Micron Technology's (MU) Management Presents at Credit Suisse 20th Annual Technology, Media & Telecom Conference (Transcript)

| About: Micron Technology (MU)

Micron Technology, Inc. (NASDAQ:MU)

Credit Suisse 20th Annual Technology, Media & Telecom Conference

November 29, 2016 11:00 AM ET

Executives

Ernie Maddock - CFO

Analysts

John Pitzer - Credit Suisse

John Pitzer

Good morning. Why don’t we go ahead and get started. My name is John Pitzer, I cover the semiconductor sector here at Credit Suisse. It’s my pleasure this morning to introduce Ernie Maddock, the Chief Financial Officer of Micron. Ernie is going to go through a short side presentation and then we’re going to move straight into Q&A. I’ll start off the fireside-chat, but there will be a microphone throughout the room. So if you have any burning questions, please raise your hand.

And with that, I will turn things to Ernie. Thank you for joining us this morning.

Ernie Maddock

Thanks John, appreciate it. Just thought we would provide a couple of slides here, so given how much has been going on in the industry, and particularly with Micron and Inotera, so hopefully this will be useful.

I’d call your attention to our Safe Harbor statement. Relative to the business environment, we have continued to see positive trends and as a result of that positive impact on our financial performance relative to the guidance that we’ve provided. You can see here that for the first fiscal quarter of ’17, we’re expecting to be at or above the high-end of our guided range, driven predominantly by DRAM ASC improvements, so it should be no surprise given everything that’s been written about it. So, we’re not expecting revenue somewhere in the range of $3.975 billion plus or minus $50 million, and you can see that the previously referenced guidance there; so some nice upside.

We expect gross margins to be $25.5 million plus or minus 0.5%, again at the high end or potentially above the high end of our guided range. And as we said on the call, when we get high end of revenue, high end of gross margin range that has a little bit effect on the EPS lines, so we’re now expecting EPS of $0.28 plus or minus a $0.02 significantly above the guided range of $0.13 to $0.21.

Relative to the market as we see it, the overall demand environment continues to be healthy. We do continue to see supply growth flowing with technology transition, and of course that’s predicated on no incremental wafers being added. There are some indications of allocation across multiple segments, so we are working with our customers there to figure out what makes sense for all of us. And we do see that positive momentum continuing presently into fiscal Q2 of '17, and we will be providing more information about that on our call, which is December 21, I believe, I have got my dates correctly.

Second thing just some quick updates on Inotera. We are still on track to close on December 6th. Based on the current market conditions, as we believe the transaction will be accretive to both gross margins, to EPS and then of course to free cash flow. In addition, as we’ve noted before, it will have a number of operational benefits in terms of the cadence and timing of the investment levels at that facility. And then as we align Inotera’s manufacturing precisely with the rest and the best of Micron’s, we do expect that there will be some opportunities there in terms of incremental efficiencies.

So, with that, we will start our fireside chat.

Question-and-Answer Session

Q - John Pitzer

So appreciate the update on the near term business trends. I guess and what sort a obligatory first question in a fireside chat in case there is some investors in the room that aren’t as familiar to the story, is maybe some general companies positioning story. So Micron has gone through a pretty broad transformation over the last year or so. Talk a little bit about the core IP, where the market share you want to address to those core IPs? And kind of how the model changed over the last three, four, five years?

Ernie Maddock

Yes, so I think you have to look at the businesses slightly differently, because there are different stages of maturity; DRAM, quite a mature business, three IP owners; Micron being a significant player there. I think we have a great market facing presence there in general if you look at what the DRAM market looks like in aggregate, how the Company sales profile looks. In general, we are well aligned with the market. We’ve had a couple of quarters here where we’ve had some puts and takes with the mobile inventory build that is behind us, that’s selling through nicely. And then obviously as you go through technology transitions, there is some disruption for a quarter or so as you move the newest output into the least demanding pieces of the segment.

