Micron Technology - Earnings Call - Q3 2011

Transcript

Speaker 1

Good afternoon. My name is Saeed, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technology's third quarter 2011 financial release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you'd like to ask a question during this time, please press star and the number one keypad on your touch-tone telephone. If you'd like to withdraw your question, please press the pound key. Thank you. It is now my pleasure to turn the floor over to your host, Mr. Kip Bedard. Sir, you may begin.

Speaker 9

Thank you. Good afternoon and welcome to Micron Technology's third quarter 2011 financial release conference call. On the call today is Steve Appleton, Chairman and CEO, Mark Durcan, President and Chief Operating Officer, Ron Foster, Chief Financial Officer and Vice President of Finance, and, of course, Mark Adams, Vice President of Worldwide Sales. This conference call, including audio and slides, is also available on Micron's website at micron.com. If you have not had an opportunity to review the third quarter 2011 financial press release, this is available on our website again at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of this call accessed by dialing 706-645-9291 with a confirmation code of 769-07886. This replay will run through Thursday, June 30, 2011, at 5:30 P.M. Mountain Time. A webcast replay will be available on the company's website until June of 2012.

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. I think what I'll do is go ahead and read it for you. During the course of this call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to the documents the company files on a consolidated basis from time to time with the Securities and Exchange Commission, specifically the company's most recent Form 10-K and Form 10-Q.

These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward-looking statements. These certain factors can be found on the company's website. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Also, we are under no duty to update any of these forward-looking statements after the date of the presentation to conform these statements to the actual results. What I'd like to do now is turn the call over to Mr. Steve Appleton.

Speaker 12

Thanks, Kip, and I also want to thank everybody for joining us today. I thought I'd start with a very brief update on Japan on the supply side. In other words, silicon and other materials like specialty gases and targets, I just want to confirm that there were no interruptions, and I think we're past the difficult period. I think it's worthwhile to comment on how good the Japanese companies were in executing their recovery strategy. We really don't see any issues with it moving forward. On the customer side, I think similar for the most part, but we do see some fallout from the challenges the country is facing in recovering. In particular, this impacted our ESG revenues, and it was about 5% for the quarter. On the operations and technology, I think we had a number of achievements that were worth noting.

Clearly, from the media, you would have seen that we sold the Micron Japan wafer fab to TowerJazz, and Ron's going to have some more comments on that in a little bit of a detail during his segment. IM Flash Singapore continues to perform very well. Again, Ron will also add some comment on that, but let me just say that we're shipping to customers qualified product from the facility. I will note that, as is typical with us in the past, when we bring on a new facility, it's focused on pretty much a singular process known as singular product, and all of that coming out of that facility is MLC. Our 20nm NAND still looks good for a RAM in the second half of the calendar year, so we're pretty pleased with that.

Let me add that we are sampling 30nm DRAM from our Virginia facility, and that technology will spread to another DRAM facility in the fall. Finally, on the SSD side, I mentioned under technology because, obviously, that's required to have success in that space. Our revenues continue to rise. We're up about just under 40% quarter over quarter, so we feel pretty good about that. Now, in terms of a couple of market and product segment comments, the DRAM, I think in our last earnings call, I noted that we thought that the markets were bottoming at that point. I think overall this might turn out to be true, but we all know from the reports that at least for us in the memory world that it's stayed at these lower levels.

Fortunately, it's also true that in terms of the DRAM supply, that it's been relatively muted compared to last cycle, so that's obviously helpful. Although I'll note that we've had some inventory accumulation in the channel, in other words, channel or customer base of probably about five weeks, so not dramatic, but a little bit more than we'd normally see. More specifically, desktop and notebooks continue to be weak, and I'll just say that I don't think we really have a good feel for how that's going to play out over the next quarter or two. I think we can also add wireless to the list of weak markets with respect to the lower value segments. Fortunately, most of the other markets actually look pretty good. They look better. The corporate and enterprise actually look strong through the second half of the year.

In particular, the server networking and AME all look pretty positive. On the NAND front, I think the story is a little bit different. The pricing has moved around a little, but for the most part, it's been in line with what we expected. Wireless, particularly smartphones, in terms of memory consumption continues to look okay. I mentioned on the SSD shipments, I'll note that we were up quarter two over quarter one, and we're up again quarter two over quarter two, as I just said, under 40%, so that's obviously very positive. I think as opposed to the DRAM inventory levels, for both Micron Technology and our customers, we remain relatively tight in NAND inventory with the big consumption by the SSDs and tablets. On the NAND front, I think as you might expect, other than the hiccup in Japan, it's all pretty steady and normal.

All of this leads me to make a few final comments. Our business units and the associated structure with those business units in the company is working well. The structure allows us to strategically focus on customer markets and applications, and I think it's really starting to help drive the diversification of our product line while at the same time we're able to leverage our advanced technology and manufacturing skill. Ron's going to add a little color later on about the financials, but when you take a closer look at our financials, keep in mind that essentially what occurred during the quarter was that we shipped less product into the commodity markets. We shipped more product in the higher margin markets, and that shifted up our cost structure somewhat, but it also more so lifted our margins.

In summary, I think we're in relatively good shape as compared to some others, but we still have to deal with the continued pricing pressure in the DRAM, in particular in the commodity markets, and make sure that we're in the best position we can for whatever happens in these variety of markets moving forward. I think at the end of the day, we feel pretty good about our position. With that, I'll hand it over to Ron.

