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Micron Technology, Inc. (NASDAQ:MU)

F1Q08 Earnings Call

December 20, 2007 4:30 pm ET

Executives

Kipp A. Bedard - Investor Relations

Steven R. Appleton - Chairman of the Board, Chief Executive Officer

Michael W. Sadler - Vice President, Worldwide Sales

Analysts

Jim Covello - Goldman Sachs

Amit Saraf - Credit Suisse

David Wong - Wachovia Capital Markets

Kevin Vassily - Pacific Crest Securities

Bob Cohaverti

Krishna Shankar - JMP Securities

Atiq Malik

Hans Mosesmann - Nollenberger Capital Partners

John Lau - Jefferies & Company

Bill Naserlind

Glen Yeung - Citigroup

Doug Freedman - American Technology Research

Betsy Van Hees - Cowen & Company

Daniel Berenbaum - Caris & Company

Tristan Gerra - Robert W. Baird & Company

Operator

Good afternoon. My name is Jason and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Micron Technology first quarter 2008 financial release conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Kipp Bedard. Sir, you may begin your conference.

Kipp A. Bedard

Thank you very much. I would like to also add my welcome to everyone joining Micron Technology’s first quarter 2008 financial release conference call. On the call with me today is Mr. Steve Appleton, Chairman and CEO; and of course, Mike Sadler, 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 first quarter 2008 financial press release, it is also available on our website at micron.com. Our call will be approximately 60 minutes in length. There will be a taped audio replay of this call available later this evening at 5:30 p.m. Mountain Time. You can reach that by dialing 706-645-9291, with a confirmation code of 27073959. This replay will run through Thursday, December 27, 2007 at 5:30 p.m. Mountain Time. A webcast replay will be available on the company’s website until December 20, 2008.

We encourage you to monitor our website 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.

And with that, we’d please like you to 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 achievement. 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.

I’d like to now turn the call over to Mr. Steve Appleton. Steve.

Steven R. Appleton

Thanks, Kipp. Let me just give a quick update on the CFO scenario. I think most people know that months ago, we announced that Bill Stover would be leaving the company and in fact, he did leave at the end of last month, which coincided with the end of our quarter and I am interim CFO at this time.

However, I fully expect that this will be the only conference call that I am the interim CFO and that we have been in the process of reviewing both internal and external candidates and believe that we’ll get that wrapped up this quarter.

So in the interim, I’ll cover some of the financial material. For those that did not see the release, we ended up with revenues of about $1.53 billion and I’ll note that that was about 7% growth over last quarter. Mike will cover it later but of course both DRAM and NAND were under significant price pressure for the quarter and we did report a loss of $262 million. I’ll also note that there was a $62 million in our re-charge to COGS for finished goods that was in that number.

On the manufacturing cost side, we did have good news. The 300-millimeter ramps at Lehigh and Singapore continued to make really strong progress --

Unidentified Speaker

Sir, are you still looking for Lithium Motors, correct?

Steven R. Appleton

I think we have somebody on the call that’s talking on some other lines. Not hear with us in the room but on a different line, so let me just continue. So on the manufacturing cost side, as I said, the 300-millimeter ramps at Lehigh and Singapore made pretty good progress and just to note that the DRAM costs were down about 10% and the NAND costs were down really kind of mid-double-digits quarter over quarter and we think that we’ll be able to continue that trend as we’ve stated before.

Also good news, on the operating expense side, we have noted that we’ve been working on that pretty diligently and in fact, if you look at the data, in 2007 we averaged about 25% for operating expenses as a percent of revenue. In fact, in Q1, we got that down just below 18%, 17.9%. And if you break that out between SG&A and R&D, our Q1 dropped to $120 million from $143 million and our R&D dropped in Q1 to $163 million from $184 million.

Now, a couple of notes on this; the SG&A, just because of some litigation costs and so forth we think will probably be in the mid-120s for this quarter coming up and on the R&D, you should expect for it to be about the same as it was this quarter, as we move through the holidays and obviously we’ve got a few other activities that are going on in the quarter.

So we think net net, pretty good. Obviously the market has been under a lot of pressure from pricing but in terms of the objectives that we set out to accomplish on the operating expense line and the cost line, we feel pretty good about it.

Switching over to really the CapEx and the balance sheet, our capital expenditures are still consistent with what we have said before. We expect it to be about $2.5 billion for fiscal ’08. It’s also probably worth noting that that capital is pretty front-end loaded. We had about $900 million that we spent in this first quarter. Obviously the vast majority of our CapEx continues to go to 300-millimeter. I’ll also note that we have, we still have over $2 billion in cash and just to help people understand the cash position of the company, as I said we have over $2 billion in cash. We’ve spent about $900 million of the $2.5 billion that we expect to spend already in this quarter, and it looks like cash flow from operations for fiscal ’08 will be between $1.5 billion and $2 billion as well, so I think that can give you a pretty good idea of where we sit on cash and we think we’re in good shape.

So with that, I am going to turn it over to Mike Sadler to make some commentary on sales and the market.

Michael W. Sadler

Thanks, Steve. We had another solid sequential growth quarter with megabit shipments of DRAM and NAND up approximately 25% and 60% respectively and imaging units up about 15% quarter over quarter. In fact, despite the unprecedented market price pressure, we managed to achieve fiscal Q1 revenue growth of about 7% on a sequential basis.

We can look primarily to the diversified DRAM product portfolio for insulating us somewhat from the ASP declines observed in the pure commodity market. As an illustration, the DDR2 spot market price declined 45% from the midpoint of our fiscal Q4 to the midpoint of fiscal Q1, while the aggregate average selling price per megabit for our basket of DRAM products declined by only 20% in that same period.

