Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Micron Technology, Inc. (NASDAQ:MU)

F2Q08 Earnings Call

April 2, 2008 4:30 pm ET

Executives

Kipp Bedard – VP IR

Mike Sadler – VP Worldwide Sales

Steve Appleton – Chairman, CEO

Mark Durcan – President, COO

Analysts

Daniel Amir – Lazard Capital Markets

Tim Luke – Lehman Brothers

Krishna Shankar – JMP Securities

Shawn Webster – J.P. Morgan

John Pitzer – Credit Suisse

Analyst for Glen Yeung – Citigroup

Daniel Berenbaum – Caris & Company

Analyst for Jim Covello – Goldman Sachs

Hans Mosesmann – Raymond James

Doug Freedman – American Technology Research

Analyst for John Lau – Jefferies & Co.

Bill Desellum – Titan Capital Management

Operator

Good afternoon. My name is Mary and I will be your conference facilitator today. At this time I would like to welcome everyone to the Micron Technology’s second quarter 2008 financial release conference call. (Operator instructions). Thank you it is now my pleasure to turn the floor over to your host, Mr. Kipp Bedard, sir you may begin your conference.

Kipp Bedard

Thank you very much, I would like to also add my welcome to Micron Technology’s second quarter 2008 financial release conference call. On the call today is Steve Appleton, Chairman and CEO, Mark Durcan, President and Chief Operating Officer and 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 had not had an opportunity to review the second 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 an audio replay of this call. You may reach access by dialing 706-645-9291 with a confirmation code of 39996231. This replay will run through Thursday, April 9th 2008 at 5:30 p.m. Mountain Time. A webcast replay will be available on the company’s website until April 9th 2009. 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.

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 10K and Form 10Q. 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’ll now turn the call over to Mr. Mike Sadler.

Mike Sadler

Thanks Kipp. We continue to feel the effects of an oversupplied market in fiscal Q2 and saw average selling price declines for both our DRAM and NAN flash memory product lines. While we had another quarter of strong operational execution and associated costs of goods sold reductions, the unfavorable pricing environment overwhelmed operational efficiencies, resulting in the operating loss we are reporting today. As I mentioned in last quarter’s call and in the mid quarter analyst conference, we have seen strong demand throughout this supply driven cyclical downturn, which has now spanned about one year. This continues to be the case as the computing and mobile phone markets in particular are exhibiting both solid unit and content growth.

We have an industry leading technology position with our six step squared 78 nanometer DRAM process and circuit designs which are fully ramped on 300 millimeter wafers in our Virginia facility. We are in the early stages of ramping the 68 nanometer process at the 300 millimeter facility in Singapore. This puts more distance between Micron and the competition in terms of manufacturing efficiency with an effective 20% chip size reduction verses the 78 nanometer process. We now have our 1 gigabit DDR 3 product in volume production and are firming up second half 08 supply programs with some key early adopting OEMs who value the performance and power savings associated with the DDR 3 technology.

Motivated by a combination of operating system and application enhancements as well as price elasticity, our computing customers are packing more and more memory into their systems. This marries up well to our strategy and capability of running high density 1 gigabit and 2 gigabit chips as our primary volume drivers on the advanced process technology nodes. On the other end of the spectrum, from a cash flow, operating income, market opportunity and customer satisfaction perspective, we are making good use of our remaining 200 millimeter DRAM capacity. Moving forward, we do not see this changing for the foreseeable future with our diverse family of specialty DRAM products showing sustainably strong demand from a variety of market segments, including networking, telecom and a variety of consumer electronics product markets.

On the NAND flash front we are in the middle of a seasonal lull for consumer electronics products, one of the primary demand drivers for flash memory. This in conjunction with unprecedented industry supply growth has resulted in the challenging pricing environment I referenced earlier. We should see seasonally stronger demand in the second half of the year and over the long haul we believe with conviction that this is a high growth market leveraging Micron’s core technological capabilities.

We are continuing with the rapid cadence of NAND process technology development and implementation. Just two quarters after the introduction of our 50 nanometer technology node, we have started our sub 40 nanometer production ramp and this will proceed throughout the balance of this year. At this technology node, we have accomplished our objective of being on par or better than the competition with respect to both die size and operational efficiency.

Economies of scale and rounding out the product portfolio are the remaining hurdles and we are well on the way to closing the gap on both of those. We will make initial production shipments of our first micro SD card compatible product, an 8 gigabit chip on a 50 nanometer technology in the current quarter. This product is being made available to our traditional OEM customers for bundling in products such as mobile phones and digital cameras as well as to retail channel customers through our Lexar brand. We are rolling out a broad family of NAND plus DRAM multi-chip packaged products for the mobile handset market and have stacked up a number of design wins that will result in revenue contribution this fiscal year.

Finally, we have introduced our initial line of solid state drives, 32 and 64 gigabit drives with SLC NAND as a market entry and will roll out a low cost MLC drive and very high performance SLC follow on products later this year. We are demonstrating success with our CMOS image sensors in the high pixel density segment of the market at 2 megapixels plus as a result of the superior image quality associated with our pixel and image processing technology. Customers have embraced and continue to embrace our sensors for use in high end products such as 3G mobile phones and digital cameras.

In fiscal Q2, we bolstered the product portfolio with the introduction of a 9 megapixel sensor for the digital camera market and demonstration of our initial wafer level module, essentially a stand along camera for the value end of the mobile phone camera market.

