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Micron Technology, Inc. (NASDAQ:MU)

F3Q10 (Qtr End 06/03/10) Earnings Call Transcript

June 28, 2010 4:30 pm ET

Executives

Kipp Bedard – VP, IR

Ron Foster – CFO and VP, Finance

Mark Adams – VP, Worldwide Sales

Mark Durcan – President and COO

Analysts

Tim Luke – Barclays Capital

Daniel Berenbaum – Auriga USA

Kate Kotlarsky – Goldman Sachs

David Wong – Wells Fargo

Alex Gauna – JMP Securities

Glen Yeung – Citigroup

Daniel Amir – Lazard Capital Markets

Gary Hsueh – Oppenheimer & Co

Uche Orji – UBS

Kevin Cassidy – Thomas Weisel Partners

Bob Gujavarty – Deutsche Bank

Vipon Nyag [ph] – Macquarie Capital

Bill Dezellem – Tieton Capital Management

Operator

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

Kipp Bedard

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

This conference call, including audio and slides, is also available on Micron’s website at micron.com. If you have not had an opportunity to review the third quarter 2010 financial press release, it is available on our website again at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of this call, accessed by dialing 706-645-9291 with a confirmation code of 81966928. This replay will run through Monday, July 5, 2010, at 5:30 PM Mountain Time. A web cast replay will be available on the company’s website until June 28, 2011.

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

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

We refer you to the documents the company files on a consolidated basis from time to time with the Securities and Exchange Commission, specifically the company’s most recent Form 10-K and Form 10-Q. These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward-looking statements. These certain factors can be found in the Investor Relations section of Micron’s website.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of the presentation to confirm these statements to actual results.

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

Ron Foster

Thanks, Kipp. Our press release is available on our website. It has been a busy quarter with the Numonyx acquisition and other items. Let me first set the stage with the financial summary for the quarter. Then I will review with you some of the significant or unusual items in the quarter before diving into the operating details.

The company’s third quarter fiscal 2010 ended June 3, 2010. The company reported net income of $939 million or $0.92 per diluted share on net sales of $2.3 billion. Included in net income are gains related to purchase accounting for the Numonyx acquisition aggregating to $488 million. Of that gain 437 million is presented on a separate line on the income statement and 51 million is reflected as a benefit on the income tax line. In computing earnings per share, the shares issued in the Numonyx acquisition are included only for the period they were outstanding, roughly 4 weeks out of the 13 week quarter.

Now let us look at some of the significant or unusual items that arose in the quarter starting with the Numonyx acquisition. The purchase price for Numonyx is based on 130 million shares issued to the Numonyx shareholders and consideration for the employee holders of restricted stock units that were assumed by Micron. The total purchase price was $1.1 billion.

The new purchase accounting rules under FAS141R were effective for Micron with the beginning of our current fiscal year. Under the new rules, the net assets are recognized on the opening balance sheet at their fair values and any excess over the purchase price is recorded as a gain in the period of the acquisition. That gain in the Numonyx acquisition was $488 million, which is included in the results for the third quarter. This purchase price allocation is preliminary. While we are not aware of any adjustments to the allocation, there could be adjustments in the fourth quarter.

There were no acquisition intangibles recognized in the purchase accounting, and the value of depreciating assets was just slightly lower than their historical cost reflected in the Numonyx financial statements before the acquisition. Now let us move on to a couple of other noteworthy items occurring in the quarter. During the second quarter the company accrued $64 million for estimated settlement costs for pending litigation, including the indirect purchasers’ antitrust case. Settlements to these matters are not final; however, we believe they will be finalized in the fourth quarter.

Under existing supply agreements, our Lexar business periodically receives price adjustments from its suppliers of NAND products. During the third quarter, we completed a settlement that resulted in an $41 million benefit to cost of goods sold. We were successful in being awarded a total of $26 million in grants and other incentives during the third quarter. 10 million is related to our manufacturing operations, and is included as a credit to cost of goods sold, 16 million is related to our entities in China and included in the other operating income.

Numonyx is a party to a joint venture with Hynix that operates a memory wafer fab in China. The arrangement with Hynix also includes a supply agreement. Hynix has certain rights that were triggered upon the change and control of Numonyx. In May, we received notification that Hynix intends to exercise their call option to purchase all of the Numonyx interest in the joint-venture, as well as notification of their intent to terminate the supply agreement. The notification from Hynix contemplates closing the purchase and termination of supply agreement in August, although the close date may occur later depending upon receipt of necessary government approvals, Micron and Hynix are currently in discussions regarding the extension of the supply agreement.

The estimated price to purchase the Numonyx interest in the joint venture is approximately $425 million. ST Micro [ph] currently provides a cash guarantee in support of a $250 million bank loan to the Hynix, Numonyx joint-venture. As a result of Hynix exercise of the call option on the joint venture, we are obligated to substitute for ST Micro’s guarantee and to deposit $250 million of the proceeds from the sale into a pledged account. We will receive funds out of the pledged account as the joint-venture repays the original bank loan through 2016.

Let us move on to discuss a few details of our operations during the past quarter. First, recall that several new accounting pronouncements were effective for Micron with the beginning of our 2010 fiscal year. Prior period’s results have been recast to reflect the presentation comparable with the current period. Total sales in the third quarter increased 17% over the second quarter. Compared to the third quarter of last year, total sales increased 107%, reflective of continued improvements in market condition in our business and industry over the past year, particularly for DRAM.

