Micron Technology - Q4 2011

Transcript

Operator (participant)

Good afternoon. My name is Hugh, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to Micron Technology's Fourth Quarter and Fiscal Year-End 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 would like to ask a question during this time, please press star and one on your touch-tone keypad. If your question wishes to be withdrawn, you may press the pound key. Thank you. It is my pleasure to turn the conference over to your host, Kipp Bedard. Sir, you may begin your conference.

Kipp Bedard (VP of Investor Relations)

Thank you very much, and welcome to Micron Technology's fourth quarter and fiscal year-end 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, it is available on our website at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of this call accessed by dialing 404-537-3406 with a confirmation code of 11557620. This replay will run through Thursday, October 6, 2011, at 5:30 P.M. Mountain Time. A webcast replay will be available on the company's website until September 2012.

We encourage you to monitor our website, again 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 statements.

Speaker 22

During the course of this meeting, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to the documents the company files on a consolidated basis from time to time with the Securities and Exchange Commission, specifically the company's most recent Form 10-K and Form 10-Q. These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward-looking statements. These certain factors can be found in the Investor Relations section of Micron's website. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievement.

We are under no duty to update any of the forward-looking statements after the date of the presentation to conform these statements to actual results.

Kipp Bedard (VP of Investor Relations)

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

Steve Appleton (Chairman and CEO)

Thanks, Kipp. I'm going to make a few comments, and then Ron Foster will make a few comments. As Kipp said, we'll open it up for questions. It may seem a little odd, but I thought I'd just do a quick refresh where we started the last quarter, which was we were all concerned about Japan. At the time, we forecasted that we didn't think there would be any disruptions of significance in our supply chain, and in fact, that turns out to be the case. That all went pretty smoothly, just as a point worth noting. On the operations and technology front, we feel like we had a pretty good quarter. As you can see from some of the data we posted from our bit growth and our cost reductions. On the execution side, we had a good operational quarter.

In conjunction with that, our 20-nm NAND is ramping, continues to go well, but obviously, we're continuously adjusting the mix to take advantage of higher margin opportunities. IM Flash Singapore (IMFS) is on track and also continues to perform pretty well. We're on track to reach the wafer start capacity sometime in the late fall. We continue to make investments in R&D, as evidenced by our new research facility that will be ready. It'll be ready for tool installs in the beginning of calendar 2012. I might add that the facility itself will be 450 mm-capable, but obviously, we're very focused on 300 mm at this time. One other comment on IMFS I think is worth noting is that in our Q4, it accounted for about 25% of our trade NAND revenues. That's obviously becoming pretty significant for us. On the CapEx front, we came in about where we thought we would.

We were just over $900 million for the quarter and just under $2.9 billion for fiscal 2011. If you recall, we noted that as we're finishing up the payments of all the tool installs at IMFS, that we'd have a couple of big quarters. In terms of our thoughts around fiscal 2012, we remain the same with an expectation of just over $2 billion. I'll switch over and talk about the markets. At our last earnings call, I noted that the DRAM market was pretty weak. It's remained weak, at least for most of the quarter that we just ended. There's been some modest improvement in pricing in the last few weeks, but I think everybody knows that it appears we're still primarily being driven by a lack of demand versus a riding-over-supply scenario.

This is mostly reflected in the consumer markets, whereas we think the corporate market is in better shape. I can say that specialty DRAM remains a bright spot, particularly our growth in server market share and our continued high levels of market share in networking. On the flash front, we obviously have a little better environment. I think on the NAND front, we've experienced some modest price decreases, as many of you know, but overall, we're still pretty bullish going into the holiday season, as demand remains relatively strong for smartphones, SSDs, tablets. It's worth noting that we were recently recognized, or Crucial was recently recognized. That's our online retail channel that's the market leader now, and channel SSD drives in their August report, so we feel pretty good about that.

Finally, the last data point worth noting on NAND is that the total NAND revenues across all of the business units exceeded our total DRAM revenues for the first time in the company's history. I think that's being impacted, of course, by the decline in the DRAM ASPs, but it's still a significant milestone in our efforts to diversify. NOR has been a pretty stable story. It seems like we say the same thing every quarter. We're going to say it again on the NOR front. Everything was, again, pretty good, pretty stable. We don't expect any extreme pricing pressure in this segment in the foreseeable future. We also released the highest-intensity NOR SPI product this quarter, so we feel like we're in a pretty good position. With that, I'm going to turn it over to Ron.