To sum it we are both proud and pleased with our existing technology and product portfolio today and with the trajectory for advancing both as we move forward. With just a little cooperation from the markets on supply demand balancing, we are well positioned to deliver positive results. We appreciate your continued interest and I’ll turn it over to Steve.

Steve Appleton

Thanks Mike. I said at the last earnings call that I intended not to be the interim CFO at this earnings call and I’m happy to announce that that’s true. I didn’t beat it by much but I just want to introduce Ron Foster who is with us here today. And we had already put out a press release announcing his joining Micron. We’re excited to have him. I didn’t really put him in a position to answer questions today since he really only joined the last couple days but we’re very excited to have him join the team.

I just want to make a couple of comments around the financials and then we’ll move on to the Q&A. I don’t intend to go through the finances in any detail, you can obviously look at the release and ask questions about it as we move through the conference call.

First I do want to highlight that you know we had some significant cost reductions, we had indicated that we thought we would be able to achieve those at the last call. In fact we did, we had about a 15% reduction quarter over quarter on the DRAM. And we also had about a 25% reduction quarter over quarter on the NAND. So we feel like the execution on the operation was pretty good and in fact our operating cash flow actually increased slightly over the last quarter to about $282 million.

Now on the R&D I think it’s also worth pointing out it was up from the guidance that we had given a little bit. And that was entirely due to really just the timing of the product qualifications, it wasn’t due to anything else and that affects when a device moves from R&D into cost of goods sold and the difference was entirely due to that. I also want to note that our overall DRAM gross margin actually remained positive as well for the quarter. So I think those are some good data points to have and with that we’ll open it up for questions.

Kipp Bedard

Thanks Steve, with that we’d like to now take questions from callers. (Instructions).

Question-and-Answer Session

Operator

Certainly sir. (Operator instructions). And our first question comes from Daniel Amir from Lazard Capital, please go ahead sir.

Daniel Amir – Lazard Capital Markets

Thanks a lot and thank you for taking my call. A couple questions here. I guess on the NAND and DRAM markets, obviously it’s been a struggle here in terms of memory pricing this past quarter. What’s kind of, what do you see now in the market in terms of both DRAM and NAND, in terms of demand supply balance and how do you kind of manage your business here going forward in terms of the cost reductions to accommodate that potential change here?

Mike Sadler

Yeah, this is Mike, I’ll address the market piece and then Steve will address the cost reduction piece. On the DRAM side, you know my assessment is that the market is relatively balanced right now and that is kind of evidenced by the flat pricing environment essentially for the last couple of months. I think we were successful in passing on a price increase to our OEM customers either late January or early February and price have essentially been flat since then. And that continues to be kind of steady state.

So generally speaking a balance supply demand environment on the commodity DRAM. Certain pockets of the specialty DRAM product portfolio are in tight supply and we’re struggling to meet demand in certain pockets. But generally speaking on the commodity side, balanced supply and demand. My view of things on the NAND flash side is not quite as positive from our perspective. We’re still seeing a continual oversupply in the NAND flash market. I think much of that can be attributed to the seasonal lull that I mentioned earlier. But certainly my view of things is that supply exceeds demand today and there continues to be price pressure.

Steve Appleton

Thanks Mike, on really the reaction that we have of course of the pricing pressure in the marketplace and let me just point out that we had as we noted in the press release we had a 15% decrease in the average selling price of DRAM and we were able to reduce our costs in DRAM about that amount. So you know clearly we would like the pricing environment to be better but I think we have been executing pretty well and those matched up.

Now on the NAND of course we had a 30% decrease and that’s a pretty touch number to outrun in a given quarter. But let me just say that we do think that the advances we’re making in the technology will help. Obviously we continue to gain scale as we ramp our facilities both in advanced process node and in more wafers and we’re doing a lot of work around the op ex and materials. So we think we have runway in front of us. But let me just also say that you know we’ve had some pretty big decreases sustained now for this downturn hat Mike talked about really over the last year.

And you know it just doesn’t appear that at least on average for these products it would be sustainable and I think that you’re starting to see a number of companies struggle with the environment we’re in which really and you can see the announcements just like we do. I think a lot of these companies have gone into balance sheet preservation and they’re trying to figure out how to continue one where we think actually we’re pretty good. I mean you look at our cash balances, we’re still about $1.9 billion and you look at the execution we’ve been able to make on our cost reductions, we feel pretty good about where we’re at.

Daniel Amir – Lazard Capital Markets

Okay and just one follow up question, can you expand a bit about one of your announcements this quarter I guess with Nanya and kind of what the strategy is there in terms of you know going forward, is this going to be more than just a technology sharing agreement or what’s kind of your thought process there?

Mark Durcan

Daniel, this is Mark. A couple of things on that and then I can’t say too much because we’re still working through definitive agreements but we have said there’s really two major components to it, there’s a technology development component which really involves joint development of products as well as process technology on a go forward basis. And we think that’s a significant value to Micron as it drives down our operating expenses and drives a more efficient model for us.

The other major component is a joint venture and the timing of that and the exact business plan we’re still working through but you can think of this in terms of a what we believe will be a capital efficient model and a capital efficient way for us to put leading edge and efficient production in place for the benefit of our business. And there’ll be more of that as we complete, more on that as we complete definitive agreements.