Speaker 9

Thanks, Steve. The company's third quarter of fiscal 2011 ended on June 2nd. As usual, we provide a schedule containing certain key results for the quarter as well as guidance for certain metrics for the next quarter. That material is presented on a few slides that follow, as well as on our website. As was previously announced, we sold our Japan fab operations to TowerJazz, as Steve mentioned, in the third quarter. We will continue to source wafers from that operation through a wafer supply agreement, which extends over approximately the next three years. The sales transaction resulted in a gain in other operating income of $54 million in the third quarter. In addition, there was a tax provision of $74 million stemming from the gain and the write-off of deferred tax assets, netting to a $20 million loss for the total transaction in the quarter.

Other operating income also includes a gain of $35 million from the final installment from Samsung under the cross-license agreement we entered into earlier this year. For the whole fiscal year, we recognized all of the $275 million gains in the cross-license. Recall that there is a withholding tax on these payments that is reflected in the income tax provision of $6 million in the third quarter and $45 million year to date. The total tax provision of $104 million in the third quarter includes the effects of the sale to TowerJazz and the Samsung cross-license fee, in addition to our regional taxes in other jurisdictions. As you see from the chart, we expect the tax provision in the fourth quarter to be back to more normal levels. IM Flash Singapore (IMFS) continues to ramp ahead of schedule.

As Steve mentioned, we began to charge most of the manufacturing costs into inventory as we have qualified the site's first products for sale to customers in the third quarter. The company's overall gross margin percentage improved in the third quarter compared to the previous quarter, primarily due to favorable mix shifts in DRAM and decreases in DRAM production costs. Total bit sales of NAND products were relatively the same level in the third quarter as in the previous quarter. Micron Technology's trade sales shifted toward lower bit density but higher margin SLC devices and client SSD applications, as Steve mentioned, which explains the increase in NAND average selling prices and costs you see in the chart. Inventories of NAND product increased during the third quarter, primarily as a result of the timing of customer qualifications and the IMFS ramp.

The mix of product sales by architecture, DRAM, NAND, and NOR, was relatively stable in the third quarter compared to the previous quarter. With the ramp of IM Flash Singapore in the fourth quarter and where Micron Technology has been providing all of the recent capital contributions, Micron Technology's share of IM Flash Singapore output in the fourth quarter, which is based on ownership share with a one-year lag, will be 57% and is expected to increase to 83% in about a year based upon current ownership. Last quarter, we reported operating results for the first time along the newly established business units of DRAM Solutions, NAND Solutions, Embedded, and Wireless Solutions. The third quarter results for DSG track closely with the DRAM product ASP, cost per bit, and bit volumes presented earlier.

Although revenue declined, operating income grew through manufacturing cost reductions and increased mix sold to premium DRAM segments, while total average selling prices remained roughly flat. NSG trade sales at the NAND Solutions Group track closely to the NAND trends presented earlier, with revenue down but operating income percentage up slightly from the second quarter. NSG sales to Intel from our IM Flash joint venture were approximately $220 million in the third quarter, an 8% increase compared to the second quarter. Recall these sales are at long-term negotiated prices approximating cost. WSG sales of products by architecture in the third quarter were NOR, NAND, and DRAM in decreasing order of revenue. While NAND and DRAM sales were flat from the second quarter, NOR sales were slightly decreased on lower wireless OEM demand.

ESG sales of products by architecture in the third quarter were NOR, DRAM, and NAND in decreasing order of revenue, with rank order unchanged from the second quarter. ESG revenue decreased 4% in the third quarter, notably in the amusement market, which was impacted by the Japan earthquake and tsunami. R&D expense for the third quarter of $211 million increased from the second quarter as expected due to higher pre-qualification costs as we readied key new products for production. R&D expense in the fourth quarter is expected to be at approximately the same level as in the third quarter, between $205 and $215 million. SG&A expense of $151 million increased compared to the previous quarter, partially as a result of a higher level of costs associated with the Numonyx integration and pending legal matters. SG&A expense in the fourth quarter is expected to be between $140 and $150 million.

The company generated $589 million in cash flow from operating activities in the third quarter, and we remained free cash flow positive for the period. At the end of the third quarter, we had cash and short-term investments of $2.4 billion. Expenditures for property, plant, and equipment were $534 million. We anticipate capital spending in total for this fiscal year to be approximately $2.9 billion. This amount can vary, however, based on the timing of year-end tool receipts. We estimate capital spending in the next fiscal year to be down with an initial estimate around $2 billion plus or minus as the payments for initial IM Flash Singapore (IMFS) capacity are completed in the first half of the FY12 fiscal year.

Decisions on future IMFS capacity expansion beyond the current target of 60K wafers per month by the end of the calendar year will be made based on overall market demand and customer requirements as we go forward. Primarily due to the additional production assets placed into service at IMFS, we're expecting depreciation and amortization to be between $580 and $590 million in the fourth quarter and approximately $2.2 billion for the 2012 fiscal year. During the third quarter, we repaid the remaining balance of $250 million on a credit agreement with our former tech semiconductor joint venture. At the same time, we were refunded the associated restricted cash deposit of $60 million. In total, during the third quarter, we repaid $327 million of debt and borrowed $173 million through equipment financing. The current debt-to-capital ratio is 14% after these repayments.