Ron Foster (CFO and VP of Finance)

Thanks, Steve. The company's 2011 fiscal year ended on September 1st. As usual, we provide a schedule containing certain key results for the quarter, as well as certain guidance for the next quarter. That material is presented on a few slides that follow, as well as on our website. The fourth quarter was financially challenging for us in our industry, which is reflected by the company's net loss for the quarter. Although we were able to meet or exceed all of our output and cost reduction goals in this quarter, DRAM price declined, putting the overall business in a loss position. However, as Steve mentioned, in the fourth quarter, revenue from sales of NAND products surpassed sales of DRAM. This had a favorable effect on the company's financial results, as margins on sales of NAND flash products have remained more stable when compared to the margins on DRAM products.

Comparing in fiscal 2011 to 2010, we saw a nearly 40% decrease in per-bit selling prices for DRAM products compared to about a 15% decrease for NAND flash products. In addition to the DRAM-to-NAND shift, we continue to have an increasingly diversified product portfolio within DRAM and NAND. Consequently, Micron has achieved significantly higher average selling prices for the year and most recent quarters compared to industry averages. On the operational front, you may recall that in the third quarter of fiscal 2011, IM Flash Singapore qualified its first product for sales to customers, which triggered the start of depreciation of production equipment at that site. We continue to invest in the IM Flash Singapore venture as it continues its production ramp. As of the capital call that was funded earlier this week, Micron's ownership interest in IMFS is 82%.

Due to the timing of changes in wafer allocation relative to changes in ownership, Micron received 57% of the IM Flash Singapore output in the fourth quarter. The output from the IM Flash U.S. operations remains at the initial 51%-49% ownership split. Bit sales volume increased in the fourth quarter compared to the third quarter by 22% for DRAM and 47% for trade NAND. These sales volumes were made possible through increases in production for both DRAM and NAND. Inotera production improved in the fourth quarter with better wafer output and yields. As Steve mentioned, we had a significant boost from IMFS revenue in the quarter. These production improvements led to better-than-projected cost reductions in the fourth quarter.

In fact, IMFS production cost per bit is already below the average for all our other fabs producing NAND, contributing to a 28% cost reduction for trade NAND in the fourth quarter, with projected double-digit declines in the first quarter as well. The company's overall gross margin percent declined in the fourth quarter primarily due to lower gross margins on the sale of DRAM products, as sales price declines outpaced cost improvements. In particular, selling prices for DDR3 products decreased significantly over 30% during the fourth quarter. DRAM bit output is expected to continue double-digit growth in the first quarter, as Inotera volume continues to grow and technology node migrations occur at all our fabs. Cost reductions will keep pace in the high single to low double-digit range.

Turning now to the business unit results, in addition to the drop in DRAM selling prices, DSG operating income decreased quarter to quarter due to an accrued loss in the fourth quarter on the purchase commitment for Inotera production. NSG trade sales tracked closely to the NAND trends presented earlier, with revenue increases driven by higher bit sales volumes that outpaced price reductions. NSG sales continue to show healthy growth with a positive mix shift into SSDs, which grew over 30% in the fourth quarter compared to the third quarter. NSG sales to Intel from our IM Flash joint ventures were approximately $255 million in the fourth quarter, reflecting a 17% increase compared to the third quarter, primarily as a result of the increase in production from IMFS. Recall, these sales are at long-term negotiated prices approximating cost.

WSG sales of products by architecture in the fourth quarter were NOR, NAND, and DRAM in decreasing order of revenue. While NOR and DRAM sales were flat from the third quarter, NAND sales were lower on softening wireless OEM and distribution demand. This softening demand also resulted in the write-off of certain customer-specific inventories in the fourth quarter. Fourth quarter ESG revenue increased slightly compared to the previous quarter, with growth in NOR revenues partially offset by a slight decrease in DRAM revenue. SG&A expenses of $155 million in the fourth quarter increased slightly compared to the previous quarter, partially as a result of higher legal costs associated with pending matters. SG&A expense in the first quarter is expected to be between $155 million and $165 million. R&D expense for the fourth quarter of $209 million was fairly stable compared to the prior quarter.

R&D expense in the first quarter is expected to be between $200 million and $230 million, reflecting higher labor costs in advance of ramping our expanding R&D facility in Boise that Steve mentioned. The company generated $354 million in cash flow from operating activities in the fourth quarter and $2.5 billion for the fiscal year. The fiscal year ended with a cash balance of $2.2 billion. Expenditures for property, plant, and equipment were $928 million for the fourth quarter and $2.9 billion for the fiscal year, a substantial portion of which related to the equipment acquisition at IMFS. We still anticipate capital spending in total for the 2012 fiscal year to be approximately $2 billion, weighted toward the early part of the fiscal year as payments are made on equipment acquisitions for the IMFS build-out.