Daniel Amir – Lazard Capital Markets

Okay thanks a lot.

Operator

And our next question comes from Tim Luke from Lehman Brothers, please go ahead sir.

Tim Luke – Lehman Brothers

Thanks so much. I was just wondering if you could give any color on your sense as how you think bit growth may proceed in the coming quarter in DRAM and in NAND. And then separately Mike if you have a sense of how if pricing was to stabilize from here, what will you be thinking about in terms of quarter over quarter price declines for the May period?

Mark Durcan

This is Mark, let me take the bit growth and I’ll hand it over to Mike for the other. On the DRAM side we’re looking at mid to high single digits and we think that’s a good number for this quarter and moving forward over the next few quarters. Similarly for NAND, we think a good placeholder would be a 30-40% range quarter over quarter. And in both these numbers will be potentially be a little bit lumpy as production moves back and forth during these technology ramps.

Mike Sadler

And on the pricing situation, Tim, again under the assumption that prices are flat going forward for the rest of the quarter which would be another eight weeks or so, on the DRAM side we would be down mid single digits percentage wise. And on the NAND flash side we’d be down in the mid 20’s from a percentage standpoint. And again the assumption on both is that pricing remains flat from where we are today.

Tim Luke – Lehman Brothers

If I may just ask Steve as a follow up, if you could give any color on how you perceive the op ex going forward, should we assume some fairly flat levels from the 120 in SG&A and 180 in R&D. And then also if you have any color on how you perceive your cash balance going forward. And then lastly just coming out of the Intel analyst meeting, it looked like some not total transparency of the visibility of their longer term commitment to the NAND business, if you could give any color on how you see the structure of the JV going forward or on the outlook for that. That would be very helpful.

Steve Appleton

Sure. On the operating expenses as I noted the R&D I think was, I don’t want to say artificial but somewhat impacted by the timing of product qualifications, so we think that will come back down as we move forward and really come back into this kind of a 165-175 range. On the SG&A I don’t think it’s going to change a lot from where it is for this next quarter. But as I might note, both of those are down. Remember in fiscal year 08 we had just over $800 million in R&D and if you look at the numbers that we’re forecasting right now, it’s obviously going to be down you know something closer into the mid 6’s. So we’ve made progress on that in SG&A is coming down as well.

So I think it will come down, I don’t think there’s a lot of dramatic change from where it’s at today. But that’s primarily because we’ve made a lot of progress on it so far. On the cash balance, you know we, as I noted are in pretty good shape. We really preserved our cash balance pretty good quarter over quarter and we had operating cash flow of about $282 million. So you know I think the question that a lot of people get at is or that you might be trying to get at is how do we see our need to go raise cash in the future. And really we think we’re in pretty good shape. We don’t see any near term need to raise any money and we’ve balanced it with where we need the cap ex is and we feel pretty good about where we’re at. So I don’t think that’s an issue for us.

On the Intel joint venture and I noted a couple of times before, it’s actually going pretty well. You know despite the fact that we’ve had a pretty tough NAND market, the JV in terms of its operation has actually been ahead of schedule in terms of what it’s accomplishing on the technology and the ramp. So we feel pretty good about that. I don’t have any commentary that I know of coming from Intel leadership that they are interested in getting out of this joint venture.

So I guess I’d have to defer you back to Intel. From our perspective its gone pretty well. Obviously the market’s pretty tough but I think we still both view it as pretty strategic product area you know not only from where it’s at today but for where it’s going to move to in the future with SSGs and so forth so I think it’s still pretty strategic.

Tim Luke – Lehman Brothers

With no change to the big growth plan this year?

Steve Appleton

No, nothing that would be significant, Mark do you want to make any comments?

Mark Durcan

Yeah let me jump in, relative to this year there’s nothing, we’re still full speed ahead. We have made the decision with Intel relative to our IMFF fab that we will start that in the first half of 09. So that is a slight slip from what we had originally projected coming late in 08. But we think that’s just the right thing to do given current market conditions in the NAND market.

Steve Appleton

Yeah just to add on to what Mark said you know we were pretty aggressive on trying to drive that new facility schedule and you know given the market conditions I think we just view it as we don’t need to be so aggressive, we can be less aggressive and a little more normalized about how we bring that on. And as Mark said, that’ll really be the first, probably the first part of 09 now.

Tim Luke – Lehman Brothers

Thanks so much guys.

Operator

Our next question comes from Krishna Shankar from JMP Securities, please go ahead.

Krishna Shankar – JMP Securities

Yes as you look at the DRAM market what is your outlook for industry bit growth this year and do you see, you know you mentioned that the market was in relatively good balance. Do you see that tightening as we go forward into the May and the August quarter with the PC [bus] cycle, Intel’s [montarina] ramping and just increased box loadings.

Kipp Bedard

Krishna are you talking about bit supply or are you talking about bit demand at the customer level?

Krishna Shankar – JMP Securities

Actually if you could give color on both that’d be helpful.

Mike Sadler

Okay, this is Mike I’ll comment on the demand side and then I think Kipp’s going to provide some input on the supply side. With respect to demand specifically from the computing community, from our PC customers you know I’ve taken a cross section here that’s pretty representative of the entire worldwide market and from a demand standpoint in calendar Q2, we’re looking at demand growth sequentially, so relative to calendar Q1 of about 12% on a bit basis.