It is important to note that in the Numonyx purchase accountings, the work in progress and finished goods inventories are written up to the estimated selling price, less estimated costs to complete. Virtually no margin will be recognized until the products on hand as of the acquisition are sold through. In addition, purchase accounting rules don’t allow the acquirer to recognize deferred revenue for products that are in the distribution channel when accounted for on a sell through basis, which is the model for both Numonyx and Micron.

Until the products in the distribution channel are sold through, the only revenue reported by the Numonyx operations will be those from direct sales. Because of these items and the fact that only three weeks of Numonyx activities were included in the fiscal third quarter results, Numonyx added $80 million to consolidated net sales at a nominal gross margin.

Focusing on the memory segment, that excludes any Numonyx activities, DRAM revenue increased 10% compared to the second quarter. This increase resulted primarily from a 9% increase in average selling prices. Revenue from the sales of NAND Flash products in the third quarter increased 16% compared to the previous quarter, due to a 21% increase in bit sales partially offset by a small decrease in the average selling price.

Memory sales in the third quarter include royalty and technology fees of 21 million, which compares to 34 million in the previous quarter. The decrease is the result of the transition in the Nanya Technology arrangements that has shifted from a transfer fee recognized as revenue to an R&D cost sharing arrangement that is reflected as a reduction in R&D expense.

Revenue from our foundry like model with Aptina was $92 million, reflecting a 15% increase compared to the second quarter. Average selling prices for DRAM products continued to strengthen in the third quarter, resulting in a 9% increase in DRAM per gigabit average selling prices compared to the second quarter, and increased 54% compared to the third quarter of last year. Sales of specialty DRAM products grew at a quicker pace in the third quarter compared to core DRAM, resulting in a slight shift of mix towards specialty DRAM products from core. This is a reversal of the trend we have seen in the past several quarters as a result of core DRAM growth from Inotera production volumes. Output from our Inotera operation decreased slightly compared to the second quarter, as Inotera continues its conversion to Micron’s stack process.

Sales of DDR3 DRAM crossed over DDR2 in the third quarter to become a larger portion of the company’s sales both in bits and dollars. DRAM production costs increased slightly in the third quarter compared to the second quarter, primarily due to the increase in the cost per equivalent unit from Inotera, as a result of manufacturing inefficiencies during their transition to Micron’s stack process. Inotera continues on track though with their long-term conversion targets.

DRAM cost reductions in fiscal Q4 are expected to be down low single digits and bit production is expected to be flat to up slightly compared to Q3. Micron produced product will again show cost per bit declines, while Inotera cost is expected to be relatively flat compared to Q3 as Inotera continues to incur costs related to the stack process conversion.

NAND selling prices in the third quarter decreased slightly compared to the prior quarter. Total NAND bits shipped in the third quarter increased 21% compared to the second quarter as we have initiated the ramp of our 25 nm technology and transition to higher density products. NAND production cost per bit in the third quarter decrease 9% compared to the previous quarter, including the effect of the $41 million price adjustment from suppliers.

NAND cost reductions in the fiscal fourth quarter are expected to be down a couple of percents, and bit production is forecast to be flat. The country is balancing the mix of products to optimize margin and to achieve cost reduction and bit growth with our ramping 25 nm technology. SG&A expenses in the third quarter were $190 million. SG&A expense in the third quarter includes expense per litigation accruals of $64 million, Numonyx SG&A costs for the period following the acquisition of $10 million, and other acquisition related costs of $14 million.

R&D expense in the third quarter decreased compared to the second quarter as the 25 nm NAND process development was completed and transferred into production on our accelerated schedule. Numonyx accounted for an additional $15 million of R&D expense in the third quarter, and for the first time this quarter R&D expense includes a credit of 24 million for the cost sharing arrangement with Nanya. We anticipate SG&A expense in the fourth quarter fiscal 2010 to be between 140 and 150 million, while R&D expense in the fourth quarter is expected to be between 165 and 175 million. Both of these forecasts include Numonyx spending in Q4.

Now to the balance sheet. The third quarter generated over $700 million in free cash flow to end the period with $2.3 billion of cash on the balance sheet. During the third quarter, the company generated $889 million in cash from operating activities and repaid $378 million of outstanding debt, including $218 million to the Singapore EDB, which was repaid before its maturity and $70 million for the Lexar convertible notes, which matured on April 1.

Expenditure for property, plant and equipment in the third quarter were $177 million. Initial capital expenditures for our IM Flash Singapore fab are expected to begin in fiscal Q4 and increase to a significant level beginning in fiscal 2011, as we move forward with tool installations and start-up activities. With the inclusion of Numonyx capital in Q4, we expect total fiscal year 2010 CapEx to be at the high-end of our $850 million to $950 million guidance range.

In Q4, we project the incremental revenue for Numonyx to be between $475 million and $500 million with gross margin in the single digits as we continue to sell inventories that were written up in purchase accounting and rebuild inventories in the distribution channel. With respect to our consolidated joint ventures, distributions were made to JV partners of $75 million in the third quarter, which consisted of distributions from IM Flash to Intel. Intel contributed $24 million to the IM Flash venture in Singapore, which matched the company’s contributions.

With that I will close here and turn the commentary over to Mark Adams. Mark.