In the Numonyx acquisition, we assumed a guarantee related to debt in a Numonyx joint venture that included a restricted cash deposit as collateral for the guarantee. During the third quarter, that joint venture repaid the debt, and we were refunded our $250 million cash deposit. As a consequence, $250 million in restricted cash shifted into our cash balance. In the Numonyx purchase accounting, we recognized a liability for the fair value of that guarantee. That liability was relieved with the termination of the guarantee, which resulted in a $15 million gain in other non-operating income in the third quarter. For now, I'll close and turn it back to Kip. Thanks, Ron. With that, we'd like to take questions from callers. Just a reminder, if you are using the speakerphone, please pick up the handset when asking questions so we can hear you clearly.

With that, let's please open up the line.

Speaker 1

Thank you. Ladies and gentlemen, if you have a question, please press star and one. Our first question comes from Future Oji from UBS.

Speaker 15

Thank you very much. Let me start off by asking you about the DRAM expectation for the coming quarter. One of the observations we've made is your gross margins were better even as your revenues fell short of expectations. Part of that is obviously as we look into the mix for the coming quarter, what should drive the upload to meet single digits, and should we expect that mix to also be positive for gross margins?

Speaker 9

Yeah. Around specialty memory, those obviously have a positive, more positive impact to gross margin. Was that the fit of your question?

Speaker 15

That's correct, yeah.

Speaker 9

Yes, especially memory continues to be our highest gross margin products.

Speaker 15

Right. My point is, in terms of how we expect the expectation for the coming quarter, are we expecting within that guidance, what is your view of what should happen within the PC market, and how do you expect the PC market demand for DRAM to pan out?

Speaker 4

Hey, this is Mark Adams responding to that. I think in general, we've all seen a softening of the desktop notebook PC climate, partially offset by some growth around tablets, more helpful on the NAND front, obviously, than the DRAM front. It's been pretty hard to kind of see beyond Q3 calendar here in terms of what the demand picture looks like. Some of the bigger OEMs have kind of come out and made their forecasts. The analysts certainly have made their forecasts. Overall, the PC environment is weak at this point and hard for us to call too much further out in the future.

Speaker 15

Just one more question. In terms of servers and networking, that's one area where we've seen strength, especially in your comments earlier. How do you expect that to trend within your guidance and for the rest of the year? We've seen strength from servers for the past few quarters, and how much more onward do you think we can get from that?

Speaker 4

That's a good point because I should have qualified my comments. The PC comments are primarily around the consumer environment. You know, the corporate refresh is still in process and going fairly well in terms of demand size for our more enterprise corporate-type products. Server certainly is one of the products that Kip was just referring to as being a better opportunity for us and been more stable for us. We think that continues not just around the servers, but even our networking product portfolio and some of our embedded products more on the commercial applications. The softening we're talking about is primarily around the consumer environment and desktop notebook. You know, even Steve made reference to the value lines market, consumer value line mobile market.

The enterprise applications, especially DRAM, continue to be pretty strong for us, and we see no reason that's going to change in the coming quarter.

Speaker 15

Right. Just lastly, IM Flash Singapore wafer fabs for 4Q targets. You talked about that ramping. Is it possible for us to know what that wafer fab will be for the 4Q?

Speaker 9

We've given you the bogey of 60K wafers per month, and the more current guidance is all baked into our fifth growth guidance for your Q2Q.

Speaker 15

All right. Great. Thank you.

Speaker 1

Thank you. Our next question comes from James Schneider from Goldman Sachs.

Speaker 11

Good afternoon, and thanks for taking my question. Could you talk about the inventory levels that customers you mentioned with respect to DRAM and when you expect those to be back at normal levels? Within that, can you talk about what the linearity of your DRAM sales were to this quarter?

Speaker 12

Sure. I think I'd break the inventory answer into two parts: the OEM component to that and the channel. The OEM component, I think, will probably be managed fairly well throughout this calendar quarter. What I mean for this calendar quarter, Q3 or Q4, I think the OEMs will get a good handle on that because I think that's already in process. The channel piece that Steve mentioned, somewhere in the five-week range, four to five weeks, and I think that really was a reaction to Japan and some early accumulation on concerns over supply to the spot market and the aftermarket module market. I think that is more of something that gets managed over time here over the next coming 90 days or so. I feel that the OEMs are in better control of that and already actively working through that.

The channel folks are getting into it now, and I think that's what's causing the differentiation between the spot market pricing and the OEM contract pricing.

Speaker 11

Great. Thanks. That's helpful. With respect to the mobile and server DRAM spaces, can you tell me whether you see any of your competitors moving capacity to those areas and what kind of impact you expect on pricing, either what you saw in the last quarter or what you expect over the next couple?

Speaker 12

Sure. I think server isn't so easy just to run over and do that on a quarter-to-quarter basis. There's a lot of qualification and supply variables that go into actually getting into the server business. I think on the mobile side, a lot of people have talked about that, and we've seen one of our competitors talk about going back to the commodity business. That's a harder one to gauge, but I also think that comes with the challenges of not just redirecting capacity but getting qualified as some of these bigger OEMs. It's not a perishable capacity choice. You have to kind of be in the business and be committed to it over time. I think the comments might be more fluff than reality in the short term.

Speaker 11

Understand. One last one from me. Can you talk about where PC DRAM pricing is relative to your own cash costs today?

Speaker 12

I'm not aware of anybody that gives out their cash costs. Sorry.

Speaker 11

Okay. Fair enough. Thanks very much.

Speaker 12

Yeah.

Speaker 1

Thank you. Our next question comes from Mr. Vijay Rakesh from Wells Fargo.