And that ranges by the way from a low of minus 2% to a high of about 40% on sequential bit growth, bit demand growth in calendar Q2. For the year the same data rounds out to about 65% in terms of bit demand growth and the range there would be a low of about 49 and a high of about 105. And again that’s a good cross section of our customers which I think is a pretty fair representation of the overall market. Now what I believe is imbedded in here although again you’d have to get this directly from our customers, but I believe a unit growth rate somewhere in the neighborhood of 10-12% is what’s imbedded in here and the balance of course is driven by content growth.

Kipp Bedard

Thanks Mike it looks like on the industry side, supply bit growth will come in, again based on current public comments, somewhere between 50-60% year over year.

Krishna Shankar – JMP Securities

Okay and on the NAND flash side, is there anything out there that could reverse this excess supply situation here whether it is the Apple 3G phone or other competitors coming out with 3G phones, what will be a couple of big factors you know tightening NAND supply out there?

Steve Appleton

Well you know there is the announcement that [Hynex] made that they’re going to take the 200 millimeter offline which I saw a number that said it accounted for about 5% of the world’s supply, that’s actually pretty significant. On the supply side, Mike I don’t know if you have any the demand side?

Mike Sadler

Well on the demand side we’re certainly, well I shouldn’t say certainly, we believe that we’ll get a strong demand growth in the near term when we head into the selling season for consumer electronics products. So essentially from back to school through the end of the year, you know Christmas and holidays, should be a much stronger demand profile for consumer electronics products which do drive a significant piece of the overall NAND flash demand.

We also believe that we’re going to see continue to see pretty strong elasticity growth as a result of lower NAND prices, higher density flash cards in the marketplace and so forth which is naturally going to drive demand. We are going to see some demand created from the introduction of solid state drives, actually today through the rest of the year although I don’t believe that one is going to be significant enough in 2008 to really swing things in favor of demand. And over the long haul just a more rational investment profile which matches what the demand profile looks like I believe is going to ultimately balance things out and whoever is the most cost efficient and has the best operation is going to be a winner and we think we’re in a pretty good position with respect to that.

Krishna Shankar – JMP Securities

Thank you.

Operator

And our next question comes from Shawn Webster from J.P. Morgan, please go ahead sir.

Shawn Webster – J.P. Morgan

Okay, thanks for taking my questions. Can you ground us a bit on some of the February quarter bit production and bit shipment information for DRAM and NAND.

Mike Sadler

Sure bit growth on the DRAM side was roughly flat quarter to quarter and NAND production bit growth was up nearly 30%.

Shawn Webster – J.P. Morgan

So DRAM production was flat sequentially?

Mike Sadler

That’s correct.

Shawn Webster – J.P. Morgan

Okay, was there something that you guys changed in terms of your plan, I thought you were intending to grow your production in your February quarter?

Steve Appleton

Yeah we actually changed the product mix and we moved wafers in favor of imagers.

Shawn Webster – J.P. Morgan

Okay. And in terms of the sensor business, can you talk about what that did sequentially in terms of revenues or units or give us some color on what was happening there.

Steve Appleton

Yeah, revenues were down roughly 20% and we’re looking, our third quarter guidance would be up 5-10% in units.

Shawn Webster – J.P. Morgan

And then for your inventories, did I read it right that it was $15 million in the quarter in terms of the write down this quarter?

Steve Appleton

Yeah our [NRV] was about $15 million for the quarter.

Shawn Webster – J.P. Morgan

Okay and then maybe stepping back a little bit, when you look at the landscape of your competitors and their relative cash positions, do you see any of the marginal players falling off sometime at this point sometime later this year or over the next year given the cash burn situation or do you see actual consolidation likely or any of those scenarios that could come to pass this year you think?

Steve Appleton

I think that the, well I’ve said this before Shawn, I think that the industry needs to still have some consolidation it needs to go through. Clearly some of our competitors on their cash burn, it’s pretty high and you know I don’t know their ability to access the markets and continue on. So that’s tough for me to judge.

But we’ve been looking at the landscape pretty closely and I think what you’re saying is true that there’s a lot of pressure out there on these balance sheets and that they’re trying to figure out, in some of their cases how to survive or whether they ought to join up with somebody else to you know essentially consolidate the industry. And I guess the only other caveat is you know the longer the industry is in a downturn the more probability and the more candidates there become to become part of a consolidation.

Shawn Webster – J.P. Morgan

Okay and then maybe finally did your, can you tell us what your wafer growth was sequentially in your February quarter and how you expect that to evolve maybe next quarter or over the course of the year?

Mike Sadler

Yup, same as last quarter, was up a couple percent in Q2 and that’s what we’re guiding to as well. Let me make sure I stated something as well, during the quarter the imaging units were down 19-20% but it remained approximately 10% of the total revenues. I think I mentioned that revenues were down 20 but it’s actually units were approximately 20.

Shawn Webster – J.P. Morgan

Okay, thank you for that. Thank you very much.

Operator

And our next question comes from John Pitzer from Credit Suisse, please go ahead.

John Pitzer – Credit Suisse

Yeah, good afternoon guys, thanks for taking my questions. Just a couple here, on the cap ex front we’re halfway through the fiscal year, you spent about $1.5 billion, you’re still throwing out a range of $2.5-$3, can you just help me understand what gets you to the low end of that range and what gets you to the high end and then I have a follow up.