This tough market environment is supply driven and primarily a result of capacity expansions occurring industry wide from 2005 through 2007. Demand for our products continues to be quite strong. In fact, the primary markets driving demand for our memory and imaging devices, the PC and mobile phone markets, are experiencing extraordinary growth.

Each of these markets will grow units between 12% to 15% in 2007 and most market researchers are pegging the compound annual growth rates in the range of 12% to 15% for each of these markets over the next five years.

Independent of the market environment, our technology development and deployment moves ahead and we recently rolled out some exciting new technologies and products. We showed initial silicon of the one-gigabit DDR2 DRAM device on our advanced 68-nanometer process. This is an approximately 25% die size reduction from our already industry-leading one-gigabit chip on the 78-nanometer process. We anticipate this process moving to volume production at our Singapore fabrication facility some time in mid-2008 and it will serve as a platform for continued aggressive cost reduction on a variety of other DRAM products.

In the NAND space, rollout of our 50-nanometer process in the Virginia and Utah fabs is tracking ahead of schedule. The vast majority of our NAND shipments in the current quarter are MLC chips on this 50-nanometer node.

On the product front, we are now in volume production of DDR3 devices for next generation computing applications and recently announced our entry into the solid state drive market with a variety of SLC and MLC based serial interface drives.

Neither are big demand drivers today, although we believe that these memory product families will help ensure our themes of growth and product differentiation heading into 2009 and beyond.

In fiscal Q1, our imaging business experienced healthy unit and revenue growth. We are certainly getting a boost from a seasonal mobile phone and PC demand and realizing the benefits of a broadened and more balanced customer base. By no means is the image sensor business immune from market price pressures, particularly at one megapixel density and below.

We’ve managed, however, to keep our own average selling prices relatively flat as we migrate the business towards higher pixel densities. Our plan is to continue leveraging technological advantages to deliver superior image quality and better cost performance to our customers in the mobile phone, PC, automotive, and security spaces.

The combination of image sensors and more specialized memory products, such as SLC NAND, low power, and legacy DRAM are making good use of our 200-millimeter capacity. We believe the economic viability of this model for somewhat specialized products should continue in the foreseeable future.

No question that the market environment is challenging, to say the least. The market challenges, however, present various opportunities for advancement and intermediate to long-term value creation. Micron is not fully insulated from market price pressures, although we believe that on a relative basis, our strong balance sheet, as Steve referenced, our diversified product portfolio, advanced technology platform and growing economies of scale have us in position to come out of this cycle a much stronger company.

I’ll turn it back to Kipp and we’ll take some questions.

Kipp A. Bedard

Thanks, Mike and as Mike alluded to, we’d like to now take questions from callers. And just a reminder, if you are using a speaker phone, please pick up the handset when asking a question so we can hear you clearly. With that, we’d like to open up the line.

Question-and-Answer Session

Operator

Our first question comes from the line of Jim Covello.

Jim Covello - Goldman Sachs

Good afternoon. Appreciate you taking the time today. The question is really on the supply side -- how concerned are you that Samsung just seems so intent on keeping this market in excess supply to try and hurt some of the marginal players in Taiwan, let’s say, that it could be a long time before this thing gets a lot better when you have maybe somebody acting a little irrationally like that?

Steven R. Appleton

It’s probably hard for us to comment on Samsung’s motivations and what they are trying to do, but if you look at the data in aggregate in terms of the investment going into the sector, in particularly in DRAM, I think you’d look at it as -- and we think that the output as well, it’s probably peaking in this timeframe. And whether it’s plus or minus a quarter is always hard for us to know, but the equipment guys will tell you the same thing, that the CapEx is coming down in aggregate for the industry. And then in fact, we’re feeling the effects of I think what everybody would acknowledge was a pretty big expansion year in capacity in ’07.

I think there will be weaker players that are probably vulnerable to something happening in the industry but we’ll just have to see how that plays out as we move through ’08.

Jim Covello - Goldman Sachs

Okay, and then in terms of what you guys could do, there’s things you can control and things you can’t and some of the things that you had roughly alluded to maybe a couple of calls ago was -- and again, you didn’t say this so I don’t want to put words in your mouth, but partnerships or joint venture kind of arrangements that might help to combine some people’s best designs with some other people’s capacities. Any update on thoughts around that? Any luck making progress on that with your discussions with others in the industry?

Steven R. Appleton

First of all, we did that in the NAND business, so I assume you are talking about the DRAM business?

Jim Covello - Goldman Sachs

Correct.

Steven R. Appleton

And the DRAM front, clearly Micron has been a company that has taken advantage of opportunities when the market has been extremely weak and this is really the first collapse that you’ve seen in the industry really probably since we took Toshiba out of the mainstream DRAM business.

So we are continuing to look at what opportunities might be out there and if they surface, then of course we are interested. In addition to that, I think you made reference to it, we are trying to look at our model. If you back up five years ago, only one of the five primary developers of the technology actually partnered with anybody to have their product produced and now there are really three out of the five doing it, primarily Samsung and Micron not doing it. So we’ve got to look at that model and see if there is some benefit for us to extract out of that, but really we don’t have anything to announce today. We’re just continuing to look at it and see if it makes sense for us.

Jim Covello - Goldman Sachs

Great. Thank you and good luck.

Operator

Our next question comes from the line of John Pitzer.

Amit Saraf - Credit Suisse

Thanks. This is Amit Saraf calling in for John. First, I was just wondering if you could clarify our CapEx. I think I read in the press release, it said $2.5 billion to $3 billion, and I recall earlier you talking more about just $2.5 billion. Has there been any change to your CapEx guidance for the next fiscal year and how would it break down between NAND and DRAM?

Steven R. Appleton

Well, we haven’t really changed any guidance. If you remember, if you go back up a quarter or two ago, I really said we thought it would be between $2 billion and $3 billion. I think in the press release, we’re just trying to narrow the range for you, if you will.