Speaker 5

Yeah. I guess just on the DRAM side, obviously, it looks like you had some case funding with Notera as well. Is that fairly resolved? Do you think that should help you on the margin and output side as you go out?

Speaker 12

Vijay, you were breaking up a little bit. Could you repeat the first part of your question?

Speaker 5

Yeah. I said in the mid-quarter, you guys probably had some impact from Inotera. Are the yield issues fairly resolved where that should help you going forward on the margin and the big growth?

Speaker 9

Yeah. This is Mark Durcan. On Inotera, we continue to make progress there, not only on the 50-nanometer yields but also on the 42-nanometer ramp. We're looking for an improving situation as we move forward quarter over quarter.

Speaker 5

When you look at your mix in DRAM now, what's the mix between PC, server, and mobile, and where do you see that end of the year?

Speaker 9

Today, personal systems are about 18%, and that looks like that'll come in about where we'll average for the year. As Ron mentioned, we're getting awful close to having NAND surpass total DRAM revenues for the first time in our history as well.

Speaker 5

Got it. Okay. It looks like your CapEx goes down very nicely next year. What are the puts and takes for that $2 billion that you're on year out for next year? Is there a chance that it comes down even more? The last two years were kind of in the $600 million range CapEx.

Speaker 12

I think that our CapEx next year and the variability of it will really be based upon how we view the market. You know our CapEx for our fiscal year, keep in mind that we still have IM Flash Singapore we're paying for as the equipment's been delivered or under qualification or somewhat of a lag delay. A lot of that CapEx is associated with IM Flash Singapore, of which we're already committed to and ramping. The rest of it is just sprinkled throughout the rest of the network. That's not likely to change much unless for some reason we feel like we ought to try to get more production out of IM Flash Singapore, in which case we would spend more to do that. That's all market-dependent at this point.

Speaker 5

All the CapEx is for NAND, IM Flash Singapore, nothing in, mostly all for NAND, not for DRAM, right?

Speaker 12

No, that's not true. I didn't say that. I said a lot of it was for IM Flash Singapore and NAND, and the rest of it is sprinkled throughout the rest of the network. Remember, we got many fabs, and it doesn't take a whole lot per fab to add up to a total of $2 billion.

Speaker 5

All right, thanks.

Speaker 12

Yeah.

Speaker 1

Thank you. Our next question comes from Daniel Amir from Lazard.

Speaker 0

Thanks a lot. How could you view the NAND side here as you ramp up IM Flash Singapore in terms of the impact on gross margins? How should we look at kind of the margin profile of that business here in the next six to nine months?

Speaker 9

Danny, in terms of the gross margin ranking, TradeNAND is one of the better ones we have. It's about our second-highest gross margin. To the extent that we're shipping more of those bits, it will certainly help on the gross margin side.

Speaker 0

as you and IM Flash Singapore, I'm assuming, will just have a positive impact as the volume increases there.

Speaker 9

Sure. There are a couple of moving pieces, so you have to be a little bit careful. Obviously, we're adding more bits. We get more of that output, so that's good. There's obviously an ASP component to it, which we don't want to get into trying predicting today. In a steady state today, it's our second-highest gross margin product.

Speaker 0

Okay. The other question is kind of on the wireless side. I mean, you made some commentary that you know it is a little weak right now. What do you predict here in terms of the next quarter? I mean, do you see seasonality starting to come back helping the wireless segment, or do you have the same visibility on the wireless side as you do on the PC side?

Speaker 4

I think our visibility on the wireless side is pretty good. I think part of what's going on in the wireless space is a little bit of a shift in industry structure, with market share shifting from company A to company B. I think that's contributing a little bit to the fogginess in terms of that business. Having said that, I would think with some newer models coming out, and it is a bit of a seasonal uptick, it would be reasonable to assume that there could be an improvement in terms of the market conditions around wireless coming into back to school and the holiday. Remember, our comments were around a segment of the wireless market. The smartphone markets continue to be very strong. I absolutely think that might be something that contributes to some higher-end growth for the back half of the year.

Speaker 0

Thanks. Thanks a lot.

Speaker 1

Thank you. Our next question comes from Kevin Cassidy from Stifel Nicolaus.

Speaker 9

Thanks for taking my question. Can you give some of the puts and takes on the TradeNAND for next quarter being down low double digits? Is it less demand in the SSDs, or is that a steady state, or maybe just give a description of what's happening there?

Speaker 12

I think let me make sure you're reading the right lines there. We look at bit production up double digits, and currently, the ASP is down low doubles. Is that what you're asking?

Speaker 9

Right. I was asking about it was up 15% in the third quarter, and now you expect it to be down low double digits. I was wondering.

Speaker 12

Yeah. That's correct, Kevin. As Ron mentioned in his comments, we're going to see we're obviously executing pretty well at IM Flash Singapore, and those will be more discrete units here in the short term. We expect more OEM-type business during the short-term quarter. It's mixed related.

Speaker 9

Okay. It is mix related. Are you allowed to say what or do you know what Intel's mix was going to be?

Speaker 12

No.

Speaker 9

Okay. Maybe on the DRAM side, could you say what your % is of 2-gigabit DRAM now?

Speaker 12

Kevin, I don't have that breakout in front of me, but I'm happy to follow up with you. It's something that we present from time to time, and I'll get it to you.

Speaker 9

Okay. Great. Thanks.