Mike Sadler

Well yeah there’s a couple things. As you know if you followed our fiscal year ends over the last several years, it’s just simply timing of the equipment installs and qualification can have a 2-300, even $400 million range. So that by itself is enough to be drive us anywhere through that. I think as Mark and Steve have alluded to, we keep a lot of flexibility in our cap ex budgets in a lot of different areas as well, so those two things would keep us in this range for now and of course we’ll keep you update on future calls.

John Pitzer – Credit Suisse

Does the push out of Singapore albeit just a minor push out drive you to the lower end, is that what we should be thinking?

Steve Appleton

It’s pretty minor, not really. You know it’s really this timing of a lot of the stuff that we’re doing and whether it hits exactly at the end of the quarter or not. If you look at us historically a lot of times we don’t end up spending $200-$300 million of the money that was in the budget that we thought would happen at that time because qualification or acceptance of [unintelligible] deliveries get pushed a little bit.

John Pitzer – Credit Suisse

Just a follow up for Steve, Steve just given that you’re still viewing consolidation as something that needs to happen in the industry, can you help me understand your proposed joint venture with Nanya in light of that, are we supposed to assume that this joint venture helps the industry capacity and if it doesn’t, would you be better off being a consolidator instead of going through this sort of joint venture?

Steve Appleton

Well, first of all, I don’t think they’re mutually exclusive. The fact that we did a joint venture and by the way I think it’s worth pointing for a lot of you that have heard me speak over the years, you know we don’t think that these foundry arrangements work but I think that true joint ventures work. The one we have with Intel is working well and the joint venture that we will have with Nanya we think will work pretty well. But that’s because we are truly co-developing and co-sharing if you will on trying to generate the most capital efficient model.

In other words, I think the way to look at these are you know we have consistently tried to make sure that we did not enable a competitor at a lower cost structure than our own in terms of how we structured these deals and in fact we haven’t done that. So clearly the other thing that we’re interested in is continuing to drive scale and op ex efficiency and that’s what we’re driving towards in this joint venture as well. I don’t think it’s a good assumption that because we are doing the joint venture that we wouldn’t also be interested in consolidation if the opportunity were to exist. So we continue to look at that as well.

John Pitzer – Credit Suisse

Alright, thanks guys.

Operator

And our next question comes from Glen Yeung from Citi, please go ahead sir.

Analyst for Glen Yeung – Citigroup

Hi this is [Ji Hung] for Glen. Can you talk about the channel inventories that you’re seeing on the DRAM side?

Mike Sadler

Sure, happy to, on the DRAM side I had two components of our customers, one would be the OEM customers for the PC manufacturers and other hardware manufacturers and the others would be I’ll call them the low value add customers or the speculators that are buying and holding and speculating on price increases or are adding a relatively small amount of value in the form of a module say, a PCB. On the OEM side I don’t believe that any of our customers have accumulated significant inventory if they have at all. And again as I’ve stated in the past, the only reason they would do so is to speculate or to hedge on price increases.

We are make business too easy for them to force them to accumulate inventories, we store the product right at their facilities. So it’s my observation that they are not accumulating any inventory. On the channel side, the speculators, I believe there is a fair amount of buying in anticipation of price increases and trying to take advantage of that. Having said that I don’t believe there is a significant amount of product in the channels. So it would really be difficult for me to quantify it but my sense is it’s not very significant. On the NAND flash side, however I believe there is quite a bit of inventory in the channel among those kind of third party speculators and that’s kind of fueling my perspective that we are in a pretty significantly over supplied situation on the NAND flash side.

Analyst for Glen Yeung – Citigroup

Thanks and in your prepared comments you talked about some design wins with your DRAM and NAND products, into wireless handset OEMs, so can you talk a little bit about those design wins? Thanks.

Mike Sadler

Sure, I can’t disclose who our customers are but you know I think you’re aware of who the large mobile handset makers are, there are only five of real significance. And the market is, as the market shifts from 2G to 2.5G to 3G the memory subsystems are shifting from a NOR based multichip packages to NAND based multichip packages and we have actually we are currently shipping in production and we are continuing to stack up a variety of design wins with our own silicon, so our own NAND flash silicon and our own low powered DRAM products in these MCPs. And it’s with multiple customers, it’s certainly not just with one.

Operator

And our next question comes from Daniel Berenbaum from Caris & Company, please go ahead.

Daniel Berenbaum – Caris & Company

Yeah hi guys, you guys did obviously a great job on cost reduction in the quarter, can you talk about the path for cost reduction for both NANDs and DRAM over the next several quarters. And then also if you could just break out by a percentage of revenue, what percent was DRAM and what percent was NAND and if you could maybe look out into the future more importantly and maybe give us a way to think about when will NAND become a larger percentage of your revenue than DRAM given the push out of the Singapore fab.

Mark Durcan

Okay Dan, this is Mark, let me talk a little bit to where the cost reductions are coming from on a go forward basis then I’ll let Mike handle the supply revenue breakdown piece. First of all as we’ve stated already, the cost reduction on cost per bit basis was about 15% on the DRAM and about 25% on the NAND. As we look to the future, the DRAM cost reductions are coming from incremental output in both [M]TV and Tech at 300 millimeters.