But let me just say a caveat, that we look at this market as we go throughout the year and our best guess right now is in this $2.5 billion range and realistically, it could move around a few hundred million on either side, depending on what we decided to do as we moved towards the end of ’08.

Amit Saraf - Credit Suisse

And can you just break that down between NAND and DRAM? How do you see that split and how does that compare to fiscal year ’08?

Steven R. Appleton

Well, fiscal year --

Amit Saraf - Credit Suisse

Or fiscal year ’07, sorry.

Steven R. Appleton

Yeah, fiscal year ’07 I think you will -- I don’t have the numbers right in front of me and maybe Kipp can get them -- clearly ’07 was dominated by NAND because we had the 300-millimeter equipment install in Utah. I think you will see that mitigated somewhat in ’08, although just keep in mind we are finishing out the ramp, if you will, of Utah, and so there is some carryover from there. And then the new fab is IMFS, which is really under construction for shell now, so as we -- and we have been optimizing the output at a couple of the facilities, particularly look at Virginia and I think we’ve been looking at CapEx there for additional DRAM to come out of that facility.

So you might see a trend back a little bit towards DRAM but frankly, I think still the most of it that is showing up right now will be the finish out of Utah and some of the shell construction in Singapore.

Amit Saraf - Credit Suisse

Okay, and then just on the demand side for DRAM, you mentioned strength in the PC and mobile market. Can you talk about the PC market specifically going in 1Q and then also comment a little on the Vista uptake -- where are we in that cycle and do you see that accelerating in the near-term?

Steven R. Appleton

Before Mike answers that, I did want to make one other note here -- our tech facility, Tech Semi in Singapore is in the middle of a 300-millimeter conversion, so that’s one of the reasons that you’ll see it shift back, is because they are in their 300-millimeter ramp as we speak right now and obviously installing CapEx and ramping. Go ahead, Mike.

Michael W. Sadler

Sure. On our views on the PC market through dialoging with our customers are, as you are fully aware, notebook market continues to be on fire in terms of growth and our customers are projecting a similar type of scenario unfolding as we roll through the holiday period and into the new year. And that’s going to be the primary growth driver from a unit standpoint.

In terms of the down stream demand that’s creating for DRAM, a sampling of some of our larger customers, which are representative of the largest DRAM consumers in the world, indicating calendar Q1 DRAM demand up about 4% relative to calendar Q4 and that would be a range from 0% to about 8% or 9%, depending on the particular customer. So a pretty healthy calendar Q1 is what is being projected from a DRAM consumption standpoint.

You asked a question about Vista. To date, our view of Vista and again, getting this from our customers, is that it’s primarily been a consumer product. There is going to be a rollout of a service pack for Vista in the first quarter, which should make the product more attractive to corporations. And this is really beyond our area of expertise, so I’d be hesitant to comment, to editorialize too much on it but we should expect to see some kind of demand kicker in the corporate area for Vista as we roll through calendar Q1.

Generally speaking on the content side, somewhat surprisingly, if you just follow the statistics, the memory content per box on the PC side has expanded but not extraordinarily and there has been not a tremendous amount of demand elasticity based on the pricing environment.

Some of our customers have experienced some concern about the direction of DRAM pricing going forward and the predictability of it and I would share those same kinds of concerns, concerns and questions. And that’s why I think they’ve been a little bit gun-shy in terms of cranking up DRAM content significantly.

So I think as soon as they get a feeling that pricing is going to be relatively predictable, if they get that feeling, I think they’ll feel a little bit more bullish about cranking up the content. But as it is today, we are hanging around 1.5 gigabytes per system and haven’t seen anything extraordinary in terms of big content moves up that you would naturally expect, given the price degradation that we’ve seen.

Amit Saraf - Credit Suisse

Sounds good. Thank you.

Operator

Our next question comes from the line of David Wong.

David Wong - Wachovia Capital Markets

Thank you very much. Can you give us some idea with your current CapEx plans what sort of bit production growth you expect fiscal ’08 over fiscal ’07 for NAND and for DRAM?

Steven R. Appleton

Well, first of all, our bit production growth, we have been essentially on the DRAM side, I think we’ve been saying that it’s going to be in the mid/low double-digits, somewhere in that neighborhood. And then on the NAND side, we think it’s kind of quarter over quarter running in this 40% range.

But I need to make the caveat that both tech and the 300-millimeter conversion and Utah and their ramp, they are always slightly unpredictable in the exact timing. So sometimes they move higher through the yields in the ramps than others. But in general, I think you could expect that quarter over quarter through fiscal ’08.

David Wong - Wachovia Capital Markets

Thank you.

Operator

Our next question comes from the line of Kevin Vassily.

Kevin Vassily - Pacific Crest Securities

Thanks for taking my call. Two quick questions; one, did you have to write down any of your NAND inventory? And then a second question on NAND; you grew bits about 60% in the quarter and I think that was about 20 percentage points higher than what you alluded to on your last call. Can you comment on what drove that delta?

Steven R. Appleton

On the first question about the NRV, we had NRV on both NAND and DRAM. We did not have one on imaging.

And in terms of the bit growth, it’s just gone -- I think in general, we’ve been pleasantly surprised and we’ve said that for several quarters now that both the ramp schedule on the 300-millimeter and the yield improvements have been ahead of plan, and that’s primarily driving the greater bit growth.

Kevin Vassily - Pacific Crest Securities

Did yield or the ramp drive the greater proportion of the bit growth?

Steven R. Appleton

I would say it’s been the yield that’s driven the greater proportion to this point.

Kevin Vassily - Pacific Crest Securities

Great. Thank you.

Operator

Our next question comes from the line of Bob [Cohaverti].

Bob Cohaverti

Just a question -- your Lexar business, I know you don’t give specific guidance, but I know you can take advantage of non-captive capacity. Did it grow more than 60% or less than 60% of the overall NAND business?