Speaker 1

Thank you. Our next question comes from Daniel Barenbaum from MKM Partners.

Speaker 14

Hi guys. Thanks for taking the question. Can we come back to DRAM shipments in the quarter? Just kind of running through the math, it looks like your DRAM bit shipments were actually down somewhere in the 10% range. Is that somewhere in the right ballpark, and can you help walk me through why they were down so much?

Speaker 12

Yeah. Sure. This is Mark Adams again. The DRAM shipment was more of a carryover for us, especially around some of our OEM customers for Inotera output that got us timely in the quarter where we could not convert into modules in time to get to our OEM agreements. Secondly, towards the end of our quarter, we saw a pretty wide gap between the spot market and the OEM contract market, and certainly didn't want to play into the game of end-of-quarter negotiations in the spot market driving breakdown further. We chose to keep some of that inventory for our larger OEM to go into the Q4 fiscal.

Speaker 14

Then some of the increase in the inventory under balance sheet was due to holding on to some of that NAND?

Speaker 12

Oh, sorry.

Speaker 14

Holding on to some of that DRAM? Sorry.

Speaker 12

Absolutely. That is absolutely the case. If you track the spot market pricing over the last two to three weeks of our quarter, it started to get pretty volatile. For us, given our OEM demand curve for Micron memory, it was a pretty logical choice not to play in the spot market game at the end of the quarter.

Speaker 14

Okay. Can you comment on gross margin in the wireless and embedded solutions business? How did those trend? If you're willing to give absolute numbers, that'd be great. If not, how did those trend from last quarter?

Speaker 12

We're not going to give you the actual numbers, but they did come down a little bit in those segments.

Speaker 14

Sorry. Gross margin came down in those segments?

Speaker 12

Yes.

Speaker 14

Are we past sort of all of the purchase accounting from the Numonyx acquisition in terms of gross margin?

Speaker 12

No. There was an impact a little larger than we expected, actually. It was about a $20 million impact in this quarter that we just reported, and that's about equal to what's left. We do anticipate the rest of that will come in over the next couple of years.

Speaker 14

You had a $20 million negative impact in the quarter. Okay, and then as Joan said, the rest will come through, and you would then expect all of the mnemonics accounting treatment to be done sort of by your fiscal Q1 of next year?

Speaker 12

It's all related to the certain parts that did get written up into inventory, and some of those are legacy parts that will sell out over the next year even. It won't all clear up in one quarter.

Speaker 14

Okay. While we're sort of on those kind of targets, were there any other inventory adjustments in the quarter?

Speaker 12

No.

Speaker 14

Okay, great. Thanks very much.

Speaker 12

Thank you.

Speaker 1

Our next question comes from David Wong from Wells Fargo.

Speaker 7

Thank you very much. On your summary sheet, you talk about your TradeNAND cost per bit being up approximately 12% in the quarter. To what extent do startup charges play into that?

Speaker 12

This is Ron. We had startup charges, I mentioned, last quarter, and we had some reduced level of startup charges overall this quarter. In total, for the company, it was about $36 million in the second quarter and dropped to about $20 million in this most recent quarter. Some of those costs are now being put into inventory, and we'll go out with the shipments of IM Flash Singapore product in the coming quarters.

Speaker 7

That wasn't the primary driver of the cost per bit for TradeNAND being up.

Speaker 12

No.

Speaker 7

Was there some other factor?

Speaker 12

Yeah. If you look at it, the ASPs were up about 15%, and our costs were up about 12% in the quarter, and the impact was related to mix, as Steve commented, specifically in the area of higher SLC mix. SLC is a higher margin product. It's also higher cost, and that affects the cost line, but we end up with more margin, as Steve mentioned in his comments going forward. Also, there was some SSD growth that he mentioned that helps drive up both the pricing and the cost a little bit.

Speaker 7

I see. On the DRAM side, what was the pattern of your contract pricing through the quarter? Was contract pricing rising or falling as you progressed through the May quarter?

Speaker 12

I would say that early in the first half to two-thirds of the quarter, the contract pricing was rising, and I'd say it kind of plateaued and flattened out towards the end of the quarter.

Speaker 7

If it was rising through the quarter, why does your ASP estimate for the current quarter, the quarter today, why is it down so much? Was there a huge plunge at the beginning of the current quarter, or is there some other factor that's playing into your expectation for DRAM ASPs looking like it's going to be down high single digits?

Speaker 12

There are two things. The guidance we're giving is quarter to date, so I'll come back to that in a second. Your question earlier was about Q3 and the trend during Q3, and I stopped short by saying that it was flat during the last month, which was May. Our June contract pricing is down slightly, and we also have some mixed effects there as well, causing the net impact of the quarter to date guidance we're giving you.

Speaker 7

Great. Thanks.

Speaker 1

Thank you. Our next question comes from Doug Friedman from Gleacher.

Speaker 4

Thank you for taking my question. Can I question you on what you think the bit demand for the full year is now looking like it's going to be given where we are halfway through the year now on both DRAM and NAND?

Speaker 12

Let me start, Doug, with the bit supply, and then Mark can talk you through maybe some of the different segments. We look at DRAM somewhere in that 40% to 45% range. We see NAND in that 70% to 80% supply range. Duly noted that on recent equipment conference calls, they have referenced equipment push-outs. In our analysis, it does look like we've probably come through or are in the highest sequential bit growth quarters now, and that going through the rest of the year, especially in DRAM, they tend to tail off pretty good. We're fairly looking at the NAND numbers in terms of supply. It looks like you're going to run kind of low double digits here for the next couple of quarters. With that, I'll let Mark maybe talk you through some of the segment demand things that he sees.