Mark Adams

Thanks Ron. We continue to see strong demand for our memory products during our third quarter. Although our Q3 has historically been slower from a demand perspective, our NAND bit shipments were up 21% and our DRAM bit shipments were up 2%. Given that our overall DRAM bit shipments increased only slightly this quarter, we consciously directed more of our bits towards higher margin products, including products to our server, networking and storage and automotive customers.

Revenue from our personal computing business, which includes desktop computers, notebooks and net books, was up 3% quarter-on-quarter as ASPs remained strong in our core DRAM business.

Revenue from our server business was up 22% quarter-on-quarter. Demand from our major customers continues to look robust through the second half of calendar 2010. Our networking and storage business achieved a 25% revenue increase in our third quarter.

The growth in our networking and storage business was driven by a double-digit shipment increase, as well as 10% ASP increase quarter-over-quarter. As the case with our server business, the forecast from our networking and storage customers continues to be strong heading into the back half of calendar year 2010.

All in all, demand for Micron’s DRAM products continues to remain very favorable as we look to optimize our production plans around these strategic growth markets, where we are uniquely positioned with a diversified product portfolio. We continue to see a shift in demand from bit shipments towards DDR3 memory in Q3. Bit shipments of DDR3 products increased as a percentage approximately mid-teens quarter-over-quarter, representing more than half of our overall core DRAM segment.

When one considers our DDR2, we feel that Micron is in a favorable position to take advantage of potential increase in legacy opportunities around DDR2. From a pricing perspective, the weighted average ASPs for all of our DRAM products continued to increase, up 9% quarter-on-quarter. The ASP increase realized in Q3 were consistent across the computing, server and networking and storage segments. Contract pricing for DDR3 has remained flat quarter-to-date, even in a seasonally slow period.

DDR2 spot market saw a decrease earlier in our current quarter, but has rebounded a bit since. Quarter-to-date blended DRAM ASPs are down slightly of a flat pricing. Even though the DDR3 migration is accelerating, we feel that DDR2 will be tight in supply to our existing customers within our specialty segment. I was asked about the potential of despecking memory content on our last call, and wanted to comment on what we have seen in the marketplace.

In fact, we have seen limited examples of low-priced consumer PCs offering 1 and 2 gigabyte models, but by and large the OEM continue to market 4 and 8 gigabyte models. We have seen little evidence of despecking outside of the entry-level consumer market. Demand from Micron’s flat memory products continues to grow as we experienced 21% quarter-on-quarter bit shipment growth.

Micron NAND products are used in a broad range of customer applications, including the consumer, mobile, and enterprise markets. We were able to advance our technology leadership in Flash memory as we began shipment of our 25 nm product through Lexar and other channel customers. We feel the 25 nm process technology will further strengthen our position in Flash memory.

On the SSD front, we continue to grow shipments of our award winning C300 RealSSDs to our OEM customers, and through our crucial channel. There was substantial overlap on the SSD front with customers who rely on Micron’s DRAM solutions, thus demonstrating the overall breath and strength of our product portfolio.

Our retail business had the best operating performance since the acquisition of Lexar in June of 2006. The Lexar branded flash memory card and USB products, coupled with our crucial branded SSD and DRAM model solutions have continued to gain market share worldwide. In a time of supply constraints, our retail customers value the vertical integration model Micron offers through these channels to meet their demands and requirements.

We continue to see the retail and e-commerce markets for DRAM and NAND branded products as differentiated channels that few if any of our competitors are able to access directly. Trade selling pricing [ph] for NAND memory was down slightly quarter-on-quarter. This was compared to the quarter-to-date reference of flat ASPs we gave on our last call. Although there are signs of 3-bit to sell NAND from our competitors in the marketplace, we are pleased with the pricing for Micron’s 25 nm 2 bits per cell, higher performing Flash memories available to maintain a price performance benefit over other lower performance options.

We feel the market will trend to higher density chips and that bit consumption will continue to grow throughout 2010. We remain optimistic that market segments such as mobile, consumer electronic devices such as tablets and the SSDs will drive demand for higher cycling performance requirements. We are pleased that the pricing has remained fairly strong during a seasonally slow season for consumer products, with trade ASPs down in just a couple of percent quarter-to-date, and we are optimistic that the NAND market will remain strong for the remainder of calendar year 2010.

As Ron mentioned, due to purchase accounting rules, Numonyx numbers do not fully show up in our sales figures this quarter. I wanted to provide some commentary around the customer and market feedback. Our customers in the mobile and embedded markets are looking for Micron for grow strategically in supporting their overall memory requirements today and for their future product requirements in NOR, MCPs and NAND application.

Our broad portfolio puts us in a strong position as a non-competitive supplier at our major customers. From a market perspective, NOR memory remains in very tight supply conditions and appears unlikely to change in the second half of calendar year 2010. Except for some cases where we’re holding inventory to serve some strategic customer opportunities, our finished goods inventory remains relatively low in aggregate and seasonally very low. The channel appears to be low as well.

We have been asked about the impact of Europe’s economic issues on our overall business. Openly, the size of the business in some of the impacted companies is relatively small as a percentage of the overall demand, and we have not noticed any material impact to date.

As we come to the end of our fiscal 2010, we are encouraged by the strong demand signals across our channel segments. Our customers continue to seek expanded supply partnerships with us as we continue to lead from a technology and portfolio scale perspective. We see the demand supply equilibrium in the memory business continuing to work in our favor as we look for continued strong operating performance going forward.

With that I will hand back over to Kipp.

