and we are going to have a good run here but I want to maintain flexibility making investments we need to make to continue to grow the company as well as potentially return some stuff to shareholders beyond that, some balance to shareholders.

Unidentified Analyst

Got a couple of questions, historically there has been some fungibility of capacity between DRAM and NAND, as you struggled in the low 20 nm for DRAM and sudden move into 3D for NAND, can you understand what happens to fungibility and if that have supply with situation and then my second question what sort of sustainable margins would you need to see before you went out and get a Greenfield. \

Mark Adams

So related to the capacity fungibility question between technology nodes, that’s going to get tougher and tougher because the technology said are going to continue to diverge. So if we move the 3D NAND, as Scott talked about, there is a relatively large capital investment that is required to facilitate that transition, those tools are not necessarily fungible over the DRAM side. So I think while you may see competitors in the States continue to optimize, here while we are running significant NANDs and plainer NANDs that would probably go away over time. You won’t see as much of that. Related to the implications of that I don’t know that they are all that huge. I think that the DRAM capacity is in place. Looks like it’s pretty appropriate for the market on a go forward basis. And likewise on the NAND side I think there certainly a faster growth trajectory in terms of how many bytes are needed for storage in the world. And that one may break down more quickly overtime, but as a look at the business of both DRAM and NAND today I don’t foresee that there is a need for lot of additional capacity, and I think that it’s going to stabilize in about the right spot. And the second part of your question? Where would the sustainable margin number be for Micron to say hey, I need new capacity? I think the best way to answer that is to say some big-big number. And you know the reason is quite simple. When you think about adding new capacity the marketplace first of all the new capacity with Greenfield capacity is much more expensive. You’re buying all new tools as opposed to making small incremental investments to facilitate technology transitions since you’ve got a larger much fixed cost associated with that, and that has appreciated over time. So your margin on that incremental capacity is lower. And then you got a factor in. That’s a small incremental relative to your installed base and if it is a significant increment it’s going to impact the ASP, you get across the rest of your business. So when I think about building a new fab, I just think it’s a long-long-long time in the future because I got to be sure I am going to get a return on an incremental capacity over an extended period of time, and I got to be sure that I am not building so much sort to impact the rest of my business. I think it’s possible that the people will look at what’s the demand for out there in the future and our margins getting so high that we’re doing damage to our customers and pinching off end market demand. And if margins got so high, if that were a problem, my response would be I want to have small amounts of clean room available where I can add small amounts of incremental capacity; not real big Greenfield FABs. And so that seems like the way we would approach the future and that’s certainly how I think about it today.

Unidentified Analyst

Given the present state of NAND pricing, and the first quarter been weaker, than like some might have expected, what would it take for you to slow down your NAND capacity expansion going on in Singapore?

Mark Adams

Again we’re not really interested in commenting on exciting what’s going on there with that transition and picking any details to it but I’ll answer a bigger question which is how would Micron look at running its capacity flowed out or flood out in either segments DRAM or NAND versus market conditions where there is significant ASP erosion. And I just said we’ve got a pretty variable cost structure right now. We will look at our end markets and we will look at what we think the relative balance overtime is and we’ll make adjustments as we seek it.

Unidentified Analyst

Mark that sounds like a very different man should then we heard for many years. Number one you sounds like you variable component is much higher and therefore your willingness to pullback or not expand at the same rate that you originally projected, that’s changed, is that a fair interpretation?

Mark Adams

The industry is very different and Micron is very different than it has been historically so, yes.

Unidentified Analyst

Another question on your capital structure, if the world place out the way, I think you and everyone in this room hopes it does over the two three four years, we do like to get to the point where Micron’s capital structure whatever debt you have is all straight debt, would you like to eliminate the converts totally overtime or do you envision converts always playing a role on the company’s capital structure?

Mark Adams

I think we are on the road in the direction, I think three or four years in this business is a long time and I don’t know what other growth initiatives or opportunities or situations might be out there. But I think the trend definitely for Micron is going to be more straight depth and less converts.

Unidentified Analyst

Mark Adams did a good job of letting out how your striking strategic partnerships with the number of customers and it makes a lot of sense. There is two areas that where it seems slightly problematic to me and that’s in the server market where lot of the big OEMs are under pressure from the cloud vendors who seem to care about low cost more than anything else and also in the mobile category where the best growth is coming from those emerging markets which we’re also very cost sensitive. Can you talk about how you strike partnerships in those areas.

Unidentified Company Representative

I think any large markets they’re always going to be cost sensitive. So for us they have partnerships in those areas, we going to be delivering real value that helps the customer at the end of the day and that’s kind of how we approach it. As you mentioned, the server business is kind of diverting a little bit. There is sort of mission critical or high value servers and there is more and more some of the data centers or that are moving data around the internet that where cost -- they are more cost sensitive and there is less value that can be supported through what has historically been the value proposition and service which is quality and bid our rates and fix rates over time etcetera. That doesn’t mean they aren’t opportunities to do things that are unique for those data center customers that can add value for them and so that’s how we approach those kinds of customers, what do you need in your business where we can add, differentiate the value and so far with the number of them we’ve been able to find opportunities.

I think over time in the mobile space, we’ll see similar things like that where we can potentially help them drop memory towards out of the overall systems functionality or where we can bring differentiated power performance by getting more closely integrated with their systems that maybe help them strip cost that are out of parts. And so we just look for how do we get the memory more closely integrated in VN system and little bit deliveries value and then finally share that value with the partner.

We’ll take one or two more. One more? Okay.

Unidentified Analyst

Hi Mark. You talked a lot about focusing the solutions for customers and at some point can you move the model more like a backlog model like lot of other companies in the sector.

Mark Durcan

So, it’s a great question. I can’t tell the answer -- I the answer is yes but I can’t tell you when because there is long history in this business that I think Ron showed about people or customers remember that and are nervous about it and I think on the one hand they would like to have long term contracts with more built in stability but on the other hand they’re nervous that they missing an opportunity to take advantage of our misbalanced in supply and demand at some future point in the business and so structuring those deals is something that we’re certainly interested in doing and that we are open to doing and are talking with customers about but there is a history on our side as well which says you better hold the money because those things are tough to enforce.

So, I think it’s a matter of time and relationship building before we can get that today but I think it is a trend that you will see more of that in the memory industry over time.

Alright. I want to thank you all again for coming. Hopefully we answer a lot of questions and we certainly try to cover lot of ground it’s great to see lot of old friends here again and glad we’re able to have all of them and then we have in the marketplace today. So, thanks for coming.

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