But in general I think the Company's profile is very strong there. We have great customer relationships, which obviously become really important at in either really good times, or in really core times and we try to maintain a very balanced view with respect to our customers and distinguish ourselves in that way. NAND obviously much less mature, even though it's quite a big business. We think that’s going to grow much more rapidly, and so that has a lot of opportunity in terms of establishing a share position. I think the Company’s big opportunities, which we’re executing on, relates to the 3D transition. We have been an early leader there. We continue to believe we have a very strong technology position.

And as we hit that crossover, which we forecasted for the fall of this year and in fact has occurred that will enable the entry into the storage market and the mobile market, which provides more and better margin opportunities for the Company. So we foresee that that will continue to improve over the course of the year. We’ve announced an SSD release schedule clients and consumer TLC based 3D SSDs are in the market being very well received, data center drive release, here this quarter and then enterprise drive in the first quarter of 2017 calendar. And then in addition, we have the qualifications going on now with 3D for mobile. So we think we’re in a fairly good position there as well.

And then of course 3D Xpoint, the first new emerging -- first new memory technology in 20 or so years. I know that folks are very anxious to see that move into a level of maturity that the other two products are. I would stress DRAM has been around for what 30 years, and NAND has been around for at least 15, and this is two years old. So there is still some market development that’s left to go. And we’re excited to see how that market progresses.

John Pitzer

Ernie, you’ve been CFO now for almost a year and a half. I think it's been in June 1st of last year was your effective date. I am kind of curious coming in what was sort of your operational agenda, one; and two, what was your view on sort of communication to the street and what you might change or what you might see?

Ernie Maddock

I think any CFO’s first item on their operational agenda, and monthly the accounting and all that stuff aside is how do I support the business. And what do I need to do to get the business the capital it needs? How can we provide the analytical framework for the business to make the best possible decisions? And how do we make sure that we are operating and holding ourselves accountable to us fairly at high level of discipline and integrity? And I think the great news is Micron was already well down that path. I can’t think of a more ethical, honest, a company with the highest standards. I think as there is no surprise, the biggest focus that I’ve had over the last year or so has been making sure we have access to capital. And picking the time that you do that, the method that you do that, we would all like to think that that’s the science, but it really is as much an art as a science. And then really participating with the other leaders of the Company in determining what the priorities are and how we focus the resources that we have has been a big part of I’ve done .And I can’t think of a better team that works to do that.

John Pitzer

From an investor relations perspective, I think for people in this room, including myself, the biggest change is really communications around guidance where you actually started bringing out revenue and gross margin and an EPF model, which was very different than your predecessor. To what extent is that just a reflection of the structural changes in the industry that maybe giving traditional quarterly guidance easier? To what extent was that something that you instilled? And clearly if you go back and look at the quarters you’ve been here, the guidance tends to be conservative. Is that the way we should think about how you want to communicate of the investors?

Ernie Maddock

Well, I don’t know that I fully agree that the guidance has been conservative. We have a few quarters where we’re actually at a revenue and gross margin level. We were just across the low end of the range. We did better on EPS. And now you can see here that in very, very good times, we are a little above the high-end of the range. So, we do our best to provide a balanced set of guidance. And I think it's been my experience from the get-go anywhere, if you do well on every single element of your guidance range, you are going to blow out the EPS line. No one gives guidance that in EPS range that contemplates hitting the high end of revenue, high end of gross margin, low end of OpEx, et cetera, et cetera.

So we let the record speak for itself in terms of how we’ve performed. Relative to your first question, I think that the business has become more mature, but it's also become more complicated. So this idea of giving a cost per bid and a market price per bid that is indicative now of a business on the DRAM side the ranges from the spot market all the way through embedded is it's an interesting and very obituary thing to think about. Because whenever the Company performed outside of the ranges of the both two things, the answer was while we had a different mix. If you look at the NAND of the house now, particularly with the Company's ability for storage market, you have the same thing.