Kipp Bedard

Thanks Mark. We would now like to take questions from callers. (Operator instructions) With that let’s please take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Tim Luke of Barclays Capital.

Tim Luke – Barclays Capital

Thank you so much. I was wondering if you could just clarify with respect to the fiscal fourth quarter for August, what we should be thinking in terms of bit growth going forward in DRAM and in NAND, and if you could provide any framework for how we should think about beginning to model the revenue ranges for Numonyx for the coming period, and just to confirm it sounded like you were saying that as of now if pricing was stable in DRAM from now, it would be down slightly, if you could – perhaps give the same guidance with respect to the NAND environment. And then lastly, if I may, the inventory was up some, what was Numonyx in terms of the inventory change. Thank you.

Mark Adams

Thanks Tim. I think we got all those. I will take the first one. The production bit growth guidance for DRAM was flat to up slightly, and for NAND was roughly flat in our fiscal Q4 over Q3. I will hand the ball off to Ron for the Numonyx guidance.

Ron Foster

Tim, Numonyx revenue, I modeled that for you so you had a baseline to start from and going forward we don’t anticipate that we will be able to provide visibility of Numonyx separately as we get it integrated into our business unit planning and the structure of our company. But for Q4, we are anticipating for 475 million to 500 million of revenue in the fourth quarter related to new Numonyx products. And with regard to your inventory question, which I think was your fourth question, the Numonyx inventory – this was our first quarter, including the full fair value assessment.

So it has no embedded margin in it as I mentioned, and so the increase in the revenue base will be at full fare value and as we flush through inventory at cost, then it will come down to a cost basis as we go through the fourth quarter. But I also anticipate that in the fourth quarter we will have very small margins on the Numonyx products, because it will be mainly flowing through at fair market value.

Tim Luke – Barclays Capital

How should we think about Numonyx margins going forward after the fourth quarter, if you could give some color there and then my last thing, I will pass it on, have you completed your arrangement with your partner for Singapore. It sounds like you have an initial matching of CapEx, but how do you see that going forward? Thank you.

Ron Foster

So, Tim, the Numonyx margin, as I mentioned the fourth quarter is going to be only slightly possible as we are flushing through fair value inventory, but beyond that time as we get to full normal cost production, I guess one thing I refer you back to is that recent reported history, they have run in the mid 20s kind of gross margin ranges.

Mark Adams

Let me jump in on IMFS if the question was relative to…

Tim Luke – Barclays Capital

Yes.

Mark Adams

Capital fund there. We still don’t have complete clarity as to the level of participation of our partner in that ramp. We have indicated previously that that fab is roughly 100,000 wafer per month fab. I think as a placeholder, you should anticipate as we move through calendar 2011,we will ramp that to roughly 60% level, but we want to maintain flexibility to move that around based on market conditions. So we don’t have a firm road map for you yet on that, and the Intel participation, again too early to say.

Tim Luke – Barclays Capital

Thank you so much guys.

Operator

Our next question comes from Daniel Berenbaum of Auriga USA.

Daniel Berenbaum - Auriga USA

Yes, hi guys. Thanks for taking my question. Can we just go back to the inventory, I'm just trying to get straight in my head there was like a $700 million increase in the quarter. How much of that was Numonyx inventory? How much of that was you marking up mark-to-market for DRAM, and then maybe just go back and relate to clarification of newer gross margin. Was newer gross margin as you reported on the P&L negative in this quarter, and then when would you expect it to get to that mid 20% normalized number?

Ron Foster

Daniel, this is Ron. So, in terms of the inventory effect in Q3, it was all driven by essentially Numonyx, and so that was the adjustment. And the inventory that we put on the balance sheet for Numonyx was at fair market value less cost to complete, so that when it goes out it will be effectively going out at a zero gross margin. So, that affect will flow through the Q3 effect, so we were essentially at zero gross margin in Q3, and will be near zero gross margin in Q4 as that continues to flow through.

Daniel Berenbaum - Auriga USA

So – I am sorry, so it's sort of the right way to think about it that you have $700 million in NOR revenue that has to flow through at 0% gross margin before you move to more normal gross margin?

Ron Foster

That is a reasonable way to think about it, yes.

Daniel Berenbaum - Auriga USA

Okay.

Ron Foster

In addition, we had – just to reiterate, we had our inventory in the distributor channel that was there at that time we executed the close, and as I mentioned in my comments, as part of the purchase accounting, the distributor inventory that was deferred on our books is wrapped up in purchase accounting and we don’t ever report that as revenue either in the current period or future. So, until that pipeline gets rebuild, the distributor inventory pipeline, we have an effect from that, and I incorporated that in the guidance for the fourth quarter that I gave you for Numonyx.

Daniel Berenbaum - Auriga USA

Okay, that makes sense, and then just on the accrual for litigation, what litigation are we talking about? Is this in addition to, is this cost or price fixing case and is it in addition to Rambus litigation?

Ron Foster

Dan, this is Ron again. It doesn’t relate to Rambus litigation. It is the anti-trust class-action suit related to indirect purchasers, effectively representing consumers, and that settlement involves Micron and four or five other participants in the settlement of that anti-trust class-action related to the indirect purchasers. Samsung actually previously settled that same suit and this one involves Micron, NEC, Elpda and Infineon as examples.

Daniel Berenbaum - Auriga USA

Thanks and then just one last administrative question, guidance for share count, share count for next quarter when you have the full effect of the Numonyx issued shares?