Steven R. Appleton

I’m not sure I understand the question, Bob, but let me say that -- let me just first give a response and then you can tell me if we didn’t get to it or not. The percentage of supply that is coming internally as opposed to externally into Lexar, first of all, has been growing pretty steadily. So I think that first of all, ask it in that context, we’ve been supply more and more internally than we have externally into that business for obvious reasons. I mean, we’re a bigger producer of it today and their business is actually, from our perspective, doing pretty well. You know, it’s probably worth saying that again, as I said on the last call, we’ve been pretty pleased with Lexar and it’s meeting the objectives that we had.

Go ahead, to break down your question if there’s something further.

Bob Cohaverti

No, just curious. You are obviously supplying more and more internally, you get internal production, but I am pretty sure you have some supply arrangement for Lexar as well, so you can --

Steven R. Appleton

Oh, yeah, absolutely.

Bob Cohaverti

You can [inaudible] a little bit by taking some non-captive supply into Lexar as well, so I was just kind of curious if Lexar is taking advantage of both your internal organic bit growth plus some non-captive contracts as well.

Steven R. Appleton

Well, in terms of -- yeah, I think the answer is yes, they are. I don’t know the breakout between which one was greater they are trying to take advantage of. They clearly still have supply from the outside, which is substantial. And I think they’ll continue to do that. I mean, that’s the model that we want to run with them, is that they have dual supply sources because obviously we have a customer base outside of Lexar as well that we have to service and we don’t want that being too high a percentage of what we do.

Bob Cohaverti

Fair enough. I look at your DRAM ASP, pretty good job in terms of avoiding some of the declines in the commodity space. Do you think there is an opportunity to do that in NAND as well? I mean, if you look at SLC, spot pricing might not be 100% accurate but it’s held up reasonably well compared to MLC. Is there an opportunity to mix more specialized NAND in there to keep your ASPs a little bit more stable?

Steven R. Appleton

Well, Mike can jump in here too. I think you have to look at our NAND business in two different ways. One is the component supply business, which I don’t think NAND today has differentiated enough to allow us to get a premium over the other producers. Remember, when you think about the NAND producers and their capabilities and their product portfolio, we’re pretty similar. I mean, these are the big guys as we think of in the memory business like us. They are not smaller companies that maybe don’t have the resources to do the portfolio that we have, and I think that’s in general pretty tough for us to differentiate today.

Now having said that, by the way, the product mix itself, SLC versus MLC and there are differences in price and premiums along those lines, the fact that we’re able to benefit from some of that I don’t think is substantially different from the other players that we’re competing against being able to benefit from that as well, because they both have those portfolios.

The other part of our business though where I think we are seeing a benefit today and maybe over a couple of the others is, as you already noted, Lexar for us. We’re in the retail channel. If you look at the reset pricing in the retail channel, it doesn’t really coincide with what happens in the component business, and for a variety of reasons.

The fact that we are able to move a lot of product through that channel I think has actually been a positive for us as opposed to maybe others that didn’t have that channel directly.

In fact, I think it’s -- we said this last quarter and we’ll say it again -- that the margin for Lexar has been positive for us and we like the story that it’s playing for us right now.

Bob Cohaverti

Okay. Thanks, guys. Appreciate it.

Operator

Our next question comes from the line of Krishna Shankar.

Krishna Shankar - JMP Securities

What is your outlook for NAND demand going into the first quarter of 2008? Can you talk about NAND bit demand trends going into Q1?

Michael W. Sadler

I don’t have nearly as good a read on the NAND demand, primarily because it’s just not nearly as mature a market, as I do on the DRAM demand. But my expectations are that NAND demand in aggregate in calendar Q1 will be down from calendar Q4 because of the strong consumer tie to the MP3 market and the flash card market and the digital still camera market and so forth. So I would expect that on an absolute basis, demand is going to be down in calendar Q1 relative to calendar Q4.

Krishna Shankar - JMP Securities

Okay, and the number that Steve referred to, low to mid single digit DRAM, that’s bit production on a quarterly basis for DRAM and 40% or so for NAND. Is that right?

Steven R. Appleton

Very similar to what we’ve been posting, around 10% ongoing in quarterly formats for DRAM and yes, we are going to average around 40% over the next several quarters in NAND.

Krishna Shankar - JMP Securities

And finally, can you give us an update on your restructuring and strategic efforts? You had mentioned that in previous conference calls in terms of looking at options for the CMOS imaging business.

Steven R. Appleton

Yeah, we -- I’m sorry, I’ve already commented on the operating expense line and some of the restructuring there. With respect to imaging, as I said the last time, we don’t have any plans to change manufacturing the product. We’ve been looking at ways -- really, is there some other partnership that’s a better way to take that product to market after it’s been produced, so to speak, and we’re just still in the middle of trying to work through that and figure out what the best path is.

Krishna Shankar - JMP Securities

Thank you.

Operator

Our next question comes from the line of Atiq Malik.

Atiq Malik

Thanks for taking my question and nice job on the operating expense side. You comments on CapEx, you mentioned that your CapEx is going to be front end loaded. If I hear the Korean guys, I think they are also postulating that their CapEx is going to be front end loaded and so it seems like all guys are behaving the same way. They are trying to add capacity in the first half for a better second half. Wouldn’t that imply that the supply will get worse from here?

Steven R. Appleton

Well, it’s hard for us to know the supply number. And by the way, when I say front-end loaded, that means it’s a quarter that we already ended, so the $900 million that I referenced was in our Q1. The others, as they move throughout ’08, I don’t know for sure although I’ve also heard a lot of commentary about push-outs and cut-backs, but -- so it’s hard for us to know what they are doing.

For us, our front-end loaded has already happened or happening as we speak.