Depreciation and amortization is expected to be between $570 million and $580 million in the first quarter and approximately $2.3 billion for the 2012 fiscal year. As previously announced in the fourth quarter, the company issued $690 million of convertible notes. $57 million of the proceeds were used to purchase capped calls, and an additional $150 million was used to repurchase 19.7 million shares previously outstanding. The fiscal year ended with a debt-to-capital ratio of 17%. Without turning it back to Kipp.

Kipp Bedard (VP of Investor Relations)

Thanks, Ron. We'd now like to take questions from callers. Just a reminder, if you are using a speakerphone, please pick up the handset when asking a question so we can hear you clearly. With that, please open up the phone line.

Operator (participant)

Yes, sir. Ladies and gentlemen, if you would like to ask a question, please press star and one on your touch-tone phone. If your question has been answered or wish to remove yourself from the queue, you may press the pound key. Again, to queue up for a question at this time, please press star and one on your touch-tone phone. Again, to queue up for a question, please press star and then one on your touch-tone telephone. One moment for questioners to queue. Our first questioner in our queue is Alex Gauna with JMP Securities. Your line is now open. Please go ahead.

Alex Gauna (Analyst)

Thanks very much for taking my question. I was wondering if you could go into the gross margin. A pretty steep fall-off here. Maybe some of the puts and takes, you had some pretty good bit growth, but I'm wondering about, you know, what's happening on the gross margin line and maybe what your expectations are going forward here.

Mark Durcan (President and COO)

You bet. Primarily, as was captured in both Steve's and Ron's comment, the biggest quarter-to-quarter change was in commodity DRAM. That was not only from an ASP change, which was pretty dramatic Q to Q, but also from an enriched mix from the Inotera, where they start with more of the standard 2-Gb DDR3 products, which, as Ron mentioned in his notes, had the biggest quarter-to-quarter downward pricing pressure. Primarily look forward in that DRAM area.

Alex Gauna (Analyst)

Going forward here, can we expect with some of the enriching mix of NAND that we have some levers going the other direction?

Ron Foster (CFO and VP of Finance)

We're not going to make any predictions, as you know, to gross margins, but I think throughout the call, you'll get our feel for what our cost reduction outlook is. Of course, we have you overlay that with what you think the market dynamics from an ASP standpoint will bring. Yes, we do have some opportunities in terms of product mix that I think Mark Durcan would like to chat to you here in a minute.

Mark Durcan (President and COO)

Let me just jump in on the NAND mix specifically. We did comment last quarter about a richer mix of SLC, and we continue to ship larger volumes of SLC in the marketplace. With the ramp that's going on at IMFS continuing to be weighted heavily towards MLC currently, I wouldn't look for some big uplift in terms of the richness of mix in NAND over the next quarter or two. We'll see continued cost reduction and bit growth, but that'll be primarily in the MLC area. As we look for additional opportunities to richen that mix as we move forward. Thank you.

Operator (participant)

Thank you, sir. Our next questioner in queue is John Pitzer with Credit Suisse. Please go ahead.

John Pitzer (Analyst)

Yeah, thanks, guys. Good afternoon. A couple of questions. First, can you talk a little bit about just inventory levels in commodity DRAM? I think at the analyst day, you talked a little bit about inventory levels having come down and price bits per box starting to see an acceleration. I'm kind of curious how we ended the quarter.

Mark Adams (VP of Worldwide Sales)

Yeah, this is Mark Adams. The inventory in the channel seemed to play out favorably towards the end of our Q4. The speculation was that through most of our Q4, inventories were up, as we commented on in our last earnings call. We saw some activity, as Steve noted in his opening comments, towards the last week of our quarter and so far quarter to date, that suggests that inventories are in better condition, better balance, and it's reflected in a very modest but still upward trend on commodity DRAM pricing.

John Pitzer (Analyst)

Can you talk a little bit about the revenue fall-off in the wireless solutions group and the operating loss there, and kind of how do we think about that segment of the business moving back into an operating profit position?

Mark Adams (VP of Worldwide Sales)

Yeah, I think, again, this is Mark. The wireless business, as many of you know, over the course of the year, has been interesting, to say the least, in terms of the competitive landscape on the unit side, those selling the phones and those manufacturers making the phones. We've experienced our own transitions around products serving those businesses and trying to optimize the capacity that we're allocating to each of the BUs, being pretty careful with the growth around wireless. It's good business for us long term. As we service our embedded business with like products in our DRAM and NAND business, we're trying to be careful with the volatility around the wireless business against the demand profile. The top line growth is kind of somewhat limited by our ability to serve other business units and other segments more profitably for Micron.