Ron Foster

It should be 1159.

Daniel Berenbaum - Auriga USA

1159, thank you.

Ron Foster

Yes. That of course depends upon income levels.

Daniel Berenbaum - Auriga USA

Right, understood, but fully diluted assuming–

Ron Foster

Fully diluted will be at 1160.

Daniel Berenbaum - Auriga USA

Great. Thanks very much.

Operator

Our next question comes from Kate Kotlarsky of Goldman Sachs.

Kate Kotlarsky - Goldman Sachs

Hi, thank you for taking my question. A couple of questions, first on the NAND bit shipment guidance for next quarter, could you maybe clarify a little bit as to why we're only seeing flat production next quarter, and if there is any difference between what you expect your production to be next quarter versus what you expect your shipments to be?

Mark Durcan

Yes. This is Mark Durcan. Let me jump on that one. The effects were numerous, but primarily revolve around increased penetration of our 25 nm node being offset by lower volume purchases, but primarily a shift in mix to more higher margin NAND products, which tend to be lower densities.

Kate Kotlarsky - Goldman Sachs

Okay, that makes sense, and then any difference in what your production is going to be versus the actual shipments in the quarter?

Mark Durcan

I believe we are roughly flat. No inventory change.

Kate Kotlarsky - Goldman Sachs

Okay, and then my other question is on the cost reduction trajectory, you mentioned that next quarter cost reductions will be fairly minimal, should we expect them to accelerate over the next couple of quarters and if you can quantify that that would be great?

Mark Durcan

Yes, absolutely. We have got a lot of runway ahead of us here as we move into fiscal 2011. In particular on the Inotera front, we have the 50 nm transition moving ahead, and we will really start to see the impact of that, and fiscal Q1 and beyond should be a big story for the entire year. On the NAND front, I mentioned we were into the 25 nm transition, that will be on the order of 25% of the bits in the quarter we are in and it will be closer to 75% of the bits the following quarter, and that will drive significant cost reductions as we move through the year on the NAND front as well.

So to boil all that down, I think on the NAND front, you can look for high teens moving forward quarter-over-quarter and for DRAM, you can be a little bit lumpy, but averaging out something in the mid-teens.

Kate Kotlarsky - Goldman Sachs

Okay, and then just finally, the follow-up to my first question on the NAND side, how should we think about the growth after Q4?

Mark Durcan

Sorry, can you say that again Kate?

Kate Kotlarsky - Goldman Sachs

Yes, so next quarter, on the NAND side, bit production is going to be relatively flat. How should we think about that in the following quarters?

Mark Durcan

Yes, bit production, probably flattish again the following quarter, and then we will have some pretty good growth after that. I would say, how would we characterize that guys? Yes, mid-teens.

Kate Kotlarsky - Goldman Sachs

Okay, thank you.

Operator

Our next question comes from David Wong of Wells Fargo.

David Wong - Wells Fargo

Thanks very much. Can you give us a rough idea of what your weeks of inventory are for DRAM and NAND, and do I understand correctly if you got about $700 million on Numonyx revenue and you're saying that the run rate might be $500 million that accounts to about 20 weeks of inventory for the Numonyx NOR stuff?

Mark Adams

I will take a short on the inventory question, on our finished goods inventory, we are slightly below. Our normal inventory level is about three weeks on hand for finished goods, and in certain high-volume products they are even less than that. Sometimes, towards the end of the quarter, we have the choice to make on holding over some inventory to position and serve some higher margin opportunities in some of the specialty areas we serve, and that sometimes is the case. But on average, we are lower than we are normally seasonally, and slightly less than three weeks in total.

Ron Foster

This is Ron. In terms of your Numonyx revenue question, I didn’t say $700 million Numonyx revenue, we had about $700 million, $686 million in Numonyx inventory at the end of the quarter, and that was mostly marked to fair market value of the acquisition, although we did have obviously production that went in there in the three week intervening period after the close. Then that will flow through essentially at market value less cost to complete. It will flow through and based upon the guidance, the vast majority will flow through in the fiscal fourth-quarter, but bear in mind some of that inventory already is probably at cost in that mix also.

David Wong - Wells Fargo

But doesn't that mean that you've got a quarter or more less of inventory on your balance sheet for the NOR?

Ron Foster

That is correct. Yes.

David Wong - Wells Fargo

Great, thanks.

Ron Foster

Yes, that is right.

Operator

Our next question comes from Alex Gauna, I am sorry if I mispronounced your name from JMP Securities.

Alex Gauna - JMP Securities

Yes, thanks very much. I was wondering and I apologize because I think you've touched on this, but with your flat bit or flattish to slightly up bit growth in DRAM, can you reconcile what I would think would be stronger seasonality on that front with that sort of guidance?

Ron Foster

Keep in mind that is not a shipments guidance that is only production guidance.

Alex Gauna - JMP Securities

Okay, and so but again, in such tight environment wouldn't we be looking to grow it? I mean, is it entirely accounted for by the transitions going on with Inotera and DDR2 to DDR3 conversion?

Mark Durcan

Yes, our bit growth is right now no wafers coming on board for us in the immediate future. So it is all transitions. So it is a combination of Inotera transition and Micron’s internal or wholly owned transition.

Alex Gauna - JMP Securities

Okay, and then if I could ask the same question that you just answered on NAND, if we looked beyond this current quarter, what might we see on the DRAM bit growth side a little bit later in the year?