Atiq Malik

I understand. And then a question on your -- at your shareholder meeting, you mentioned that you are getting close to announcing the location of a 300-millimeter DRAM fab. And going back to Jim Covello’s question on partnerships and consolidation, wouldn’t that imply that you are not looking at partnerships too seriously if you are thinking about your next DRAM fab?

Steven R. Appleton

No, not at all. In fact, if you think about the dynamics that we have before, I think that we could take advantage of both, actually, and have it work just fine for us. The internal decision is of course we have infrastructure in various places and we can look at greenfields and so forth but in addition to that, you know, if we do it in partnership, that partnership will obviously have some capacity associated with it but it’s also driven around trying to see if there is a better cost model in the development side, which obviously is a direct benefit back to us if we are able to distribute those costs over not only more capacity but among a couple of us in terms of the true development of it.

So they are both -- both of those are still in play and we are still looking at them pretty hard.

Atiq Malik

And one last one on the specialized memory pricing environment; most memory makers are planning to use their obsolete 200-millimeter fabs for specialized memory products. How would that impact the pricing environment in this market going forward?

Michael W. Sadler

An unnatural growth of supply would likely have the effect of putting some supply pressure in place in the marketplace, although frankly we’ve been hearing a lot of this rhetoric over the last couple of years about other DRAM suppliers trying to follow our model of having a more diversified product portfolio and pricing has been relatively stable in the low power DRAM area and the legacy DRAM area.

I think that’s primarily because the end products that these DRAMs are going into are -- the DRAM bill of material cost is not tremendously significant in terms of an overall cost driver and as a result, there is not nearly as much price pressure and there is quite a bit more sensitivity towards reliability and quality of the devices as opposed to trying to save a nickel here and there. And as a result, I feel like we are in a pretty secure position there.

Atiq Malik

Thank you.

Operator

Our next question comes from the line of Hans Mosesmann.

Hans Mosesmann - Nollenberger Capital Partners

Thanks. A clarification on the growth for -- on the DRAM front of 0% to 8%, is that for the overall PC DRAM market? And how does that relate for seasonality? Thanks.

Michael W. Sadler

That takes into account the seasonality and that is for the -- basically a sampling of our computing customers, so that would encompass notebooks, desktops, workstations, and servers. And it does take into account the seasonality, so that’s calendar Q1 over calendar Q4.

Hans Mosesmann - Nollenberger Capital Partners

So you’re saying it’s seasonal? That that is normal seasonality, more or less?

Michael W. Sadler

Normal seasonality in terms of demand, DRAM demand in the PC environment I believe would be flat to down about 5% and what I’m telling you is it’s slightly better than that, flat to up about 8%.

Hans Mosesmann - Nollenberger Capital Partners

Okay, and a follow-up; if ASPs hold at current levels, whatever they may be today here on the 20th of December, what would they do quarter over quarter on the DRAM front?

Michael W. Sadler

If DRAM ASPs -- keep in mind we are three weeks into our fiscal Q2 and if our average selling price for the balance of the quarter remains flat, our DRAM ASP quarter over quarter would be down about 10% to 15%. NAND, by the way -- you didn’t ask, but I’ll throw it out there anyway -- the NAND flash prices would be down -- this would be NAND on trade sales basis only, so our sales directly to customers, they would be down about 40% quarter over quarter if they stayed flat from here.

Hans Mosesmann - Nollenberger Capital Partners

Thank you.

Operator

Our next question comes from the line of John Lau.

John Lau - Jefferies & Company

Thanks. I know -- I may have missed it but I was wondering if you can give a quick breakdown on the revenues in the different product lines, and Steve, what do you think your long-term goal is for DRAM as a percentage of total sales? Thank you.

Kipp A. Bedard

I can do a little bit of that for you, John, up front; core DRAM ran in the 30 -- mid to high 30 range for part of revenues. Specialty DRAM was up into -- let’s see, 20s. Imaging was around 11% and NAND for the first time cracked over 40%.

John Lau - Jefferies & Company

And when you said 35% of revenues for the core DRAM, what did you -- what was the commentary that you made for the 28%, I’m sorry?

Kipp A. Bedard

Mid-20s was specialty DRAM.

John Lau - Jefferies & Company

Mid-20s was specialty -- and a long-term goal for DRAM?

Kipp A. Bedard

Well, that’s going to be more dependent on market considerations. I think Steve and the team has done a pretty good job of getting us in a situation where we can move capacity around to take advantage of certain market opportunities. Like for example, right now we are putting more wafers back into imaging and specialty DRAM so specifically in Q2, you might see more of a flattish production bit number even though we are going to average more like 10.

So we are going to give you some general ranges here and just expect us to move capacity to where it’s most advantageous for us.

Steven R. Appleton

Let me just add some commentary to what Kipp said. I think the reason we don’t have a specific number is because we are going to move it around dependent upon what the market is doing, but in general by the time we get into probably late ’08, we’ll have the ability to dial back and forth. But I think the way to think about it is we could probably go 60-40 either way.

John Lau - Jefferies & Company

That’s a very interesting comment, Steve. I was wondering just as a follow-up to try to put a finer point on it, when you talk about your flexibility and your swing capacity, how long would it take for you to make those adjustments? Is that something that can occur within six months or would it take a year or short than that to kind of react to those market conditions?

Steven R. Appleton

At least our historical experience has been around four months. Now, let me just add that on the flash side, of course, we have a partner and typically we are motivated in the same direction because one will be stronger versus the other and when that happens, then we both tend to want to move in the same direction. But you’ve got to go through that process because they are our partners and we have to work through it. It could maybe take slightly longer but in general, I think you’d see it all happen within probably that four month timeframe.

John Lau - Jefferies & Company

Great. Thank you very much.

Operator

Our next question comes from the line of Bill [Naserlind]. Please go ahead, sir. Your line is open.