So incremental output at the leading edge, those would 78 nanometer and 68 nanometer wafers respectively. As we get into calendar Q3, we’ll start introduction of our 58 nanometer node in the Virginia fab and they’ll be a significant die size reductions as that technology rolls in. As we look to the NAND front it’s really a technology story. We have pretty solid approaching mature yields on the 50 nanometer node but in the third quarter you already start to see some output impact from the 30 or the sub 40 nanometer node that Mike alluded to earlier in the call. And that’s really going to drive the significant cost reductions in the second half of the year and into calendar 09.

Mike Sadler

I’ll take the revenue breakout, during the quarter executed to about a 30% core DRAM percent of revenues, about mid 20’s in terms of specialty DRAM. As I mentioned earlier, imaging was approximately 10% and that leaves NAND at about the mid 30% range.

Daniel Berenbaum – Caris & Company

So any idea, just to come back to the cost reduction then, would you care to speculate on just the sequential percentages of cost reduction that we could think about due to these very aggressive programs that you have? And then also back to the breakout side, when should we think about NAND becoming a larger percentage than total DRAM?

Mike Sadler

Sure, on the cost reductions we’ve been guiding 15% plus over the next few quarters and that’ll continue to be the case. And as Mark indicated earlier there will be periods of time where production is up higher than that 30-40% range that he mentioned. And of course that would correlate to even a faster cost decline similar to what we did this particular quarter. And on DRAM, same guidance as before, over the next few quarters we’ll average in that high single to low double digit range on cost reductions. And in terms of when NAND can be higher than DRAM revenues, I’m going to defer that because it’s always difficult to predict the ASP impact relative to that.

Daniel Berenbaum – Caris & Company

Okay, fair enough, thanks very much.

Operator

And our next question comes from Jim Covello from Goldman Sachs, please go ahead sir.

Analyst for Jim Covello – Goldman Sachs

Hi this is Kate [Kazlarski] on behalf of Jim Covello. A quick question on NAND cap ex, clearly the NAND environment has been pretty difficult, I was just curious what your thoughts are about how bad it has to get before either you guys or some of your competitors might start thinking about potentially reducing some of their investments sort of similar to what we’re seeing in DRAM today? Thank you.

Mark Durcan

The NAND cap ex, first of all I think there is some adjustment going on in the NAND production world today in that anybody that was out there producing on 200 millimeter is really thinking hard about getting out of producing NAND on 200 millimeter. I had referenced earlier that [Hynex] had announced that they were going to do that. I think others will do that as well. You know it’s worth pointing out for Micron, the percentage of NAND that we have on 300 millimeter I think is the highest or one of the highest of any company out there in the industry.

So for us, we are on primarily on the leading edge of 300 millimeter technology node in that, so that alone wouldn’t drive us to change our behavior. But I will say that we’ve already mentioned what we see going on in IMFS and that was really, that’s essentially the Micron Intel joint ventures mixed large expansion and so that is going to occur later than we originally thought it would occur. And I would imagine others are looking at the same thing. But I will say that with respect to Micron’s perspective moving forward, we’re still a much smaller player in the NAND industry than a couple of the other much larger players. So it’s probably a question that would be better to ask them and what they are thinking about doing to gauge what would happen with the industry on capacity expansion. I’ve already described to you what we’re doing.

Analyst for Jim Covello – Goldman Sachs

And just a quick follow up, in terms of the 200 millimeter capacity retirements that you had referenced, is your expectation that that capacity will be retired or would you anticipate that capacity to be replaced with 300 millimeter capacity in the industry?

Mark Durcan

Well I think you’ll see a, I mean it’s kind of an evolving scenario where it can’t be replaced immediately because it’s virtually impossible to do. In the [Hynex] case they that they would have it offline in the next 60 days. But all I can tell you is what these others are reporting in the media. I will say this though, it would not be helpful to try to take that capacity and build DRAM with it.

I mean that is no solution for us either. And so I don’t think you’re going to see a shifting of 200 millimeter from NAND into DRAM. Whether or not that capacity can build something else is hard for me to know. Depending on what the product portfolio is, but I frankly don’t think that the 200 millimeter coming off at this point in time is really effecting too much decision around what companies are doing on 300 millimeter just because these things come on over long periods of time. And it’s a much more strategic thought process about adding 300 millimeter fabs.

Analyst for Jim Covello – Goldman Sachs

Okay and just a quick question on your depreciation, do you have an estimate for 2008 for D&A? Any change?

Steve Appleton

Yeah, about $2.2 billion, so same as last guidance.

Analyst for Jim Covello – Goldman Sachs

Okay, thanks so much.

Operator

Our next question comes from Hans Mosesmann from Raymond James, please go ahead sir.

Hans Mosesmann – Raymond James

Thanks, most of my questions have been answered but I do want to get a sense of how you see the environment. There’s a sense that things should be slowing down in the world of PCs, are you seeing normal seasonal trends in behavior of your PC OEM customers? What’s their outlook relative to the slowdown that could lead to slower than seasonal trends here entering the summer?

Mike Sadler

Hans, this is Mike speaking, I don’t think the numbers, the data that we’re receiving from customers with respect to demand really exhibits any significant slowdown in absolute demand for their boxes. I reference that 12% quarter over quarter bit demand growth earlier and I don’t have historical data at my fingertips but my sense is that’s representative of you know a typical seasonal calendar Q2. So we’re not, I guess the short answer is, our customers are not portraying to us any type of a slowdown in demand yet certainly.

Hans Mosesmann – Raymond James

Thank you.

