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

Executives

Kipp A. Bedard – Vice President, Investor Relations

Ronald C. Foster - Chief Financial Officer

Mark W. Adams – Vice President of Worldwide Sales

D. Mark Durcan – President and Chief Operating Officer

Steven R. Appleton - Chairman and Chief Executive Officer

Analysts

Tim Luke – Barclays Capital

Uche Orji - UBS

John Pitzer - Credit Suisse

James Covello - Goldman Sachs

Shawn Webster - JP Morgan

Gary Hsueh – Oppenheimer & Co.

Daniel Amir - Lazard Capital Markets

David Wong - Wachovia Capital Markets

Doug Freedman - American Technology Research

Krishna Shankar - JMP Securities

Manish Goyal - Kraft Investments

Bob Gujavarty - Deutsche Bank Securities

Micron Technology, Inc. (MU) F4Q08 Earnings Call October 1, 2008 4:30 PM ET

Operator

Welcome everyone to Micron Technology’s fourth quarter and fiscal year end 2008 financial release conference call. (Operator Instructions) It is now my pleasure to turn the call over to your host, Kipp Bedard.

Kipp A. Bedard

On the call today is Steve Appleton, Chairman and CEO; Mark Durcan, President and Chief Operating Officer; Ron Foster, Chief Financial Officer and Vice President of Finance; and Mark Adams, Vice President of Worldwide Sales. This conference call including audio and slides is also available on Micron’s website at www.micron.com. If you have not had an opportunity to review the fourth quarter and fiscal year end 2008 financial press release, it is also available on our website again at www.micron.com.

Our call will be approximately 60 minutes in length. There will be an audio replay of this call, accessed by dialing 706-645-9291, with the confirmation code of 63955265. This replay will run through Wednesday, October 8, 2008, at 5:30 pm Mountain time. The webcast replay will be available on the company’s website until October 1, 2009. We encourage you to monitor our website at www.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 the consolidated basis from time to time with the Securities & 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 web site.

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

I would like to now turn the call over to Mr. Ron Foster.

Ronald C. Foster

To those listeners who haven’t seen our press release, which is available on our website and includes a reconciliation of the non-GAAP numbers discussed on this call, I will review the summary financial results for the fourth quarter, which ended August 28, 2008.

Revenue decreased 3% and gross margin declined from 3% to (4%) in the fourth quarter, compared to the prior quarter, as megabit DRAM sales decreased and NAND ASP declines outpaced cost reductions. Both DRAM and NAND revenue declined sequentially while image sensor revenue increased.

The shut decline in ASPs during the last half of the fourth quarter triggered a $205.0 million lower of cost to market write-down in memory inventory to estimated market value. Excluding the inventory write-down DRAM margin improved again in the quarter as ASPs stayed relatively flat and cost reductions exceeded 5% in the quarter.

NAND margins continued to be negative despite megabit cost reductions of approximately 15% in the quarter and ASPs declined about 20% in the same period. NAND gross margin benefited in the quarter from $70.0 million of contractual pricing adjustments from suppliers for products purchased in prior periods.

Excluding the inventory write-downs and favorable NAND supplier adjustments, the company’s total gross margin for the quarter improved to 5%.

The company recorded a net loss of $344.0 million, or $0.45 per diluted share, for the quarter compared to a loss of $236.0 million, or $0.30, in the prior quarter.

For fiscal year 2008 revenue totaled $5.8 billion and the company reported a net loss of $1.6 billion, or $2.10 per diluted share. Gross margin was a negative $55.0 million in 2008 compared to $1.1 billion positive in 2007, as the memory product mix shifted significantly to NAND at a negative gross margin and memory cost reductions of about 65% did not keep pace with ASP declines of greater than 70% year-over-year.

Results for 2008 reflect a non-cash charge of $463.0 million in the second quarter to write off good will associated with the memory segments.

Progress in reducing our operating cost structure continued in the fourth quarter. SG&A declined 8%, mainly due to adjustments for performance-based compensation costs and legal fees. R&D expenses reflected ongoing cost management efforts and progress moving key development products into production.

While controlling operating expenses will continue to be a high priority in fiscal 2009, the run rate will increase in the first quarter, due primarily to the anomaly of a 14-week first quarter. R&D expense of approximately $190.0 million to $200.0 million is expected for Q1 2009 with a run rate per quarter of $165.0 million to $175.0 million expected for the remainder of the year.

SG&A of between $125.0 million to $130.0 million is expected for Q1 2009 followed by a run rate of approximately $110.0 million to $120.0 million per quarter for the remainder of 2009.

Total head count was 23,509 for the quarter. Year-to-year, head count declined 3% with SG&A head count dropping 15%.

Operating cash flow was $243.0 million for the fourth quarter, an increase from $144.0 million in the prior year’s quarter. Notably it was $1.0 billion for fiscal year 2008 compared to $937.0 million operating cash flow in fiscal year 2007.

We ended the quarter with $1.4 billion in cash and short-term investments. Inventories declined $162.0 million in Q4 compared to the prior quarter, primarily as a result of the write-down of carrying value to estimated fair market value.

During the fourth quarter TECH Semiconductor accessed $330.0 million of their credit line, increasing the company’s long-term debt to $2.5 billion from $2.2 billion in the previous quarter.