Bill Naserlind

My apologies. That was a mute faux pas. Relative to the solid state drive business that you announced here recently, would you please discuss what you view to be your opportunities in that market and the hurdles that are specific to Micron being successful in that market?

Steven R. Appleton

Sure. I’m going to generalize here, Bill, but we see two primary opportunities for us. One would be in the server space and the key parameters there for our success are going to be performance and frankly just time. It’s going to take some time for our end customers in that space to -- servers and storage, basically, but it’s going to take time for our customers to understand the technology and ultimately integrate it into their systems to supplement the hard disk drives and in some cases, even replace hard disk drives. So it’s primarily time.

And the big motivator there for solid state drive penetration is primarily performance advantages relative to the current solution.

The other end of the spectrum is going to be in the notebook computer area and of course, the primary advantage there, there are a variety of advantages there but it’s performance, power consumption, weight, reliability and durability. And the primary inhibitor there, if you will, is going to be cost per gigabyte of storage. And as we move through 50-nanometer and 35-nanometer, we are addressing that challenge as well.

Either of those markets realistically, we’re looking at the end of next year or 2009 before either of them become real significant in terms of revenue drivers for us.

Bill Naserlind

With the decline in NAND pricing that we’ve experienced, what is the premium that’s still in place, relative to a traditional hard disk drive?

Michael W. Sadler

I’m sorry, the selling price premium today?

Bill Naserlind

Yes.

Michael W. Sadler

That’s a good question. If I’m not mistaken -- I’m not an expert on hard disk drives, by the way, but I believe they are selling for about $1 a gigabyte, ballpark. And I think solid state drives are probably today selling for about $5 to $6 per gigabyte. So it’s a pretty significant premium today.

And if that $1 per gigabyte is a magical figure, it’s going to take us quite a while before we can get our costs down to be able to participate at that price level. But in any rate, there is still a huge differential in terms of the retail selling price of a solid state drive versus a traditional hard drive.

Bill Naserlind

Thank you.

Operator

Our next question comes from the line of Glen Yeung.

Glen Yeung - Citigroup

Thanks. I understand that you have this strategy of moving production 200-millimeter for specialty and for image sensors, but to what extent is decommissioning some of your 200-millimeter fabs part of your near to medium term strategy?

Steven R. Appleton

Decommissioning is a relative term. Remember that there is also a process that we go through where we might convert, so when we say decommission, it could be a conversion or it could be a shut-down, depending on the scenario. A good example would be in Singapore right now, we’re actually converting from 200 to 300 and it’s going pretty well.

The facilities that we have that are still running 200-millimeter, which are primarily Japan and Italy, which Italy is dominated by imaging and then some in Boise, right now we are using all that capacity. So the question is when do you think -- and we’re not using that capacity for anything significant on the core memory piece. All of our core memory in the NAND is all written on 300-millimeter and we think is good technology and pretty cost-effective.

So for us, it might be a slightly different scenario. We have heard reports and we’ve read reports out there in the industry where there are several companies who have been running core DRAM on 200-millimeter and they are talking about shutting that down here in the next 30 to 90 days. And I would expect that to continue for those operations where they do run core memory on 200-millimeter.

For us, it’s a little different scenario. I think the more important issue for us is trying to understand the demand profile for the specialty memory over a longer period of time, because obviously it has long legs on it. And I don’t think, by the way, that you are talking about anything in the next year for us. I think you are talking about something further out as to we either have to convert it or we will obviously take it offline. But right now, it’s all being consumed with non-core memory.

Glen Yeung - Citigroup

I don’t know if you can comment on this or not, but you did mention that you think some of your competitors may be taking 200-millimeter offline. What’s your sense as to the impact of that on the supply/demand balance in ’08? Can it meaningfully help us? Is there enough there that it can help us out?

Steven R. Appleton

That’s hard for me to know. My instincts tell me it’s not that much. I think it’s worth noting that if you look at the wafer differential, or if you look at how the wafers break out today in silicon, not in bits, but if you look at it in silicon, about 75% of the worldwide DRAM market is made on 300-millimeter today and about 25% is made on 200-millimeter, so it’s still a significant amount of capacity in silicon.

But if you actually broke that down to bits, it would probably be something more like 85-15, and when you look at what’s happening around the world on 300-millimeter and some of the expansion that’s already been mentioned, I think primarily the greatest impact will just be a pull back on 300-millimeter expansion as opposed to taking some of this more obsolete 200-millimeter offline.

Glen Yeung - Citigroup

And then Mike, you made a point that you thought DRAM demand in the first quarter was going to be above seasonal and you also suggested that the content per box wouldn’t meaningfully improve until there was stabilization in price, and suggesting that either you either believe PC demand is going to be better or you think that content is going to higher, i.e. price will stabilize. Any thoughts as to which you are really pointing to?

Michael W. Sadler

Just to clarify, we’re still -- we’ve seen continued content growth through 2007 and we’re expecting to see content growth grow through 2008 as more applications come to the PC and we get more Vista uptake and so forth.

My comment was that we didn’t get a big demand price elasticity kicker that you would have expected with an 85% price decline over the course of the year. I think that’s primarily because the customers are aware that the current market price for DRAM is probably not going to be at that low a range for some time into the future, so they can’t really predict it.

We would expect to see strong PC unit growth next year, again in the range of 12% to 15%, and continued content growth but I do believe once prices become a little bit more predictable from the customer’s standpoint, they are going to feel comfortable about really cranking up DRAM content more significantly than they have in the past year.

Glen Yeung - Citigroup

What is your sense as to where inventories are today, either at OEMs or the -- and the module makers? What’s your sense as to where we stand?

Michael W. Sadler

Sure. On the OEM side, I don’t believe, at least with the customers we are working with, there’s virtually no inventory and there’d be no motivation for them to take on any inventory because we do such a good job of servicing their needs by storing product at their factory.