Mark Durcan

Yes, after Q4 you should start looking for some double-digit bit increases on the production side.

Alex Gauna - JMP Securities

All right, thanks very much.

Mark Durcan

Yes.

Operator

Our next question comes from Glen Yeung of Citi.

Glen Yeung - Citigroup

Hi, you mentioned that there was some difficulties with the conversion to stack at Inotera, and the long term targets remain the same. Have there been any changes, can you talk about some of the changes to the more near term targets?

Mark Durcan

Yes, this is Mark Durcan. I wouldn’t say that there is anything really unexpected going on with Inotera. We have just continued to move through equipment installations and deploying the technology on what has been the tool set of Micron as well as some repurpose tools there. In the short term, we will see a slight reduction in the wafer start rate, as we just work through the equipment repurposing activities, but we still anticipate being on the original schedule as we move late into the calendar year, and that driving some pretty significant bit growth for us throughout 2011.

Glen Yeung - Citigroup

Okay, and are you planning specialty DRAM mix to remain at the higher levels for the rest of the second half of calendar 2010?

Mark Adams

Yes, this is Mark Adams. That was something I alluded to in my opening comments and that given the profile we are looking, we were able to this quarter shift towards some specialty and higher margin segment for ourselves. And we do see some upside there, as we are in some cases sole sourced in some of these applications, and certainly tied to some of the growth opportunities in the market.

Kipp Bedard

And the next question please.

Operator

Thank you. Our next question comes from Daniel Amir of Lazard Capital Markets.

Daniel Amir - Lazard Capital Markets

Thanks a lot. All my questions have been answered but can you give maybe some commentary on kind of what you're seeing a bit in terms of customers in the PC space and how or where we're standing in terms of back-to-school orders right now?

Mark Adams

Yes, thanks Dan. It is Mark again. So, we saw kind of analysts and press talking about a softer April, but openly since kind of the May timeframe, we started to see some pretty healthy indications on the back-to-school in the second half of the year. Notably, the server business has been very strong, the desktop business is very strong, and the June OEM numbers around notebooks is very strong. So, despite some concerns or questions early on in our quarter back in April, it has still been fairly strong. We feel pretty good about it.

Daniel Amir - Lazard Capital Markets

And in terms of the specialty DRAM market?

Mark Adams

You know, likewise, as I said, we had the opportunity to take a look at our allocation models given some of the limited production upside we had this quarter, and we shipped as much as we could to those markets, because there is a lot of appetite our products. I would also mention, there is a number of questions on the Numonyx side on today’s call, and it is not just pertaining to DRAM and Flash memory, the NOR specialty market is a high-growth opportunity for us as this tremendous appropriate for Numonyx parts in that channel is low.

Daniel Amir - Lazard Capital Markets

Okay, thanks a lot.

Operator

Our next question comes from Gary Hsueh of Oppenheimer & Co.

Gary Hsueh - Oppenheimer & Co

Great. Thanks for taking my question. Just a few more follow-up questions to some of the questions that have already been asked, but just curious here in terms of your ability to basically change production bits from commodity to specialty, was that more of a reaction to what you're seeing in the marketplace particularly vis-a-vis a little bit of incremental weakness here on the commodity side with the PC market. And second question just similar vein, you talked about decontenting, you came out and said basically you didn't see any evidence of that. I was wondering how much visibility do you have on particular specs for PCs for the back-to-school selling season, in other words, are you seeing any kind of visibility or do you have any visibility on DRAM content per box in Q3 and Q4, and I have a few more follow-ups.

Mark Adams

Yes, I think the first question is did we – I think, let me restate this. Did we move some capacity, did we move it to more profitable products because we foresee weakness in the less profitable segments, not as much. We were just trying to optimize profits. On the second question around going forward configurations, we are not as tied to the choices that our OEMs make on individual configurations. I will tell you that part of my our responsibility is around the retail business, and I got pretty good interactions with the retailers and e-tailers.

So far the consumers haven’t voted on going down the lower configurations. You’ve got to remember the emotional part of buying here, the emotional part of buying is when you are used to going out and evaluating and purchasing 4 gigabyte platforms. Behaviorally, it doesn’t just seem right to go down in 1 to 2 gigabyte products, and that is just a consumer sentiment.

Secondly, these especially never hit the corporate PC side. So, it is such a small piece day, and haven’t proven to be successful that I would be surprised if it made an impact in the back half of the year.

Gary Hsueh - Oppenheimer & Co

Okay, great and just a follow-up in terms of manufacturing. You guided to single bit production on DRAM particularly. I thought that, correct me if I'm wrong, that crossover in terms of wafer production that Inotera pushed back had occurred or is expected to occur at the end of Q2, just wondering is there any kind of set back in terms of the ramp here going on at Inotera for stack particularly in regards to your single digit kind of production guidance for fiscal Q4 and how much more acceleration could we see now in the November and February quarters?

Mark Durcan

Yes, I think – this is Mark, relative to Inotera, I think your assumptions relative to the original plan was off a little bit. We are as I said continuing the pace. We are probably lagging a couple of months at the current point, but we anticipate that as we move through Q4 that will be right back on track. So we don’t see any long-term disruption there.

Gary Hsueh - Oppenheimer & Co

Okay, and we could expect basically double digit big growth beyond Q4 for DRAM?

Mark Durcan

Mid-teens, I think yes.