Capital expenditures totaled $759.0 million in the fourth quarter of 2008 with approximately half of that amount attributable to 300 mm expansion at TECH. In addition, the company invested $84.0 million in its Maya partnership in the fourth quarter.

Capital expenditures for fiscal 2008 were $2.9 billion compared to $4.1 billion in 2007. Partners’ contributions toward capital expenditures were approximately 20% of the 2008 total. TECH accounted for about 34% of capital expenditures in 2008 as it completed its 300 mm conversion. IMFT was 25%, IMFS 17% for their fab construction, and 24% for all the other Micron operations.

Anticipated capital expenditures for fiscal 2009 have been revised downward to approximately $1.0 billion to $1.3 billion for the year. Partners are expected to contribute about 15% of this amount.

We have officially delayed the IMFS fab build-out and removed tool installs from our fiscal 2009 capital plan. We will continue to evaluate market conditions to determine the exact timing and the amount of capital commitments for IMFS.

Micron’s projected cap-ex in 2009 includes research and development costs and node transitions for the Manassas ramp to 54 nanometer DRAM technology. TECH’s expenditures include continued 300 mm conversion costs and the transition to 68 nanometer DRAM technology. IM flash expenditures reflect the transition to 34 nanometer NAND technology at Lehi.

$466.0 million remains in capital contributions committed to our Maya JV through calendar year 2009. The specific timing of this investment, as well as the amounts and timing of projected capital expenditures for fiscal 2009, will be driven in part by market conditions, in consultation with our partner.

Depreciation and amortization expense was $2.1 billion in fiscal 2008 and is expected to be about $2.25 billion for 2009.

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

Mark W. Adams

During Q4 we continued to see signs of industry over-supply in both the DRAM and NAND flash memory markets. As a result, we have been experiencing increasing ASP pressure in both our DRAM and NAND businesses.

Computing continues to be Micron’s largest overall market segment. While PC desktop systems have shown some signs of weakening demand going into the holidays, the notebook segment continues to be strong.

Although we do not have direct insight into the specific demand drivers, we continue to see an increase in memory content for systems. In addition, we are seeing a growing demand for our DDR3 memory products and expect wide adoption across computing platforms through the end of the year and throughout 2009. Despite tough market conditions, we see additional opportunity at keeping customers, given our technology leadership and strong relative financial position.

Our specialty DRAM product offering remained strong in Q4. We are leveraging our existing 200 mm fabs to provide a majority of specialty DRAM products. Going forward, we are selectively moving higher volumes of specialty DRAM products to 300 mm facilities to achieve further cost reductions and allow for supply growth.

Beyond the demand from our computing customers, the mobile market experienced tremendous growth for us in Q4. We saw increasing unit shipments in our lower-powered DRAM products, we grew our sales in multi-chip packages to key handset partners, and additionally, with the launch of our 50 nanometer 8 gigabit MLC part, we began shipment of Micron’s first [migressing] memory chart. Clearly Micron is very well positioned with a broad array of products that address the needs of our mobile customer base.

Overall the NAND market continues to be in an oversupply condition. Given the flash memory market is driven largely by consumer applications such as MP3, digital cameras, GPS systems, and mobile phones, the business is highly seasonal. The forecast signals from our major OEMs and retailers suggest a softening demand heading into the holiday shopping season.

We are hopeful that price elasticity will help the current industry inventory situation as we exit the holidays and approach 2009 where we expect industry supply growth to slow substantially.

Our technology and skill advances in flash memory, highlighted by industry-leading 34 nanometer technology, will have a positive effect on cost reductions, however the oversupply and market conditions have driven today’s prices below fully-loaded costs.

As we have successfully accomplished the development of our premium DRAM segments, we are focused on striking our NAND product portfolios to improve our ASPs and overall competitive position.

We are growing a shipment of Micron NAND output through the Lexar channel in an effort to achieve higher ASPs and margins by leveraging the Lexar brand and growing detailed channel presence. In fact, while many of our retail competitors are experiencing sharp declines in tacked on revenue, our Lexar channel grew their sales in the face of these dramatic NAND price shuts.

On the product front, we continue our development of enterprise cross solid state drives and have begun testing at key OEM customers. Initial customer feedback has been positive.

Despite the over-supply conditions in DRAM and NAND, we remain optimistic about our continued success in specialty DRAM product segments and about our ability to improve our cost position in the commodity DRAM, as well as continued development into a diversified flash memory product portfolio. In the meantime, however, we are hopeful recently announced cap-ex cuts in the industry will begin to improve the supply situation as we move forward.

We continue to lead the industry from the technology perspective and [inaudible] our position in growth position and profitability as the industry reaches stability in terms of supply [inaudible].

With that, I will hand it back over to Kipp.

Kipp A. Bedard

We would now like to take questions from callers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first questions comes from Tim Luke - Barclays Capital.

Tim Luke – Barclays Capital

We would be grateful if you could just give us some sense, as you look forward, of what sort of bit growth you might be envisioning going into the November period, and DRAM and the NAND. And just off the current quarter-to-date level, if prices remain flat how should we think about your assumptions on pricing.

Kipp A. Bedard

I will take the first part of that and then turn the pricing question over to Mark.

For DRAM we’re looking at the next couple of quarters being in the mid-to-high teens for production bit growth. And NAND, although it will be somewhat lumpy from time to time, we are going to be averaging around 15% quarter-to-quarter growth over the next couple of quarters.