From an OEM standpoint, of course I can only speak to our own inventories. On the DRAM side, we’ve got about three to four weeks worth of sales in our own warehouses and our own customer hub. And in terms of the channel inventory, I really don’t have tremendous visibility there, although we continue to move bits and pieces of our output into the channel every day.

So my perception would be there is probably not too much inventory in the channel either.

Glen Yeung - Citigroup

Okay, last question then is we’ve now just this past negotiation seen the contract price get down to about the level where spot prices are and we’ve seen spot pricing the last couple of weeks not look as volatile as it has been. What’s your sense here as to whether or not we may be at least seeing a stemming of the decline that we’ve seen over the course of the last really 12 months?

Michael W. Sadler

Boy, that’s really tough to predict. I think, as you mentioned, we’ve seen -- we did see prices decline, our contract prices decline mid-December slightly, so that the rate of decline has slowed but we are getting so low here that you would naturally expect that anyway. It’s really difficult for me to predict what’s going to happen over the course of the next couple of months with respect to pricing but it does feel like things might be slowing down, at least in terms of the rate of decline.

Glen Yeung - Citigroup

Thanks.

Operator

Our next question comes from the line of Doug Freedman.

Doug Freedman - American Technology Research

Steve, if you could temporarily put on your CFO hat for me, you made a comment in your preamble about operating cash flow for next year. Can you offer some guidance on what you are looking for for depreciation, an update there? And just trying to do some calculations on how you get to your operating cash flow expectations. Is there --

Steven R. Appleton

Depreciation we expect to be around $2.2 billion.

Doug Freedman - American Technology Research

And is there any -- you know, there’s been some talk about turning off some of your 200 tools or transitioning. Is there some cash that you are expecting to receive from 200-mil tools?

Steven R. Appleton

Actually, we have both -- because of some technology we came up in the testing arena, and because we have ongoing equipment sale from 200-millimeter that is or isn’t being used or had been pulled out. And every quarter we have typically a gain from the sale of some of that equipment. And last quarter I think it was probably in the neighborhood of something like $15 million. I think that’s just kind of a continuum.

Now, the one caveat that I’ll say to that is in the event that we decide to take a facility and sell the 200-millimeter tools in it, it turns out that the demand for 200-millimeter tools right now in the world is really pretty strong, especially for the alignments that we have, which are considered pretty advanced for 200-millimeter.

So we could easily generate quite a bit of cash from selling 200-millimeter tools if we chose to do that.

Doug Freedman - American Technology Research

All right, great. Could you spend a little time talking about the early adoption of SSDs and what that’s going to do? I was at the event where you launched the products and most of them I believe were SLC based products. My understanding is your output of SLC right now is very low. Is that something that with the adoption of these drives, we’re going to see that mix start shifting again? And if you could offer a little commentary on profitability between the difference of MLC and SLC.

Michael W. Sadler

Sure. I’ll try and address that. First of all, with respect to the high volume notebook market, we believe that ultimately it’s going to be MLC technology which really drives a significant penetration in the notebook market, primarily because of the pricing demands, or the cost sensitivity of that market. And we are planning to introduce, I don’t have the roadmap at my fingertips but we are planning to introduce MLC based drives fairly early in our ramp here as we move through next year and into 2009.

With respect to the SLC mix in our product portfolio, our early penetration in solid state drives is going to be 100% SLC, so to the extent that we are able to drive some meaningful volumes heading out of next year into 2009, yes, it would be reasonable to expect that for that application alone, our mix of SLC products would increase somewhat.

It’s probably also worth noting that there are a variety of other applications. None of them as significant as solid state drives but there are a variety of other applications that require SLC performance, which we are currently supporting right now from our existing output.

In terms of margins, I don’t have the specifics at my fingertips but certainly our margins on SLC today are quite a bit higher than they are on MLC and again, that’s primarily because the applications are somewhat niche in nature and require that increased performance from SLC.

Doug Freedman - American Technology Research

All right, terrific. Just two more real quick ones; wafer starts, what are we running as far as equivalents right now and what’s the forecast going forward? How much of the bit growth is coming from new starts?

Steven R. Appleton

Doug, we’re running [inaudible] in terms of outs for us, of course; in 200-millimeter equivalents, we were up this quarter pretty nicely. In Q4, we ran around mid 90,000 outs a week and we are running 108,000, 109,000 outs a week for fiscal Q1. And that will grow a percent or so in fiscal Q2.

Doug Freedman - American Technology Research

Okay, and then my last one for you guys, any idea what you are looking at -- I mean, we’ve seen some pretty rough road here as far as pricing is concerned. But some of it’s been driven by pretty good bit cost reductions by the leaders in the industry. What are you looking at as far as next year as far as what potential do we have with the roadmaps that you have to reduce the costs going forward on both DDR and the MLC product lines?

Steven R. Appleton

Well, we actually think we probably have more runway ahead of us than some others, but we are coming from a position in particular on NAND where we’ve been ramping and gaining scale and getting yield to where we think that it’s advantageous for us. So on that front, we’ve been doing pretty well.

On the DRAM front, we’ve said I think for some time now we think our technology has resulted in the smallest die in the industry by virtue of we really are in really high volume production on 78-nanometer today and we’ve had [a success for a] long, long time. If you look at the data, it’s pretty good for us. So we don’t see any reason we won’t continue to drive pretty strong cost reductions throughout ’08.

Now, I think part of your question was also along boy, this industry looks pretty tough right now and what do you think people are doing. I think we can improve our results for the things that we can control moving forward and we are starting to demonstrate that on the operating expense line as well.

However, I do get this sense that the industry is difficult enough right now such that some of the players are starting to look at balance sheet preservation as opposed to any real expansion and we just have to see how that plays out over the next quarter or two, because it’s -- you know, it is a pretty difficult environment.