Gary Hsueh - Oppenheimer & Co

Okay, great. Thank you.

Operator

Our next question comes from Uche Orji of UBS.

Uche Orji - UBS

Thank you very much. Just a couple of questions, one is any idea how much DDR3 will constitute of your sub 50-nanometer products in the second half of 2010? Just trying to get a sense of I know you've cost on DDR3 but I just want to know how much that kind of constitutes of your sub 50-nanometer products.

Mark Durcan

Let me take a shot of that. This is Mark again.

Uche Orji - UBS

Hi Mark.

Mark Durcan

I think the – for 50-nanometer in the quarter we are currently in it’s probably, it’s roughly two to one DDR3 to DDR2.

Uche Orji - UBS

Okay. All right. That's helpful. So let me just ask you, you're saying your inventory is about three weeks. Any insight as to what the inventory at the OEMs or the channel at the major companies is at the moment? Because usually, (inaudible) back-to-school some people tend to with past school inventories, any commentary as to what the channel inventory is would be helpful.

Mark Adams

Yes, thanks. This is Mark Adams again. So the inventory, it’s actually interesting, is much tighter than you expect OEM to back-to-school. My suspicion is you know that I think we all have to remember, we’re not sitting here in the most robust economy. It serves better than 2009, but people still have kind of the memory of running to the working capital strains of that time period, and they’re pretty efficient on supply-chain and probably a little bit more risk averse than they were a year, two years back. So we see pretty tight inventories across the channels and even back into the ODM that you referred to earlier, and don’t see a lot of buildup at this point.

Uche Orji - UBS

Okay, let me ask you about the – because you talk about networking and storage business, and that's of course your specialty business. How much of – in terms of the demand you are seeing there, how much more runway do you expect for strength in the demand there, and while you – in answering that also, any commentary you can make as to the configuration you have seen in the server market and to what extent that reflects the overall strength in our enterprise vending, that would be helpful, thank you.

Mark Adams

Yes, a more qualitative response to that question is you know, it’s hard to see far-off behind you know, 6 to 12 months from a demand cycle, but it looks good, it looks really strong. The networking guys obviously are looking to get in the computing and vice versa. So you see a lot more technology players around storage, not just on the DRAM side they were talking to us about Flash applications and certainly NOR application. So as best we can see that that’s a very healthy segment for us, and one where we are pretty well positioned from a product portfolio standpoint.

Uche Orji - UBS

All right. And my last question is regarding Europe. I mean, this has been a topic for everybody in terms of you got some OEMs talking about raising prices for PC products in Europe. In the last week you kind of responded to the currency weakness. In the demand you're seeing out of Europe has there been any change at all, be it by overall specifications or people pushing back in terms of pricing on the component level, so any comments on Europe would be helpful. Thank you very much. That's my last question.

Mark Adams

Sure. You know, we haven’t seen and ironically what led to my comments earlier was we’ve actually seen some pockets of strength in retail in Europe. Certainly there has been some questions about Greece and others, smaller markets but on the margin it has been okay, and so we haven’t seen the dramatic shift. You know, a lot of conversations about it, but we haven’t seen a dramatic shift, and certainly some of the currency indications abound, but the other side of that equation is China retail has been up dramatically. So on a global footprint you know, whatever noise there might be in some smaller regions in Europe is more than offset by some other global success path around china, India and others.

Uche Orji - UBS

Thank you very much.

Operator

Our next question comes from Kevin Cassidy of Thomas Weisel Partners.

Kevin Cassidy - Thomas Weisel Partners

Thanks for taking my questions. Were there any changes in your gross margin rankings of your different product groups?

Mark Durcan

I will rank them if you like?

Kevin Cassidy - Thomas Weisel Partners

Sure.

Mark Durcan

Specialty DRAM continued to lead, number two was our trade NAND, number three was core DRAM, number four was the segment we now have as imaging and other, and then of course Numonyx was number five.

Kevin Cassidy - Thomas Weisel Partners

Okay, thanks for that, and for your internal DRAM conversion, is there any change to that schedule or could you remind us what the schedule is?

Mark Durcan

No, Kevin, I think over the long-haul we get through Q4 and we’re looking for a pretty big fiscal 2011. It’ll, you know, be in the mid teens and accelerate. In the short term we’re maybe lagging a couple of months at Inotera, but that will play through here relatively quickly.

Kevin Cassidy - Thomas Weisel Partners

Okay, and one last question on Numonyx. Of the $80 million that you sold to OEMs, what exposure was that split between handsets and embedded customers?

Mark Durcan

I think – correct me if I’m wrong here. The $80 million wasn’t maybe the actual revenue. It was the revenue we recognized by virtue of the accounting treatment of the quarter, and how did we close on the debt. So that notwithstanding, I think the answer you’re looking for is about 65% to 70% wireless and about 30 plus percent around the embedded market.

Kevin Cassidy - Thomas Weisel Partners

Okay, great. Thanks.

Operator

Our next question comes from Bob Gujavarty of Deutsche Bank.

Bob Gujavarty - Deutsche Bank

Great, thanks for taking my question. I thought you guys were a little bit constrained on your server shipments because of the Inotera transition. So I was a bit surprised how strong server was. Do you think server can be strong again in the coming quarter despite some slower bit growth than you'd hoped for perhaps from Inotera?