So I think in the whole, if I think about what you are looking for, what top line is going to look like and what does EPS going to look like. And that actually provides the Company, internally, more ability to manage mix and output in a way that I think best suits the Company and also best allows us to be competitive. So, I think it was just time to make the change. It wasn’t anything that folks opposed at all, it was I think somebody coming in who hadn’t done it for a long time and saying well wait a minute, you are giving these five data points really let's just invest and we can eliminate three of these, and its better off. So I don’t see it as a big change. I simply see it as sort of an evolution from what we were doing before.

John Pitzer

And I am sure everyone in the room and on the webcast appreciate the near term business update. You not only talked about the November quarter, you talked about momentum standing into the February quarter. I think that we can all look at the pricing trends. I think one of the concerns that I get asked often is how much of this is just kind of the year-end type sugar high against a seasonally strong demand curve. And how much of this is sustainable into the calendar first quarter. Now, your February catch of the couple of months of the calendar first quarter. But help me understand why your confidence level at the momentum persistent into what’s usually a seasonally slower period, especially within some of the consumer market that you’re leveraging?

Ernie Maddock

Yes, I think a lot of that confidence goes back to the fundamental view of this supply and this demand. With no way for additions, we are increasingly present that you are going to see this supply grow at something less than 20%, and even with some room for error on the DRAM with demand side, we still see a number there north of 20%. And so that should allow for a fairly healthy environment. Now, you are right. We might be in this period where there is a lot of volatility as folks are concerned about shortages, and trying to rebuild inventories et cetera, et cetera. But that’s one I think it's so important to stay focused on the longer term view. And so I think until we see announcements of additional wafers or additional capacity, which would cause us to moderate that view, the industry appears to be poised to do pretty well over the next few quarters.

John Pitzer

And on that the longer term view, I want to talk first about your DRAM business, which is about 60% of revenue, but clearly on the upswing cyclically. But if you look, it's still look there is still bit pretty significant technology and profitability gap between yourself and Samsung. How do you think about trying to close that gap structurally overtime, because quite frankly they are making up margins that are higher than their gross margin right now in the business, what can you do with kind of tip the scale into your favorite?

Ernie Maddock

Well, I think the first thing is to acknowledge that over the course of 2013-14, while others were aggressively moving forward with their 20 nanometer transitions, Micron was in the middle of that acquisition. And as a result of that, it deliberately and possibly delayed its transition to align on a singular roadmap. So that perspective is important, particularly if you haven’t followed the Company for a while. We’ve been aggressively moving forward on the 20 nanometer conversion. We’ve announced 1x those things will all be easier, now that we have an aligned roadmap.

So obviously we have some catch-up to do there. And I think that is -- we continually announced a CapEx number for 2017. It's actually pretty strong in DRAM. But if you look at the percentage of our CapEx that we’re allocating to DRAM it reinforces our commitment, so the fact that we need to continue to close that technology gap. And we’ve also talked about 20% to 25% cost reductions, which is not an inconsequential cost reduction. I think there is an element of scale that is not something that company can easily replicate. And then on the market facing front, I think the gross margin performance that you sided tend during the period of time when we weren’t as well representing the mobile business and other elements. So I think there is a few levers there, but the predominant one is continue to invest in the technology trends to at least get us on a level playing field that is close to a level playing field with our competitors as we can.

John Pitzer

And what are your expectations for industry big growth in calendar year ’17, and how do you think you’re got to match that? And I guess how do you address the concern that as you’re starting to reap the benefits of 20, Samsung has started moving to 1x and then all the sudden you’re going to leave that cost disadvantage then?

Ernie Maddock

Right, so our review of industry big supply growth is somewhere in the upper-teens percent range. And we will be higher than that. We were lower than industry last year. We’ve talked about it two year big growth number, and we continue to reinforce our performance against that two your big growth numbers. So, we’re confident of being able to achieve that. And I think you’re right. We’re in an never ending race. The good news is that the lead runners by definition are moving more slowly, and that doesn’t speak to their capability. It just speaks to the fact that the technology transitions are harder. They cost more. And as a result of that, you move through them in a more faster way than you perhaps moved through historical technology transition.