Speaker 4

Yeah. It's pretty consistent with earlier comments. I think it's, you know, the consumer business overall tied to kind of the macroeconomic environment. It just seems a little bit hard to predict and a little bit softer than we might have thought going into July. Certainly, you've got some seasonality affected in there as well. Around DRAM, for example, the PC business, to our earlier comments, is weaker than we had hoped. Right now, we don't have line of sight on anything in terms of a recovery back to an upwards price environment in DRAM on the consumer side. On the specialty DRAM in our better margin product areas, we continue to remain pretty bullish because the demand there has remained strong. I referenced this earlier, but the server products in the server business overall is pretty good.

The growth there on units is still in line with, I think, what the analysts kind of suggested we would be for 2011. Networking, again, networking products remain strong for us as well. Our AIM business, which is part of the embedded business unit, is very stable also. It's not that we can make one conclusive comment about the overall memory landscape. I think that the commodity consumer-oriented businesses are seeing some softness on the demand side for DRAM, and the specialty businesses around enterprise and corporate are pretty good. When you look at NAND, we're not seeing anything that would change our perspective on a pretty strong demand environment for NAND. SSDs have been a continuing good story for us at Micron Technology. Steve referenced earlier slightly below 40% quarter-over-quarter growth, new technology launches, and good reviews from the press and customer qualifications on enterprise performance drives.

SSDs continue to be a strong place for us. If you look at the smartphone piece of the business where a lot of that NAND is consumed in the mobile market, still very strong. The tablet business, again, is another good environment for us for NAND. We think the drivers on NAND are pretty consistently strong through the back half of the year, as best we can see. I don't think anything is going to change that going through the holidays, minus some significantly different environment as far as the economy.

Speaker 14

If I could, for my follow-up, focus in on the mobile DRAM side of the business and your aspirations to ship phase change by the end of the year. Can you give us an update on where you stand and what the mobile DRAM market is bringing to you guys in terms of an opportunity?

Speaker 9

Yeah. This is Mark Durcan. We continue to make good technical progress on phase change, both from a reliability perspective as well as yield improvements. The actual uptake in the market is going to be tough to call right now, but you know we're definitely moving more resources towards those products to make sure we're in positions to deliver for that market space.

Speaker 14

Great, thank you.

Speaker 9

Thank you.

Speaker 1

Our next question comes from Ryan Goodman from TLSA.

Speaker 4

Hi. Thank you. Question on servers. We've started to hear some chatter that server ASPs were actually coming under more pressure than normal over the past quarter. I know you sounded actually pretty bullish on it looking out through the remainder of the year. Just curious if you saw anything like that. The premiums are still there, but are you feeling any more pressure? Any thoughts on the impact of Bromley coming on in the second half?

Speaker 12

I don't think that that pressure is going to have its effect back down to us. I do think, though, that when you look at what's driving the applications around the server products itself in terms of the markets, in terms of cloud and some of the other applications, you are seeing a broader value line of servers take share in the market. Thus, the unit volumes shifting that way could potentially drive that. We're not seeing that implicate our server pricing so much on the memory side of the house, but I think that there seems to be a higher volume of distributed server technology in the market. I think to that extent that you could see that being potentially commoditized downstream, but we haven't seen the impact internally.

Speaker 4

Okay. Just one follow-up on the demand side of the equation in the smartphone market. Curious about your thoughts on content trends at the high end of the market. If you think how you think the demand picture comes together if there isn't a lot of content growth at the high end of the market. Also, just curious about for Micron Technology specifically how you guys are doing in terms of gaining some traction in that area of the smartphone market.

Speaker 12

I think overall we're pleased with that. If your question was around if the content for smartphone on the high end doesn't materialize, is that the question?

Speaker 4

Yeah. If there's not a lot of growth in content at the high end, are you still comfortable with the overall demand picture for 2011 and then going into 2012?

Speaker 12

Yeah. I think absolutely. Just in terms of unit growth alone, we think there's an opportunity there for us as well. If you look at the evolution of what people are using the smartphones with, we feel pretty confident that the content piece will evolve favorably.

Speaker 4

Is there any update you can give on how Micron Technology specifically is doing in terms of gaining traction in the high end? It seems like a lot of the embedded progress historically has been more in the consumer areas. Just curious how you guys are doing in smartphone.

Speaker 12

To the extent that when we look at our NAND portfolio, to the extent that we're choosing to be engaged in that market, which is pretty strategic to us, we feel pretty good about it. Needless to say, from a cost perspective and a technology perspective, it's a good place for us to invest. Our customer demand continues to remain strong.

Speaker 4

Okay. Thanks.

Speaker 1

Thank you. Our next question comes from Bill Fazone from Titan Capital Management.

Speaker 2

Thank you. Relative to the SSD strength that you're experiencing, would you please provide some more details and color behind what's taking place there, including who are you finding the primary adopters of SSDs to be at this point in the adoption cycle?

Speaker 12

Sure. Our experience has been that the OEMs are really trying to adopt this to establish a separate class of notebook users, if you will, and trying to add some higher margin opportunity for themselves in selling up to executives and consumer power users. The volumes are pretty significant around that. If you think about the sudden growth in terms of enterprise applications and actually manifesting themselves out in terms of revenue in the category, those are still pretty much the two drivers. I would say the OEMs are driving power SKUs for the enterprise executive as well as consumer power users. In the enterprise sector, I'd say the shipments basically have doubled quarter over quarter in that sector, and we continue to see long-term growth there for us out through the next two to three years.