D. Mark Durcan

On the pricing front, our DRAM ASPs are down about 15% to 20% quarter-over-quarter and on the NAND front, quarter-over-quarter is down about 30% to 35%. I would like to clarify that coming out of Q4 where we saw dramatic price pressure on the NAND front, it has been relatively stable in most of September. And ironically, the DRAM piece, while down 15% to 20% quarter-over-quarter, we’ve seen [inaudible] pressure on that in that time frame.

Tim Luke – Barclays Capital

And could you give us some kind of framework for different inputs as to how we should think about your gross margin development going forward?

Ronald C. Foster

While we won’t try to predict pricing for you, on the cost guidance we are looking at DRAM probably in the high single digits to low double digits, cost reductions Q-to-Q and we will probably have a little stronger NAND bit cost reduction, so look more for the mid-to-high teens for this quarter.

Tim Luke – Barclays Capital

And just as you begin this full year, could you give us some sense of how you’re looking now, assumptions for the bit growth for the industry in DRAM and in NAND, given different puts and takes in terms of basic consolidation as well as production sort of cut backs by some of your peers.

Steven R. Appleton

I obviously have to make commentary with the caveat that I don’t know if we have yet seen the end of operations coming off line. But from the sense with what’s been known so far, I think that most people think that the DRAM supply base growth is only going to be somewhere in the 35% to 40% neighborhood.

But that’s with things that haven’t been announced yet. And I still think there will be more to be announced in the next probably two to three months. So, I would say that I haven’t seen capacity come off line in this short a period of time at the rate that we’re seeing these announcement right now and I think that we are likely to see in the next month or two, maybe in my history of being in this business. So there are some pretty dramatic changes going on.

So I think if what we know is in the market today is what it ends up being, I think that the bit growth will drop all the way, most people are forecasting it will drop all the way to a kind of 35% to 40% range and it could be less than that. As I said, making the caveat that I still think there is more capacity coming off line.

Tim Luke – Barclays Capital

Do you have the sense for NAND as well?

Steven R. Appleton

If you think about NAND, obviously there has been less impact there. Of course, there are less producers. The NAND market cap-ex, as you already know, at least in 2008, is going to be down sequentially, which is essentially, I think, the first time that’s happened since the inception of the market. And the NAND supply, at least that we see from a lot of the forecasts, is only going to grow somewhere around 100%. And that’s the lowest on record, I think, for the NAND market since its inception.

Tim Luke – Barclays Capital

You have that $1.0 billion to $1.3 billion of cap-ex, where is that going to be focused and what are the implications for your JV with Intel with the lower cap-ex number?

Steven R. Appleton

I think it is worth noting that, first of all, primarily that cap-ex will be in the DRAM arena. But remember, as Ron just noted, the IMF fabs, we are finishing out the construction of the building but essentially we now don’t plan on having that equipped during our fiscal 2009.

But the operations that are currently running on NAND, if you think about, both the Virginia operation and the Utah operation, are pretty new and so I don’t think that they are going to require a lot of cap-ex in the next year, going forward. And that’s why most of it is skewed to the DRAM business.

Operator

Your next question comes from Uche Orji - UBS.

Uche Orji - UBS

Can you just give us an update on a couple of issues with the litigation situation. One is where do you stand and what the upcoming dates for trials?

And then regarding the equipment lead time, what are you seeing on the markets in terms of how much cap-ex you plan to spend and how flexible will you be with that cap-ex plan?

Steven R. Appleton

On RAM [inaudible] we don’t have any comment on ongoing litigation. And most of the schedules and what judges have already decided or what the trial schedule is that are public, we can get that information. So we don’t really have anything to add on that.

With respect to the equipment lead time, obviously they started contracting as cap-ex is being cut around the industry. I think that is expected. And in most cases most of us thought that they were somewhere in the 6-9 month, even as long as 12 months, depending on what you were going to order. And most of that is contracted in probably the 3-4 month time frame, depending on what it is.

But having said that, I think it’s also worth noting that the equipment industry has for the most part changed to a model of outsourcing. And when we get in periods of time like we are right now, they just simply cut back on the outsourcing and a lot of that capacity goes away and is not replaceable for the short period of time. So that would obviously be one of the concerns for the industry. If they were to try to bring it back up quickly, I think that a lot of these equipment guys now that the downturn has been sustaining are making permanent adjustments in their supply base. And most of them, as I said, converted over to a model of outsourcing. So it could very well be that even a slight uptick in cap-ex will extend those lead times.

Uche Orji - UBS

With regards to what you see in regards of content, as we see more and more of the PC market move toward [inaudible] and the effects of things like notebooks taking off, what does that mean for you in terms of the content growth in the medium term and the long term?

Steven R. Appleton

If you look at the data today, actually, it’s continued to go the opposite trend. As a matter of fact, this is the first quarter that both our desk top and the notebook content in the industry is over 2 gigabyte per unit. And beyond that, we are kind of in a wait-and-see until the notebook [inaudible] overall impact on the industry. Unit volume, they are kind of just barely starting out today.

Secondly, in addition to when you talk about [inaudible] notebook it might look like a probably down-size in the DRAM turns into an opportunity for solid state technology on the NAND side. So we’re pretty excited about that category in general and we don’t think it’s [inaudible] right now in the next 12-24 months in the unit perspective in the overall units.