So we are at a bit of an advantage there and that we are running slightly faster on a relative basis. And therefore, the gap has an opportunity to narrow. But at some point in time if you believe the idea that there is an end game for DRAM, whenever that is, then obviously everyone will catch-up. But until that time, our objective is to close the gap and make it as narrow as reasonable without doing anything that would potentially be disruptive to our performance or the industry’s performance.

John Pitzer

When you think about either cost or potential for disruption, EUV comes to mind on the capital equipment side. And clearly for the 1x no one is thinking about EUV, but we’re starting to here more chatter so as consensus in Hynix and maybe 1Y 1Z might be the insertion that was within DRAM or EUV. How is Micron thinking about the transition to EUV?

Ernie Maddock

We’re thoughtfully analyzing it. At present, I wouldn’t say it has as much prominence in our thinking process might be the case for Samsung or Hynix. But we’re still not fully developed on those subsequent technology nodes. So we’ll have to see. But certainly I think it's reasonable to think that if it used, it's used in fairly case-specific requirement. So you’re not going to replace all the edge equipments or anything else you used to get the double patterning that supported you when you didn’t have it, you are not going to bundle that up and throw it out the door and move into UV tool as it becomes a much different discussion as you think greenfield capacity.

John Pitzer

And then a follow-up to my cadence between 20x and 1x, when you look at your 25 nanometer cost and compare to the same Samsungs 20. How does that gap going to work if you’re at 20 and they move 1x?

Ernie Maddock

So we will -- our 25 to 20 was a narrower benefit for us and it was for them. Subsequently, our 20 to 1x, we believe is a bigger benefit for us to them. So, depending on where we are in the migration, because no one is standing still, that actual cost delta is going to be something that, on a quarter-by-quarter basis, is going to change with respect to how quickly we implement and where they are.

John Pitzer

Going to Elpida, on the one hand, this is sort of a continuation of what Mike has been doing for a long time, which is consolidating DRAM capacity. On the other hand, it's also a slightly different acquisition because you’ve tended to consolidate and relieve depressed periods of time at really cheap valuation, neither is true or Elpida. And so I guess people that I talk to are wondering what's the real strategic rationale for doing Elpida now at this time?

Ernie Maddock

So, I think as you look at any series of transactions, there is a box in which all party’s needs can be match. And if you are outside of the box even if it makes perfect strategic sense and you can't get the interest aligned that transaction doesn’t happen. And if you are inside the box, and the box isn’t a small box it's actually a box with some size. So I know that Micron had been looking at acquiring Inotera or acquiring the full stake in Inotera for some time, and it's just -- this was the time when you could get all the interested parties having their objectives aligned in the box. And as a result of that, you move forward with the transaction.

We were comfortable doing it because of the financial benefits that it provided to Company. Inotera was likely not on the path to do what Elpida did, right. So the only way you acquire distressed assets is if they become distressed. That wasn’t likely going to happen with Inotera. So the transaction made sense last December, even in the darkest days of the summer, it made sense and it's making even more sense now.

John Pitzer

Switching gears to NAND. At the point on node you guys were probably one of the higher cost NAND producers on the planet. As you move to 3D, it looks like your cost structure, both absolutely and relatively, is improving dramatically. Can you help us understand where you think you are going to fall on that relative and absolute cost curve at 3D ramps and the maturity?

Ernie Maddock

Certainly, absolutely -- we’ve got about 30% benefits as we make the transition to the first generation of 3D. We’ve talked about the fact that because of the Company's architecture at 64 layers, which is another road-map is a 2017 event, we believe that we will be at or near an industry leading cost per bid. And that’s an important part of the story. The other important part of the story is what that industry leading cost enables us to do in terms of participating in the storage market and the mobile market. Because you’re right, the Company’s cost basis was not extremely competitive and as a result of that, we were pretty thoughtful about we’ll replace the bids to maximize profitability, which in that case was not necessarily in some of those very fast growing markets.

John Pitzer

Well, as you think about placing bids in 3D, how do we think about embedded versus storage? And specifically on the storage, as you know, the raw NAND meeting is only about half the battle, it's the controller technology well. And so maybe an update on how you think your controller technology development is going internally would be helpful?