Operator

Our next question comes from Doug Freedman from AmTech Research, please go ahead.

Doug Freedman – American Technology Research

Hi guys, thanks for taking my questions. I guess if we could get a little bit of detail on Lexar and how Lexar is going and if you could discuss what you’re seeing as far as price trends in retail and average densities being bought there.

Mike Sadler

Lexar, interesting enough in this time period has really been an advantage for us and I think probably the easiest way to describe it is that the price declines that occur in the retail channel are just simply not as steep as they have been in the component sells. So we’ve been able to really take advantage of that as that’s been a channel for us. Now it’s also worth pointing out that Lexar still buys from third parties as well, so we’re not a100% supplier to Lexar.

But they are buying more and more every quarter that goes by as we qualify and develop new products to go into that channel. And so Lexars actually done I think quite well. From a business model perspective as I mentioned at the analyst meeting, I mean they’ve really I think got on track and got more efficient and have started re-expanding if you will from where they were when they tried to retrench and get the business model in a much better shape. So it’s gone pretty well. And you know I guess I’d leave it at there if you had a more specific question I could try to answer it.

Doug Freedman – American Technology Research

Do you happen to have the average density that’s being purchased? And any changes there, are we seeing increased density in the retail channel for NAND?

Mike Sadler

You know unfortunately Doug I don’t have that data with me, we’ll make sure to have it with us for the next time around on this with respect to the card density in retail. I would add just to what Steve said, I mentioned earlier that we’ve recently introduced our first Micron silicon that is compatible with a Micro SD card and we’re really bullish about this being a solid retail product for Lexar. It’s a 1 gigabit Micro SD card and it should be available in retail here over the next 30, 60 days or so.

Quite bullish about adding that to the product portfolio and just one other thing to what Steve mentioned on Lexar that the amount of revenue that we’re generating from Lexar via the NAND flash cards through retail is increasing every quarter we go forward. So we’re actually really happy to have this additional outlet if you will or this additional means of getting product into the hands of retailers. It’s working out quite well for us.

Doug Freedman – American Technology Research

Alright and staying on the NAND business, if we were to look at a little bit of mixed signals right now on NAND, your ASP delta or change is less than we heard from your other IMFT partner Intel at their recent analyst day, can you help the investors understand why there is such a disparity?

Mike Sadler

Well we do have separate sales channels and actually we have several products that are different as well.

Steve Appleton

Yeah I think it’s also worth noting that Lexar is in the mix for us. And you know there’s also a transfer price mechanism that happens from the joint venture to the two of us as well. And you know the differences there may explain some of it.

Doug Freedman – American Technology Research

Alright and I think a bunch of people have tried to ask and trying to understand your cap ex plans going forward and I’m a little surprised and having trouble reconciling why the push of the Singapore IMFT NAND fab doesn’t impact your spending plans given that that was expected to sort of come up at the end of this year and is now a 09 event.

Mark Durcan

Well we’re not really giving guidance on 09 at this point. Remember our fiscal 08, we’re in the, we’re basically getting pretty close. So you know our fiscal 08 ends at the end of August and it just turns out that the timing of that really wasn’t much in terms of its impact on our fiscal 08.

Doug Freedman – American Technology Research

I see so.

Steve Appleton

It’s just too late, I mean it just was coming too late in the year anyways. I mean the facility won’t even be complete until the summer. And as we look at trying to get it ready for equipping and installing equipment, there wasn’t a whole lot that was going to happen by the end of August anyhow.

Doug Freedman – American Technology Research

Alright and switching gears and moving over to the DRAM business. Percentage of 1 gigabit shipments and your share there in that market?

Mike Sadler

Yeah we’re over 50% now in 1 gig and above. I can’t tell you what our percent of share is off the top of my head, but our shipments themselves are over 50%.

Doug Freedman – American Technology Research

And then given the low pricing that we’ve seen in the DRAM market, what’s the elasticity and what are you guys seeing as far as average box loading there?

Mike Sadler

Yeah, Dough I showed a slide earlier with average box loading and if I recall it’s in the neighborhood of 1.7-1.8 gigabits per system today and you know the elasticity, I sure sense that it’s starting to kick in here pretty significantly. But we don’t see an immediate impact. But today’s price levels which is essentially you know $18.00 per gigabit is certainly seems like a compelling value add for our customers to put more and more memory in their systems and you know I think that’s represented by the demand data that I shared with you earlier.

Doug Freedman – American Technology Research

Alright, can you guys offer us some sort of insight into what type of memory we can expect to see going into some of these new ultra mobile devices that Intel is going to be pushing with their new low cost processors?

Mike Sadler

Today the boxes that I’m aware of today are using our DDR 2 memory and some of them are going to transition to DDR 3. Those that are trying to push high performance and or power savings. But it’s DDR 2 memory today in either our 1 gigabit or 2, 1 gigabit modules, something in the range of 1 to 2 gigabits of DDR 2 memory.

Doug Freedman – American Technology Research

Alright my last question really Steve for you, are we seeing any impact on your gross margins from commodity prices? I mean clearly we’ve seen some pretty healthy spikes in gold and copper and wondering if you’re seeing any impacts from that?

Steve Appleton

Well we haven’t really seen too much on the materials side. So I haven’t, I mean our cost reductions are continuing to come down as rev queued to the model and obviously anything that would be happening on the materials side would be included in that. But it’s not significant enough to change our execution course.