Doug Freedman - American Technology Research

All right, great and good luck, guys. Thanks so much for the time.

Operator

Our next question comes from the line of Betsy Van Hees.

Betsy Van Hees - Cowen & Company

Thanks for taking my call. I had a couple of questions. First, going back to the image sensor business, if I heard correctly, you mentioned that you were not immune to pricing in 1.3 megapixel and VGA being aggressive. I was wondering if you could give us an idea of what type of price declines that you saw.

Michael W. Sadler

In aggregate, our pricing quarter over quarter was flat. I mean, it might have been up or down maybe half a percent, or something like that. So in aggregate, it was flat and that was primarily a result of us continuing to climb up the pixel density curve somewhat.

I don’t have the specifics by chip in terms of what our average selling price did, but in general it was flat quarter over quarter and reasonable to expect that would probably be the case for the current quarter as well.

Betsy Van Hees - Cowen & Company

Okay, great. Thank you. And then I had a question on your mix for SLC versus MLC NAND for the quarter.

Michael W. Sadler

The vast majority is MLC. Kipp, have you got that?

Kipp A. Bedard

I think we’re -- last time I looked, we run about 80-20.

Michael W. Sadler

So ballpark, 80-20, 80 MLC, 20 SLC.

Betsy Van Hees - Cowen & Company

And do you have any plans of maybe increasing your SLC, given the better mix, margins that you are getting in that and your launch of solid state storage drives?

Michael W. Sadler

In the very near term, our mix of MLC versus SLC is going to shift even stronger in favor of MLC. As the solid state drive initiative gets some traction, as I mentioned earlier, it would be logical to assume that we’ll be ramping up SLC again but again, from a meaningful shipment standpoint, we don't expect that 2008 is going to be very significant in terms of SSD uptake.

Betsy Van Hees - Cowen & Company

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Daniel Berenbaum.

Daniel Berenbaum - Caris & Company

Hi, guys. Thanks for taking my question. If we can go back to the cash flow from operations guidance real quick, the $1.5 billion to $2 billion for fiscal ’08, you talked about where depreciation and amortization would be going. Could you give us some insight into what other variables you put into that equation? I’m sure you have some -- you’ve made some fairly tough assumptions to come out with that number. Can you help us understand what some of your assumptions are to get to those numbers?

Steven R. Appleton

Well, maybe Kipp can comment on it more, if he knows what you are really trying to get at, which I suspect is probably just price forecasting. Clearly --

Daniel Berenbaum - Caris & Company

Not just price forecasting, but just -- I mean, maybe give us some insight into where you see your revenue trends and what goes into that and then what trends you are seeing on the cost side as well? I mean, you were fairly specific about the guidance, so I am just trying to understand how you think about those numbers.

Steven R. Appleton

Well, let me give you some of my thoughts and then Kipp can add where he wants to. We are clearly in a growth phase for the company and if you look at the data, we -- most quarters, you know, we’ve had some flat periods because of significant price declines but we have been ramping our capability and you saw the growth that we had this quarter and we had growth from the last quarter prior to that. We obviously are adding more output and whether or not that results in greater revenues or less revenues, your guess is as good as mine on what the selling price is going to do.

But having said that, we have in our forecast, of course, something that we can’t share but we obviously have a continuing trend of ASP declines in the market built into our model for obvious reasons. We are trying to be conservative and making sure that we understand the financials as we move throughout the year in an environment that’s not favorable for us, although frankly we have no idea whether that is going to be the case or not.

So we have that built in and even with that built in, those were the cash flow -- the cash flow range that I gave you is with that conservancy built in.

Kipp, do you have anything else you want to add to that?

Kipp A. Bedard

Not much to add to that, Steve. Are there anymore questions?

Operator

Our next question comes from the line of Tristan Gerra.

Tristan Gerra - Robert W. Baird & Company

You mentioned on the call that at 68-nanometer, you have about a 25% die size reduction versus 78-nanometer. We know Samsung at 66-nanometers, a little bit behind; Hynix is doing well. How do you compare in terms of die size at 68-nanometer relative to the competition currently?

Steven R. Appleton

Well, we compare pretty favorable. Obviously we have been at 6F-squared and we’ve been able to optimize that for our process. I don’t know if Kipp, you want to add anything to that.

Kipp A. Bedard

More specifically, I think we have shown some slides, or Mark Duran has, we’re looking at 20% to 25% die size advantage over competitors right now, partly due to where we are in process migration and partly due to the 6F-squared technology that we’ve had matured up now for several years.

Tristan Gerra - Robert W. Baird & Company

Okay, and then just a quick follow-up in terms of mix in imaging. If you could give us some color on the mix of VGA versus 1.3-, 2-megapixel.

Michael W. Sadler

Sure. In the quarter we are reporting on now, so in our fiscal Q1, just over half of our unit shipments were 2-megapixel and above, so by definition just under half were at 1-megapixel and below. And I would expect that’s going to -- we’re going to continue to increase the higher density, the higher pixel density units as a percentage of the overall going forward, so it will be up slightly from that in the current quarter.

Tristan Gerra - Robert W. Baird & Company

Okay, so you wouldn’t expect VGA to pick up as a percentage of revenue some time next year or this year, this fiscal year?

Michael W. Sadler

I don’t want to look too far into the future, but in the current quarter I think it’s a pretty safe assumption that that would not be the case, so it will be a richer mix of 2-megapixel and above in the current quarter as well.

Tristan Gerra - Robert W. Baird & Company

Great. Thank you.

Kipp A. Bedard

Thanks, Tristan and with that, we’d like to thank everyone for participating on the call today. 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.

Operator

Thank you. This concludes today’s Micron Technology’s first quarter 2008 financial release conference call. You may now disconnect.

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