Uche Orji - UBS

So you don’t think it’s maxed out just year. The last part, did you say it was [inaudible] for the next 12-18 months?

Steven R. Appleton

I think that’s probably about right. And clearly right now it’s not material. We don’t see that going through the, as far as out as 12-24 months in terms of a overall capacity in the industry. As I said, there’s an upside opportunity on the forward side of that because they’re going out in many cases without hard drives, which storage will be an internal drive.

Uche Orji - UBS

We are seeing a lot of your competitors struggle and things are getting more difficult. Can you just talk as to how you view your role in this market place and from your perspective what will it take to play a much more active role?

Steven R. Appleton

As you just noted, you can look at the numbers like we’re looking at them. Most of the companies, particularly in DRAM space, have migrated to balance sheet preservation. The margins, the numbers, the cash flows, etc. for a couple of those in the industry are just absolutely very, very challenging, I think, for them.

And I don’t want to comment consolidation of the industry other than to say that the market environment like it is right now is just putting huge pressure on some of the competitors in this state and I think they are trying to figure out what kind of course they really have in the future.

Operator

Your next question comes from John Pitzer - Credit Suisse.

John Pitzer - Credit Suisse

A couple of qualifications first. Relative to the $70.0 million recovery for NAND products purchased from other suppliers, is that all Lexar-related? Or can you help me understand that a little bit?

Steven R. Appleton

Yes, that’s Lexar-related.

John Pitzer - Credit Suisse

And then secondly, you talked a little bit about SSDs. Have you guys actually recognized any revenues relative to the SSDs? And help me understand how we should think about this market developing over the next several quarters. At what point do you think it might actually be 5% to 10% of your NAND sales?

Mark W. Adams

Today the revenue is fairly small in the category, for us, on the Micron side. Mind you, our strategy has been to kind of develop a world-class enterprise offering as we went in and tested, as I mentioned earlier, with some of our key customers. As it relates to kind of a forward-looking market projection, it’s pretty tough, although I will tell you that given the trends in the ASP demand, it’s starting to make that curve [inaudible] come in a little bit. The cost per gigabyte today, what we thought 12 months ago, seems to be a little bit more aggressive in terms of price adoption.

John Pitzer - Credit Suisse

And just relative to your cap-ex budget for the current fiscal year, can you help me understand, you drew down some lines of credit in the fiscal fourth quarter. Can you walk through the different lines of credit you have? Do you expect that your cash flow generation, over the next several quarters, is going to be sufficient to support cap-ex? Do you think we will continue to see cash balances come down? Can you help us understand the strength of the balance sheet here?

Ronald C. Foster

If you look at our current operating cash flow generation, it’s around $240.0 million a quarter, we generated $1.0 billion in 2008, of operating cash flow. That’s probably one of the top in the industry. And if you look at our cap-ex budget going forward, just at our current operating cash flow rates, we can pretty well cover our cap-ex budget.

The only thing I would comment on is that our cap-ex requirements are somewhat flexible, in terms of time, and we will be monitoring the market as we go forward. So you can see our positioning in terms of investments, and specifically cap-ex moves, being developed over time based upon the requirements that we see in the marketplace.

John Pitzer - Credit Suisse

Just relative to being opportunistic around consolidation,, given the current state of the industry, your balance sheet, your capital requirements that you’re putting up, cap-ex requirements that you are putting up for the fiscal year, how much flexibility do you have to be opportunistic? And I guess the question mark in the market place is what happens to Tera. I guess you guys can’t comment given that you have a joint venture with Nanya at the same time that Nanya is trying to figure out what to do with their joint venture with Komando, that might be helpful, especially as far as trying to figure out when Maya might go ahead as far as equipment loading.

Ronald C. Foster

I wanted to just back up real quick. You asked a questions about the lines of credit. I just wanted to make sure that I clarify. TECH Semi, which is obviously majority-owned by us, we have other partners in Singapore, that is where the line of credit was drawn. It wasn’t at Micron at the parent-level, so to speak.

And that was a line of credit that they had put in place in order to do the 300 mm conversion. We haven’t done anything other than that in terms of drawing that line of credit.

With respect to your question around what’s our flexibility, clearly we have some flexibility. We’re probably one of the best positioned now in the industry with respect to our financials and I have said in the past that we will continue to look at these opportunities as they surface. We don’t have any [inaudible] today but we’re continuing to keep a pretty close eye on what’s going on in the market place.

John Pitzer - Credit Suisse

If you look at the quarter just reported, DRAM bits were down sequentially. If you look at the guidance for bit production growth, you are looking for mid-to-high teens. Given that all the data points relative to the PC [inaudible] it has probably gotten weaker since Labor Day. Help me understand why you’re not more concerned about that DRAM portion.

Steven R. Appleton

I’m not sure, quite, what your question was.

John Pitzer - Credit Suisse

In a quarter where the PC data points were actually relatively okay, your August-ending quarter, you had DRAM bit growth that was actually negative Q-on-Q and now you’re talking about the bit production. I know it’s two different things going up, sort of mid-teens, in an environment where the data points around PCs seem to be getting weaker, not stronger. So I’m just trying to understand that dynamic a little bit.