Speaker 2

Where are we at today with the cost differential versus the traditional hard drives?

Speaker 12

I still think from a cost per gigabyte, we're not quite close to yet equality, I think. What you're seeing from the shipments in both the client space and the enterprise space would suggest that even though we're not at cost parity or not really even close yet on a dollar per gigabyte basis, the benefits of the SSD and total cost of ownership allow us to compete pretty favorably.

Speaker 2

One additional question. What is the rate of cost reduction that's taking place with SSDs versus the hard drives?

Speaker 12

It's a different discussion point because we can, on the discrete device level, bring cost pretty down. What you're really asking is the cost to our customers, and that's more market-driven. You'll have to be a little more specific.

Speaker 2

Oh, your point's well taken, and I'll ponder the question more offline. Thank you.

Speaker 12

Okay. Thanks, Bill.

Speaker 1

Thank you. Our next question comes from Glen Hawk from Citi.

Speaker 8

Hi. Thank you. There's been some discussion about Micron Technology's potential partnership with Elpida. What are your thoughts around balancing consolidation and potential needs for additional capacity?

Speaker 12

First of all, we don't have any partnership with Elpida at this point. I think if you look at the entire industry picture, obviously, there are a few companies that are still struggling. The Taiwanese are struggling a lot, and then you throw Elpida into the mix. Of course, in terms of total size, they're also one of the smaller companies in the memory business. I think over time, most of that will get resolved. In the short term, typically, what we have to see is some kind of crisis in the industry. The more the crisis, the quicker the resolution of consolidation in the industry. Whether we're in that time period or not right now, I think it'll depend on how long the market being down lasts. Short of that, we'll just have to see how it plays out.

Speaker 8

Okay. Thank you, Steve. As you ramp IM Flash Singapore, is there a preferred mix of captive versus non-captive as Micron's ownership and output ownership of NAND from IM Flash Singapore grows?

Speaker 12

Is your question, do we have a preferred use of the product in our own products downstream as opposed to selling to the merchant market, or is it something different?

Speaker 8

I guess the proportion of captive versus non-captive as the ownership moves towards 80%. Is there?

Speaker 12

I think you can correctly surmise that the ability to ship our NAND product in downstream products, in other words, i.e. SSDs and other things, just has better value proposition and more margin for us. To the extent that we can do that, you know we'll be focused there. I would say that our objective in particular is our percentage of the total, as Ron mentioned, our percentage of the total output of the joint venture comes to Micron. Our objective really is, though, to still serve all the markets in some form, and obviously, we'll direct that capacity to the best return for the company.

Speaker 8

Thank you. Just one last one for Ron. With the Samsung, the tax issues going away next quarter, what was the guidance for taxes beyond next quarter after the impact from Samsung?

Speaker 12

It was more normal rates of, you know, $15 million to $25 million kind of range going forward on taxes. That's our normal rate that we pay for the other regional jurisdictions.

Speaker 8

All right. Thank you.

Speaker 1

Thank you. Our next question comes from Bob Gujavari from Deutsche Bank.

Speaker 6

Hey, thanks for squeezing me in, guys. I have one question, maybe a little longer term. As some of the notebook products kind of mimic more of the tablet functionality, I've talked to a few people who said they'd have to use mobile DRAM instead of commodity DRAM in kind of PC notebooks. What do you guys think of that as a longer-term opportunity to kind of move the ASP up and then potentially move your dollars per PC system up?

Speaker 12

You know, it's funny. We tend to think slightly the opposite of how you stated it, which is that the tablet not only serves in a mobile application environment, but starts to mimic some of the functions of a PC. I think there's a fair point that that might be an opportunity for us, but it is on a kind of a partner-by-partner basis in terms of how they look at their architecture and their system.

Speaker 6

Okay. Great. Thank you.

Speaker 1

Thank you. Our next question comes from Sean Westrum from Macquarie.

Speaker 10

Excuse me, my question. I just had a question about the impact from Japan. You mentioned that was that 5% of ESG or 5% of your overall revenues you think were impacted? For the inventory in the channel, is that accumulated? Did that all accumulate right after the earthquake, or is that something that you think that was more there was maybe a build-up before and then it just spiked up after the earthquake? Has it come down a little bit after that?

Speaker 12

In terms of the Japanese impact on our revenues, I had mentioned that about 5% of our embedded group was affected, primarily the entertainment industry over there, as you might expect. In terms of the inventory channel build-up, Mark can add commentary if you want. Essentially, that happened after we had the Japanese event. I would say to the extent that some of it did build, it was clearly trying to make sure that they were covered. In addition to that, as Mark already did, there's a couple of the markets were weaker than maybe people were anticipating, and so they had some inventory that they accumulated.

Speaker 10

Great. Thanks for that. If you could talk about your DRAM supply, if you were to take Inotera's impact out of both Q2 and Q3, do you think that your supply in terms of bit growth was roughly within inline expectations, or a little bit below, or a little bit above?

Speaker 12

It might have been a little bit below. As we have discussed in the past, we've been trying to enrich the mix, and generally, those are lower density devices, and you don't get quite the bit efficiency per wafer, for example.

Speaker 10

Okay. Great. Thanks a lot, guys.