Mark Adams

Yes, this is Mark Adams again. Yes, absolutely and yes I think your comment is well founded. It’s coming out of last quarter and as I mentioned on this quarter’s call and a couple of other calls in the past, sometimes we make the choice to hold on to certain inventory products that can go into those markets, and if it happens to be over a quarter and we hold it for two weeks after the closing of the quarter, we do so for the profit and customer service rationale. So we’re in pretty good shape right now and we expect as we go through the conversions at Inotera to our stack technology that will again allow us to penetrate and grow our service here.

Bob Gujavarty - Deutsche Bank

Great, thanks and just a quick follow-up on NAND. You alluded to this a little bit, but can you kind of estimate what kind of price premium you're getting for your 34-nanometer NAND? It seems like it is and your 25-nanometer NAND, if you have seen any – were you able to maintain your price premium going to the new technology because of your performance advantage?

Mark Adams

I think that it’s a little bit early to tell, but we feel pretty confident on the 25-nanometer ASPs. We’re just getting that into some of the OEM design and qualification efforts. On the 34-nanometer what we really are seeing is kind of a bifurcation between higher performing, higher cycling products, 2-bit-per-cell MLC, and some of the low performing 3-bit-per-cell application for emerging markets consumer products that are acceptable for certain regions, and we’re seeing kind of two different price points. We have been able to hold pricing pretty favorably against that in our current contract OEM customers.

Bob Gujavarty - Deutsche Bank

All right. Thank you.

Operator

Our next question comes from Vipon Nyag [ph] of Macquarie Capital.

Vipon Nyag - Macquarie Capital

Hi guys. Thanks for taking my question. I just had a quick question about the DRAM and NAND production bits for the current quarter. Could you give us an idea what those were?

Ron Foster

They were up a couple of percent.

Vipon Nyag - Macquarie Capital

For both DRAM and NAND?

Ron Foster

Oh sorry. That was for NAND. I think excuse me that was DRAM, and for NAND it was actually up very nice little more than we even guided, which as you recall was high teens.

Vipon Nyag - Macquarie Capital

Okay, great, thanks, and also if pricing would have stayed flat at current levels, how do you see ASPs coming out at the end of the quarter, Q4?

Mark Adams

If pricing were to stay at the level we are in, how do we see them? DRAM relatively stable, relatively flat through the remainder of the quarter, and, you know, NAND is interesting because we’re going into a stronger period of NAND historically and so it’s coming out of the June, July seasonally slow period and heading into back-to-school, but if it stayed relatively flat, down slightly a point or two.

Vipon Nyag - Macquarie Capital

Okay, great. Thanks a lot guys.

Operator

Our next question comes from Bill Dezellem of Tieton Capital Management.

Bill Dezellem - Tieton Capital Management

Yes, thank you. A couple of questions for you, first of all relative to the termination of the JV with Hynix, does that imply that the $250 million or so you said was in escrow through what was it 2016 or so, that would then come out of that account and be back on your balance sheet or I guess either way, but available to you?

Ron Foster

Bill, this is Ron. The JV agreement and the call option would specify that we put $250 million essentially a pledge escrow account, if you will, and it would be paid down by the joint venture between now and 2016 as – over that time schedule. So the flow of the cash back to us would be over that period between now and 2016.

Bill Dezellem - Tieton Capital Management

Okay, thank you, and then the supply agreement that you're looking to renegotiate with Hynix or that Numonyx is looking to renegotiate with Hynix, would you please discuss the implications positive and negative that could develop around that negotiation?

Ron Foster

We’re in the midst of discussions Bill and it is not appropriate to talk at this time, but suffice to say that Micron is intent on continuing the supply to our customers and will certainly supply it, and we will be working with our JV partner to affect that transition and supporting our customers over time.

Bill Dezellem - Tieton Capital Management

Thank you, and then my final question is that during the course of this call there was a reference to Numonyx and growth opportunities that you're seeing within various Numonyx markets. And given that there's been a fair amount of discussion about Numonyx markets being mature or even declining, would you please discuss in more detail the growth opportunities that you are seeing and what those of us on the outside that have been thinking about declining or missing?

Mark Adams

Yes, I think you characterize the overall NOR growth fairly. I would suggest that maybe the industry structure and the dynamics that have played out over the last 12 to 18 months come into play when you think about other competitive issues around last year, and reliability of the Micron now enables Numonyx has a strong balance sheet well financed product diverse company, and if you look at the embedded market as an example, the forecast growth in that market alone allows us to go in and get more share and it is a place that Numonyx has historically been very strong in. So certainly in a macro level I get the understanding what you’re suggesting about NOR, from a work perspective that’s modest, but the competitive landscape as well as the embedded market by itself represents some tremendous growth opportunity and that historically has been a higher margin segment for Numonyx.

Bill Dezellem - Tieton Capital Management

So when you net those two together, how would you view the overall Numonyx market space?

Mark Adams

I view for Micron very positively.

Bill Dezellem - Tieton Capital Management

Thank you both.

Kipp Bedard

Thanks Bill, and I apologize for those who are left in the queue but we’ve run out of time today. So I’d like to thank everyone for participating on the call. If you will please bear with me, I need to repeat the safe harbor protection language. During the course of this call we may have made forward-looking statements regarding the company and the industry. These particular forward-looking statements and all other statements that may have been made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC, including the company’s most recent 10-Q and 10-K. So thank you for joining us today.

Operator

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

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Source: Micron Technology, Inc. F3Q10 (Qtr End 06/03/10) Earnings Call Transcript
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