Steven R. Appleton

First of all, when you think bit growth, in terms of our production, obviously the bit growth, we are advancing our technology and converting, if you will, TECH to 300 mm and that is resulting in the big growth, and frankly, that’s going to be whatever it is because we are optimizing the operation [inaudible] cost per bit.

Now with respect to what we’re seeing in the market place, as Mark already noted, clearly the PC business was plugging along pretty well and then also was noted really in the last month the demand profile has really dropped off. And we don’t know if that is going to be sustained but clearly I think that the PC OEMs felt like they had enough inventory, that they didn’t want to carry more inventory as they moved into the holiday season, thinking this holiday will likely be weak.

But I think that what we’re talking about in terms of bit growth, that’s based on an internal operation that we control and we’re trying to optimize the cost per bit. When we’re talking about the bit demand growth that is occurring in the market place, I think most of it is more like the demand that will occur, primarily will occur beyond the quarter one calendar of 2009.

Operator

Your next question comes from James Covello - Goldman Sachs.

James Covello - Goldman Sachs

A couple of things, sort of derivations of questions that have already been asked. We’ve spent a lot time asking about DRAM consolidation. Obviously there is a pretty important piece of NAND consolidation that is out there in terms of Samsum having announced an offer for SanDisk. Can you help us understand, to the extent that it was, and the consolidation of Nanya, that specific piece of consolidation, how do you think that would affect the industry dynamics, other than from market share, supply to world containments amongst the various parties in the industry.

Steven R. Appleton

Well, I don’t want to speak for other companies, but first of all I think the consolidation that is occurring in NAND, you have to look at it at two different levels.

SanDisk is not a producer of NAND components, they are a minority partner in a company that actually is a producer of NAND components, and we all know that that is Toshiba. So in terms of Samsum potentially acquiring SanDisk, obviously I don’t have any insight as to whether that will or will not happen. I can only say that that is a consolidation, if you will, of the channels, it’s not a consolidation of NAND component production.

Having said that, there has clearly been conferrals. We’ve been part of those announcements as well as some contractions around 8-inch NAND and I think you will see additional contraction as we move forward, in particular on the 8-inch front. So I think more likely in the NAND space, I mean there’s really only four of us that produce it at the component level, more likely the NAND space at the component level, it’s really us and others either deferring expansion or taking off line a sufficient production capacity.

But in terms of the channel, I think that’s where you will probably see consolidation as these companies try to position themselves or create better links to solve whatever their own particular issues are.

James Covello - Goldman Sachs

One other follow-up questions around the solid state drive adoption, where is the industry at this point in multi-level cell controllers and has that really been the gating factor in your mind since the one thing, you know, further penetration in solid state drives, obviously prices need to come down and prices are coming down but that’s been a little bit of a gating factor. Where do you think Micron and the industry is on that?

Mark W. Adams

I think if you divide the market segments up into enterprise and PC/notebook, you get a different set of requirements to compete for the existing applications. On the notebook side, which will probably drive most of the MLC-based solid state drives, there actually has been some fairly good progress around controllers in that environment. So I think, as I said, given the price trending and the declines over the recent quarter, we’re starting to get to a point where the solid state drive application notebooks is increasingly becoming more attractive from an end user’s perspective.

On the enterprise side, I don’t think we’re in a place where we are mostly in control of development if you’re even in a position to compete for that space. You’ve got a whole set of different requirements around reliability, performance, and so on and so forth, where it’s still a chameleon SLC market and that’s where our control will kind of evolve in the short term.

James Covello - Goldman Sachs

I think Steve talked about potentially 35% to 40% DRAM bit supply growth in 2009 but it could be lower if we see additional stuff come off line and maybe 100% NAND supply bit growth in 2009. Did I get those figures right?

Steven R. Appleton

That’s right.

Operator

Your next question comes from Shawn Webster - JP Morgan.

Shawn Webster - JP Morgan

What was your DRAM production in Q4, sequentially, as well as your NAND?

Ronald C. Foster

It was up mid-teens on DRAM and NAND was up low-double digits.

Shawn Webster - JP Morgan

So somewhere between 10% to 20%?

Ronald C. Foster

Correct.

Shawn Webster - JP Morgan

And as far as production for next year, you couched it in terms of what you believe the industry will do. Does Micron plan to outgrow the industry in either or both of DRAM and the NAND segments next year, in terms of production?

Ronald C. Foster

Well, we stayed away from a year-over-year guidance for you because there is flexible and flexibility within our production plan. So we have given you a taste of what we think we will do the next couple of quarters, but there is too much flexibility for us to give you a year-over-year number for Micron.

Shawn Webster - JP Morgan

What are the available lines of credit that your company has, both directly for Micron, as well as all of your subsidiaries, in terms of how much credit you have available to tap?

Ronald C. Foster

We historically, as I already mentioned first of all, that TECH is the entity that has used lines of credit historically and they used those prior to us being the majority owner back when we were a minority partner. And also after we acquired the majority of the shares. So they continue to do that. They use lines of credit, they draw and they pay back. They’ve been doing that for the decade that we’ve been involved with them.

Other than that, Micron doesn’t actually draw on lines of credit. And we have philosophically came to the conclusion that a lot of people are experience right now, that if you need the money and you can’t get it, and then you don’t need it and you can get all you want, so we have relied on our own cash balances. And that’s why you continue to see us have a strong cash balance is because we don’t have lines of credit that we’ve drawn on. So we haven’t drawn on any because we don’t use that form of financing.