Speaker 1

Thank you. Our next question comes from John Pitzer from Credit Suisse.

Speaker 13

Yeah, guys. Thanks. A couple of questions. Sorry if I missed it, but server DRAM as a % of overall DRAM, what is the end of the quarter? I guess, what kind of target can we think about as you exit the calendar year?

Speaker 12

John, I've got it broken out to total revenues, and we're going to have server about 20%. Pretty good, pretty good business for us.

Speaker 13

I guess, Kevin, where do you think that could go as you guys continue to try to mix up the DRAM business?

Speaker 12

I might have to give that one to Mark to do a little more in-depth discussion around how he sees demand. We know that bit growth per system will be up about 60 to 65%. We know units in general, when inclusive of all the OEMs that are building servers themselves, are up double digits. Mark, if you'd like to add anything to that.

Speaker 4

No, that's consistent with the demand picture that we get for our products. I'd say in the server business, we're mildly constrained around the capacity of those parts that could go to there. We're trying to ramp that up in the coming quarter.

Speaker 13

In the core PC DRAM business, bits per box today, and is price elasticity in that market done, or are we just dependent upon unit growth, or how should we think about that?

Speaker 12

It's interesting. If you went back a couple of years when the ASCs on DRAM were significantly higher, we went through this despecking period due to the supply and demand imbalance. Since then, obviously, it's recovered pretty nicely. We were just short of 4 gigabytes per unit in the desktop notebook environment and projected to go over that threshold, which I think is the first time at least that I can remember has ever been 4 gigabytes per unit. Our sense is that continues to remain progressively increasing and then favorable.

Speaker 13

My last question, and I appreciate there's probably not a lot you can say around this, but with the Ramdis trial now moving forward, I'm kind of curious how we think about SG&A, and are there any milestones or timelines we should think about relative to that event?

Speaker 12

Clearly, the Ramdis trial started. It's a multi-month trial, and you know we'll continue to accrue litigation costs as we have in the past. That's really probably all we can say on the topic because it's in flight.

Speaker 13

Steve, now that we've moved the trial, we shouldn't expect a step up in increments, or it's already embedded in the guidance that you gave for the quarter?

Speaker 12

That's already embedded in the guidance we gave for the quarter. You know, the length of trials are unpredictable, and as a result, it doesn't mean that we'll have some additional accrued litigation costs as the longer it goes. We'll just have to deal with that real-time as it's happening.

Speaker 13

Great. Thanks, guys.

Speaker 1

Thank you. Our next question comes from Atif Malik from Morgan Stanley.

Speaker 3

Hi. Thanks for taking my questions. If I look at your guidance for NAND-traded cost reduction last quarter, low to mid-single digit, and you ended up going up 12%, are these decisions being made on the fly in the quarter to change the mix? If you can give the percentage of SLC, MLC, and TLC mix right now, and what it would be by the end of the year?

Speaker 12

I'll take the first part about decisions being made on the fly during the quarter to change the mix. The answer is, of course, we're trying to optimize the margins in the parts, and as we see opportunity, we'll do that. I think in correlation, make the comment that you know sometimes it's easy to change the mix, and sometimes it's more difficult to change the mix depending on the product and the category and so forth. We also have customer commitments that we have to make sure we make. All that goes into the hopper. Yeah, we're constantly looking at it. Maybe for the next part, I'll turn it back over to Kevin.

Speaker 9

Yeah. In terms of wafers probed, we saw a 26% increase, or 26% of our NAND wafers were processed in SLC in Q2. Of course, as those sell out, that would be into fiscal Q3. That is why you saw the pretty nice increase in cost per bit. Again, referencing both what Ron and Steve said before, that also gave us a very nice margin lift and ASP lift as well. It's worth it for us to put as many wafers in that direction as possible.

Speaker 3

Got it. I agree. It's good for profitability. What should we think about the kind of normalized SLC mix for the year? Higher than this level or about 26% for the year?

Speaker 9

This looks pretty flat-ish. As we mentioned before, IM Flash Singapore (IMFS) is primarily ramping right now on MLC. Don't think that the wafers aren't growing in SLC, but as a percentage of the total, they're about flat in that 20% range.

Speaker 3

For the second half of the year, are there any underutilization charges at Inotera that could come up if the demand remains low, or do you think you can still use Inotera for server demand and other kind of non-PC demands?

Speaker 12

This is Ron. Your underutilization question was about IM Flash Singapore in particular and?

Speaker 3

No, no. Are there any implications? I mean, can Inotera load up the factory? Are there any 100% utilization right now, Inotera?

Speaker 12

Yeah. Inotera's ramped. Yeah. They're ramped on wafers. They're still working on coming up the yield curve, etc., and getting more good bit yield output out of that production. No, we don't get specific underutilization charges. We did when it was shut down in 2009, but now we're just paying on a wafer cost basis. As I've mentioned before, there's a cost basis, and then there's a profit-sharing component that gets spread back.

Speaker 3

Got it. Thanks.

Speaker 9

Thank you. With that, it looks like we're out of time. We would like to thank everyone for participating on the call today. If you will please bear with me, I need to repeat the safe harbor protection language. During the course of this call, we may have made forward-looking statements regarding the company and the industry. These particular forward-looking statements and all other statements that may have been made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC, including the company's most recent 10-Q and 10-Ks. Thank you.

Speaker 1

Thank you. This concludes today's Micron Technology Quarter 2011 financial release conference call. You may now disconnect.