Doug Freedman – American Technology Research

Alright, great, thanks so much.

Operator

Our next question is from John Lau from Jefferies & Co., please go ahead.

Analyst for John Lau – Jefferies & Co.

Hello, this is Raul [Kalmeker] calling in for John Lau. My first question was could you tell us the contributions from our branded businesses, [Exer] and [Crusion], how much was that?

Mike Sadler

We don’t break that out for you, I’m sorry.

Analyst for John Lau – Jefferies & Co.

Okay, my second question is about your SSD business, I understand that for NAND prices, the prices have fallen almost 70% year over year, so SSDs must be getting competitive in quite a few segments in the notebook market. So is it making, has it started making significant contribution to your business and what is your outlook for that?

Mike Sadler

Well it has not made a significant contribution to our business yet, primarily because we just introduced our first solid state drive to the marketplace less than 60 days ago, I think within the past, certainly within the past quarter. And it is an SLC based solid state drive which we don’t expect much significant revenue generation from at all. In terms of penetration in the notebook market, that is going to require MLC flash and we will have our first product in the market in the second half of this year and actually we’re quite bullish on that product becoming significant in terms of revenue generation, not perhaps in the second half of this year because there will be some latency in terms of market uptake, but it should be a very strong revenue contributor for us in fiscal year 2009.

We are dialoguing with virtually all of the PC OEMs today about working on placing that product in their mobile computing platforms here as we move through this year into the next year. So we’re quite bullish on MLC NAND penetration in the mobile computer for performance reasons and as well as referencing the cost reductions that you mentioned earlier. It’s also worth mentioning on the topic of solid state drives, the complete other end of the spectrum with respect to the market is the enterprise market and we’re not really looking at dollars per gigabit there as being a primary demand driver but its more dollars per transaction. And in that area we are approaching it with SLC NAND and we have some significant inroads there with some of the enterprise customers about potentially introducing that product in their lineup later on this year and in 2009 as well. So quite bullish on the solid state drive market with respect to our product offerings.

Analyst for John Lau – Jefferies & Co.

Okay and in terms of litigation, what is your annual run rate for legal expenses?

Mark Durcan

We don’t break that out for you either.

Analyst for John Lau – Jefferies & Co.

Okay and could you just give us an update on where you think the litigation against Rambus is going to go and what your position is about it?

Mark Durcan

Well the case that just finished was an antitrust fraud case against Rambus, it was not a patent litigation, it was not a patent infringement case. We as of this point in time do not have a trial date set for the patent infringement case that’s anytime in the near future. So that’ll happen sometime later this year, maybe sometime next year. And we’re just continuing on that course. Of course we’re going to appeal the decision that just occurred but I think it’s worth noting that that’s not a patent infringement case, that was an antitrust fraud case that was against Rambus.

Analyst for John Lau – Jefferies & Co.

Okay, thanks a lot.

Operator

And the final question comes from Bill Desellum from Titan Capital Management, please go ahead.

Bill Desellum – Titan Capital Management

Thank you we had a couple of questions relative to the Nanya relationship that you have announced. In terms of us trying to understand how this helps lead to a structural change in the industry, when you were referencing before the sharing of R&D, essentially would we be looking at some of the, taking this quarter for example, $180 million or R&D that you expensed, some of that would end up flowing through Nanya’s business and coming off of your income statement? Is that correct first of all and also are there other aspects of structural change to the industry that it would represent?

Mike Sadler

We don’t view our joint venture with Nanya as a big structural change in the industry. Obviously it may have implications on other players but for us we just view it as very strategic in terms of scale and R&D efficiency. And what you pointed out I think will in fact be the case that right now we have a certain run rate on developing R&D for DRAM and you know we don’t expect that run rate to change significantly as a result of the joint venture with Nanya.

And as they cost share with us the development of leading edge technology then obviously that will reduce the R&D bill that we have for it as a standalone entity. And by the way this is very true with respect to what happened with our joint venture with Intel, I mean we were both sharing that equally as well and that has just made us much more efficient on the development of the technology. And we would expect the same thing to occur with the joint venture with Nanya.

Bill Desellum – Titan Capital Management

And then relative to the production issues taking place in the industry you had reference the [Hynex] 200 millimeter NAND line that has or is planned to come down, are there other changes of note that you have seen that are significant like that?

Mike Sadler

Well I don’t have anything that’s not already out and been published in the media. You know there are other companies talking about, I think first of all, I mean we have seen other reports about 200 millimeter DRAM coming offline. And we’re now seeing the reports about 200 millimeter NAND coming offline. The other thing that there has been a number of announcements, quite a few pushes in cap ex.

Either because the companies can’t get access to money with which to buy the cap ex or because they’re trying to conserve their balance sheet. And that’s primarily of course been in the DRAM arena where we’ve seen that as well. So I mean I think there was real change going on right now in the industry around capacity but as you know from following the industry for a long time, there’s a lag affect from when we see the benefit of that.

Bill Desellum – Titan Capital Management

Great, thank you.

Kipp Bedard

Thank you Bill 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 10Q and 10K.

Operator

Thank you, this concludes today’s Micron Technology second quarter 2008 financial release conference call. You may now disconnect and please have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Micron Technology, Inc. F2Q08 (Qtr End 02/28/08) Earnings Call Transcript
This Transcript
All Transcripts