Shawn Webster - JP Morgan

But do you have any that are available to you?

Ronald C. Foster

No. We don’t have any lines of credit that are in place. In terms of what we’ve always looked at for available financing is either to do strategic partnerships, which we’ve done a fair amount over the last ten to fifteen years, or by going to the market.

Shawn Webster - JP Morgan

In terms of the write down, can you break it out for us between the NAND and DRAM segments? The $205.0 million.

Ronald C. Foster

We don’t break down between those two segments. It’s actually a product-by-product analysis that’s done and we relate that to our pricing forecast on a line item basis. So I don’t have the break down that way. In view of us just going through our line items and comparing it to our forecast of near-term future prices, and obviously that’s a judgment call based upon what we’re seeing, or anticipating, in front of us, on a line item basis.

Shawn Webster - JP Morgan

I think someone mentioned earlier an expectation for pricing. Can I just check those number? I think for November if pricing stays flat for DRAM you said down 15% to 20%, is that correct?

Ronald C. Foster

If flat from here, that’s correct.

Shawn Webster - JP Morgan

And then 30% to 35%?

Ronald C. Foster

Yes. Again, if flat from here.

Shawn Webster - JP Morgan

How much were your Nanya licensing royalties in the quarter?

Ronald C. Foster

I believe that was $34.0 million for the quarter.

Shawn Webster - JP Morgan

And is that the kind of run rate you expect for the next several quarters?

Ronald C. Foster

As we have explained in the past, there are two line items for that. There’s the licensing, which is more straight-line amortized through calendar 2010. And then there is a royalty-as-production-ramps. So as the Nanya production ramps and/or Maya ramps, then you will see an increase in the royalty line, based on the output that they receive.

Shawn Webster - JP Morgan

And the $34.0 million hits the revenue line right?

Ronald C. Foster

Correct.

Shawn Webster - JP Morgan

What was your wafer growth, sequentially, in the August quarter?

Ronald C. Foster

It was about 1%.

Operator

Your next question comes from Gary Hsueh - Oppenheimer & Co.

Gary Hsueh – Oppenheimer & Co.

Just circling back to another question, you say that you grew bit production for DRAM in the fiscal fourth quarter by the mid-to-high teens. You basically kind of print a sales kind of bit number quarter-over-quarter of down 5%. So at what point does it make sense, even in fiscal Q1, to continue to produce bits in the mid-to-high teens? At what kind of DRAM contract or spot pricing level does it make sense to actually start cutting production, given the discrepancies between bit production and bit sales?

Steven R. Appleton

Well, the way that we do our analysis, first of all, Gary, cash is king in this environment. So if we are able to generate cash from an operation, clearly that plays a primary role in how we look at it as opposed to the way that you’re describing it.

So as long as we are generating positive cash flow with an operation, we are going to considering continuing to keep it on line. Now, having said that, the reverse is true as well. As soon as an operation looks like it’s no longer generating cash, is actually consuming cash, then we’re going to look at should we remove that or take that off line. But remember, that is all these numbers, as Ron just described, deals with forecast and historical-looking data so we want to make sure that we’re not making a short-term decision that is going to hurt us in the long term.

And I will tell you, it’s an ongoing evaluation right now, given the market conditions.

Ronald C. Foster

And one of the points on that is that going into the end of August, we had some key customer requirements that forced us to take some of the inventory from our August quarter and early September for holiday deliveries and that put us in a position where the shipments were not in line with the output.

Gary Hsueh – Oppenheimer & Co.

So there is a bit of a timing issue in terms of your bit production and actual bits shipped in the quarter?

Ronald C. Foster

That’s right, when you think about it and you look at the volatility in the pricing in the last two weeks of August, when we did our calculation from a financial model, it would have made a lot more sense to carry the inventory over for some opportunities that we needed from a linearity perspective into the Q1 of our fiscal year.

Gary Hsueh – Oppenheimer & Co.

And just so I’m clear here in terms of bit sales growth in the fiscal first quarter, I should be expecting something above a down 5% quarter last quarter, right? I mean, given the lower pricing, down 15% to 20%, presumably with elasticity, you can start shipping, or pushing through more bits, is that the thinking here?

Ronald C. Foster

Given where we are today, that’s our plan. Again, not knowing what the future holds on pricing and so on and so forth.

Gary Hsueh – Oppenheimer & Co.

The second question is just on bit cost reduction. I think you’ve been putting up some pretty disciplines numbers in terms of stepping down, the cost of goods sold per bit. Is there a kind of an end of the line here, or kind of plateau, where you can’t continue [inaudible] bit cost reduction? Where are we relative to that point?

Mark W. Adams

I don’t think that’s the case, as Kipp alluded earlier. Our bit growth and our cost per bit will be a little bit lumpy, on a go-forward basis. But we continue to say high single digits, low teens, on DRAM and mid-teens on NAND, on a go-forward basis, and we think that’s good for a number of quarters going forward.

Gary Hsueh – Oppenheimer & Co.

The mark on average, you still see the ability to kind of consistently push down along those kind of bit cost reduction numbers, over the next four quarters?

Mark W. Adams

Absolutely. We think we have got a great technology road map and we’ve got good capacity in place and we’re pretty comfortable with the technology and capital decisions we made as we put that capacity in place.