Ernie Maddock

Yes, so the Company has invested pretty heavily in controller technology. We acquired title systems a little over a year ago, and we’re very happy with the progress there. And in fact our clients and consumer base SSDs are generally now based on that title platform. And then we expect that that will continue to serve us and hopefully allow us to sort of move up the SSD continuum with that platform. For enterprise, we’re still going outside and partnering with others for that controller technology.

So we feel relatively good about that, certainly much better than, for example, we felt a year or so ago. The Company demonstrated a commitment to that business by making those investments. So, we continue to believe that the storage business, particularly the data center and enterprise pieces, represent a very meaningful opportunity for gross margin enhancements.

John Pitzer

And on the embedded side, qualification on 3D are progressing well?

Ernie Maddock

They are progressing well, that market moves a little more slowly than the storage market as you’re aware. So, you don’t see the immediate opportunity there. But certainly we think over the course of the 2017, we are not going to be qualification limited with our output.

John Pitzer

And then on Inotera, as you mentioned in the update, it is going to be immediately accretive. But you are adding depth to the balance sheet to get the deal done. And you’re not going to have the gross debt of $10 billion plus once the deal closes. I am just kind of curious because a lot of speculation about potential partnerships with Micron and perhaps someone in China Inc. How do you think about those partnerships? And I guess given the balance sheet, wouldn’t it be beneficial for you to actually get an in plus of money at these levels and kind of de-lever a little bit?

Ernie Maddock

Yes, I don’t know that there’d be any CFO who would not want an influx of money. So, I mean, yes, absolutely. And if you have checks, please drop them at the back then we’ll collect them and put them to good use. But I think you have to think about those things separately. I do not believe Micron is in any state of distress that would force us down a path of action with any particular partner. That being said, we have always exhibited as a Company a willingness to partner with folks where the economic interest of all the parties could be aligned and could meet. And I think there is circumstances with respect to China, or Canada, or India whoever it might be, are no different than that.

So certainly China poses some unique challenges, from a regulatory point of view, particularly and what not. But I don’t necessarily -- I am mindful of the Company’s balance sheet. So part of my job is to never let that force the limitation of strategic choices relative to doing something that the Company otherwise wouldn’t want to do because it made your businesses sense.

John Pitzer

We probably have time for one or two quick questions in the room if there are any, just please raise your hand. We could repeat, please just speak up.

Unidentified Analyst

[Technical difficulty] DRAM, and maybe how your revenues looks, what obviously NAND and DRAM? Thanks.

Ernie Maddock

Sure. So the question was relative margin and revenue contribution of the improved quarterly performance from NAND and DRAM. As we noted most of the improvement has been in DRAM pricing. As a result of that, I think you’d expect to see, on a relative basis, a slightly bigger than normal contribution from DRAM and a slightly bigger contribution to margins. Recognizing that in fact the guidance had embedded in and this growth and improvements in NAND as well, but a lot of the upside as you see is very, very highly focused around DRAM.

John Pitzer

Ernie on that front, and maybe the last question. Relative to our model, on a quarterly basis, what's been surprising to us is that the growth in OpEx, which is probably reflection of you structurally trying to close that gap. Where are we on OpEx leverage in the model? Will you continue to take extra revenue and spend on R&D? Or at some point, are we going to start to see some leverage in that part of the business model?

Ernie Maddock

The Company doesn’t have a formula that says take this amount of revenue and apply it to OpEx. The reality is we have pre-call expenses across multiple technologies, those are happening in the first and second quarters of the year. We’ve talked about the fact that as we exit the year, we actually expect OpEx on an absolute basis to decline. And if you had access to the internal plans of the Company, you would see that there is a very meaningful reduction in OpEx as these pre-call expenses drop-off. And then of course we’ve talked little bit about variable comp, but hopefully folks would be comfortable that we’re earning the profit and variable compensation is appropriate.

John Pitzer

With that, we’ve ended our time here. But I really want to thank Ernie for joining us here. Thank you.

Ernie Maddock

Thanks.

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