Gary Hsueh – Oppenheimer & Co.

Just to kind of help me frame 2009, a lot of discussion on consolidation, production cuts, but top-level, which line of business, DRAM, NAND, or specialty or image sensor, which line of business do you think you could see a recovery first, and which business has the highest kind of leverage to the upside in the event of any kind of recovery here in the back half of 2009?

Steven R. Appleton

If I were to try to rate that for you, and I will give it a shot, first of all, we’ve already seen the imaging business have a pretty decent gross margin and they’ve actually been up quarter-over-quarter, so I don’t know if we want to characterize that as a recovery, but so far so good on that as they move forward.

The specialty DRAM, I don’t think we expect much of a recovery because it’s already pretty good business, but I do think that we expect that the volume will decline as we move through time over the next couple of years.

Now, having said that about those two categories, my perspective, given what I’m seeing in the DRAM market versus the NAND market, I think that a lot of people feel like the DRAM business is going to recover sooner than the NAND business may recover, and I think that would be reflective, by the way, of what you see in the cap-ex.

So, when you look at the DRAM business today, it just doesn’t feel like for many companies it’s sustainable. Many of them are below their cash cost, they have moved into balance sheet preservation. It’s a very, very difficult environment.

And also it’s worth noting that there are weaker players that exist in the DRAM business compared to the NAND business because if you look at those that are really producing NANDs it is essentially Samsum, Micron, Toshiba and obviously we are major players in both spaces. So, that’s just how I see it playing out.

On the NAND front it’s just hard for me to respond because I don’t know how long it takes for a lot of the capital pushes or whatever capacity has come off line to be a factor. In particular, when you look at the demand growth rates, obviously NAND far exceeds DRAM so this is one of those periods of time where NAND has a lot of price elasticity. I mean more price elasticity than DRAM and it’s behaving a lot more like the DRAM business did in pre-1995 around that elasticity, so it’s much harder to predict when that market might turn as opposed to what we’re seeing in the DRAM business.

Operator

Your next question comes from Daniel Amir - Lazard Capital Markets.

Daniel Amir - Lazard Capital Markets

Just a question on the image sensor business. Can you comment a bit on the visibility there, what you’re seeing there in terms of growth for the next couple of quarter, if at all? And kind of what the strategy is now for the segment?

Steven R. Appleton

I wouldn’t say there’s a lot of growth. I think it looks pretty stable. I would say not a lot of growth, not a lot of decline. There are some incremental improvements that we’re making. If you would have noticed, for image sensor companies, they’ve made somewhat of a comeback and I think have gained some market share in the last quarter or two.

But, hey, look, I think that business, a lot of it is in the mobile stage and the technology stage, if you will, around PDAs and digital cameras and PC cams, etc. so I think we have some similar challenges to what other segments do, but it still looks like they’re on a pretty good path.

In terms of what we’re intending to do in that space, there hasn’t been any change of plans with respect to what’s happening with that Aptina. In fact, on this Friday they will start operating as a separate company from Micron, although it will be a wholly-owned subsidiary they will have their own systems and so forth, and we’re still moving down the path as journey with a partner to likely take that company and try to work, but yet have Micron continued to manufacture the product, at least in the foreseeable future.

Daniel Amir - Lazard Capital Markets

And on the Nanya partnership, can you just expand a bit, what the plan is in terms of cap-ex rollout there for the next year, with the partnership. I mean what quarters should we see it, what’s the road map right now?

Ronald C. Foster

If you look at our Maya partnership, what we’ve decided at this point is that in light of current business conditions, we’re deferring any near-term capital purchases as we re-assess our near-term business plans with our partner.

It is important to note that that is affecting near-term timing and we remain very committed to our partnership. The only issue we are dealing with is the actual timing of our planned expansion. These are the market demand and our judgment about timing.

We still have a $466.0 million commitment out there for the calendar year but we will judge the timing of that based upon market needs.

Operator

Your next question comes from David Wong - Wachovia.

David Wong - Wachovia Capital Markets

First a quick clarification. You said that demand had dropped off in the last month. Do you mean the last month of the quarter that is August or did you mean in September? And are you expecting continued weakness in demand through the rest of this year to only pick up in the first quarter? You made some comments about potentially a pick up in the first quarter.

Steven R. Appleton

What we saw primarily was ASP price pressure due to the demand in the August time frame and continued, again, more on the DRAM front, through September. On a going-forward basis it’s hard to tell but it looks like it’s going to be a softer holiday than initially hoped.

David Wong - Wachovia Capital Markets

And you’re 5% drop in DRAM bit shipment, is that indicative of what PC makers as a whole bought from the DRAM industry or is there something special associated with Micron that you had a different characteristic from the market as a whole?

Steven R. Appleton

As I commented earlier, the volatility in pricing the last couple of weeks of August had us kind of reflect on what was the best thing to do financially for the inventory to be sold and we looked at some key customer requirements in the early part of September that we decided to hold over in support.

Operator

Your next question comes from Doug Freedman - Amtech Research.

Doug Freedman - American Technology Research

Can you comment on what you’re expecting PC unit growth to look like in the last quarter of the year?

Steven R. Appleton

For us it’s a little bit harder than the demand side given what I just commented on and the softening of demand. But certainly from a unit standpoint, the growth is going to be, our current assumptions going into the quarter were somewhere modest, sub-10%. And at this point, given the economic and macro economic situation and the holiday projection that we now see, somewhere about flat to up or down a few percent.

Doug Freedman - American Technology Research

Can you also comment as far as the bits that you shipped in the Lexar retail, the percentage of bit? You’ve given that number in past.

Steven R. Appleton

In terms of flash components, Lexar ended up consuming about 50% to 55% of their overall needs. As it relates to Micron overall supply on NAND, it continues to approach about 20% of the overall supply of Micron parts.

Doug Freedman - American Technology Research

One of the previous callers touched on going back to market dynamics out there. What was the demand in DRAM, we saw some pretty heavy promotions in the past 2-3 months regarding to box loading and trying to use DRAM to load up some boxes and make some unit moves and entice customers, working towards price elasticity. Can you comment on what you’re presently seeing and what maybe the promotion plans are around the holidays and whether we still really have price elasticity, both in the NAND market and in the DRAM market, for general purpose PC marketing.

Steven R. Appleton

That’s a pretty tough question given the situation from what we see today. Historically we go into the Black Friday season in retail and we’re trying to drive traffic and so on and so forth and use the price to get people in the store and have them buy upsale margin opportunity while they’re in the store.

I think to your point, the pricing situation is so dramatic up until today, that we see that the retail actually has a choice of keeping that margin and not driving the top line and we have seen that in years past, in general in the market, where retailers take the, where the economic climate is not so favorable, and they take the margin as opposed to taking the top line revenue growth. So I think I kind of concur with where you were heading with that, I’m not sure the price will be a useful tool, an effective tool, to drive additional unit sales. And they may choose to play a margin gain coming into the holidays.

Operator

Your next question comes from Krishna Shankar - JMP Securities.

Krishna Shankar - JMP Securities

What do you see in terms of consumer versus corporate PC demand?

Steven R. Appleton

On the desk top side we have seen a bit more of a decline. The notebook side is relatively strong, even through the consumer channel. But if I segment out, as you’ve asked about consumer and commercial, the commercial, the commercial business is still pretty good for us and we’re just starting to see the consumer side of the desk top and some small decline overall in the PC space in the consumer side.

But again, the enterprise commercial side is fairly stable for us so far.

Krishna Shankar - JMP Securities

Can you give us an update on inventory of flash memory cards in the channel, what is the situation in terms the inventory excesses that we saw in flash cards during [inaudible]?

Steven R. Appleton

I think our public competitors have already stated their position and it’s pretty significant. Vis-à-vis Micron and through the Lexar channel, I think we’ve got a pretty good handle on that, as well as we’ve won some additional share going into the holiday to offset any problems I think we have in the channel inventory of our business. My sense is, to the earlier reflection on what the retailer tools will be to drive unit and overall volume in the stores for the holiday, the question will be better answered coming out of the holiday in mid-January.

Operator

Your next question comes from Manish Goyal - Kraft Investments.

Manish Goyal - Kraft Investments

Based on your new cap-ex guidance, what is your depreciation for fiscal 2009? And can you give us some sense as to what percent of your production today is at 200 mm for DRAM and NAND separately, and over what period of time do you see that will be decommissioned?

Ronald C. Foster

The depreciation for 2009, we’re estimating to be about $2.25 billion. On a $200.0 million a year output it’s less than 10% on core DRAM and 5% to 10% on NAND.

Manish Goyal - Kraft Investments

And over what period do you see decommissioning that capacity?

Steven R. Appleton

I think the specialty and imager wafers are still very productive for us. And we have some flexibility in terms of how we move wafers around. Clearly NAND and core DRAM production is challenged on 200 mm today, it’s not as efficient as the 300 mm. but it is a fully depreciated tool set and we can flex, so we will just continue to look at market conditions and maybe adjust them as we go forward.

Operator

Your next question comes from Bob Gujavarty - Duetsche Bank.

Bob Gujavarty - Deutsche Bank Securities

What was your DDR3 mix? Was it appreciable in this quarter?

Ronald C. Foster

We did a couple of percent of DDR3 in this quarter.

Bob Gujavarty - Deutsche Bank Securities

1% to 3%, something like that?

Ronald C. Foster

Correct.

Bob Gujavarty - Deutsche Bank Securities

And are you still on track for your 34 nanometer transition for NAND? I think the ideal was 50% exiting this calendar year.

Steven R. Appleton

Yes, that’s still progressing well. We are very happy with the yield at the Utah fab. Those are approaching maturity on some of the wafers and we have begun the transition now in Virginia and have a good yield in that fab as well.

Bob Gujavarty - Deutsche Bank Securities

Do you think once your 34 nanometers ramp that you will have kind of industry-leading costs and [Hinam]?

Steven R. Appleton

Yes, we believe so.

Bob Gujavarty - Deutsche Bank Securities

Within your memory mix, how is your server memory business? Was that as expected? Any kinds of trends in that business that were strange?

Steven R. Appleton

Clearly that remains a very strong part of our business today. A lot of the down turn in demand and pricing pressure, we’ve seen it more on the consumer side, but the server business remains pretty strong.

Kipp A. Bedard

And thank you very much for participating on the call. If you will please bear with me I will 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

This concludes today’s conference call.

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. F4Q08 (Qtr End 08/28/08) Earnings Call Transcript
This Transcript
All Transcripts