The gross margin and operating results that you're referring to are somewhat weighted down by us transitioning third-party supply of products from the old pneumonics channel to Micron-enabled silicon. That transition is almost done, which will help us, but in the past, this has somewhat limited our top line gross margin there. We're a little bit more optimistic going forward, and we're a little bit more careful about how we grow in that space. Again, to reflect on the business, the number one player a year and a half ago had close to 40% market share, is now down to 20% market share, somewhere in that range. The nature of the type of product being sold into that business is changing. We're watching that to make sure we make the right decisions around production capacity, products, and actual customers themselves.

John Pitzer (Analyst)

Great. Thanks, guys.

Operator (participant)

Thank you, sir. Our next questioner in queue is Shawn Webster with Macquarie. Please go ahead.

Shawn Webster (Analyst)

Yeah, thank you. A couple of questions. Going back to gross margins for a moment, what was the size of the inventory write-down that occurred, and what were the devices that got written down?

Ron Foster (CFO and VP of Finance)

Sean, this is Ron. We don't normally itemize inventory adjustments, but what I can tell you is sort of in line with Mark Adams' comments, given some adjustments going on in the wireless segment and with some of our customized products that go into some of those businesses, we had some inventory adjustment, notably in the wireless and to a lesser extent in the embedded markets. I would characterize it as being probably $20 million-$30 million above our normal quarterly rates that you see, that kind of range.

Shawn Webster (Analyst)

Okay. Thank you for that. In terms of the bit production, not shipments, what was your actual bit production sequentially for both DRAM and NAND in your fiscal Q4?

Ron Foster (CFO and VP of Finance)

We had DRAM in fiscal Q4 up mid-single digits. We had NAND up low 40%.

Shawn Webster (Analyst)

Okay. Maybe one more if I could squeeze it in. What are your customers telling you in terms of the demand outlook going into calendar Q4 by your various end markets on the PC side and handsets and servers? Are there any areas that are more stable or have notable strength than others?

Mark Adams (VP of Worldwide Sales)

Yeah, again, this is Mark Adams. The application or segment breakout you're looking for, I would start by separating out consumer and corporate. The consumer business still seems relatively off on the demand side. Again, the PC business is not super strong going into the holiday, and I think that impacts, you know, not just PCs. You can also make an argument that the wireless business could potentially see some negative demand pressure. Tablets are kind of a separate beast in and of themselves in terms of demand and still seem to have some pretty good growth through the holiday. Around things like server and networking, we still see pretty good strong demand, and the best we can see going forward, it looks to remain strong.

As well as in our embedded markets, the automotive and amusement segments are pretty strong around those types of NOR and DRAM-based solutions that we sell into those sectors. I would go back to repeat that consumer still seems a little weaker and that the corporate landscape maintains relatively stable around the application base that we serve.

Shawn Webster (Analyst)

Great, thanks a lot.

Operator (participant)

Thank you, sir. Next questioner in queue is Krishna Sankar with, ThinkEquity. Please go ahead.

Krishna Sankar (Analyst)

Yes, Kipp, can you give us the revenue percentages of PC DRAM, specialty DRAM, NAND, and NOR? Can you rank gross margins for those four segments, please, relative to the corporate average?

Ron Foster (CFO and VP of Finance)

I can break it down revenue-wise by the business units for you. We had about 32% in DSG, around 30% in NSG, around 20% in WSG, about 11% in ESG, and around 6% other.

Krishna Sankar (Analyst)

Okay. Going forward, can you talk? I mean, I know that PC DRAM pricing has continued to sort of, you know, it kind of picked up a little bit in September, but can you talk about sort of the incremental impact of PC DRAM on the November quarter versus the August quarter?

Steve Appleton (Chairman and CEO)

I think what we'll stay to, Krishna, is our normal talking points, which quarter to date on DRAM, we're down about 10%-15%. NAND is about flat quarter to date. Of course, it's up to you to look out over the next couple of months and determine what direction you think ASP will be.

Krishna Sankar (Analyst)

Thank you.

Operator (participant)

Thank you, sir. Our next questioner in queue is Uche Orji with UBS. Please go ahead.

Uche Orji (Analyst)

Hello, can you hear me?

Steve Appleton (Chairman and CEO)

Yes, sir.

Uche Orji (Analyst)

Yes. Sure. Real quick, if I look at this NAND ASP movement, obviously, a lot of that was a mix from SLC to MLC. Can you talk about the breakdown of how that moved around between last quarter and this quarter in the mix of SLC to MLC? Related to that, what are your plans around ramping 3-bits to sell? Are you able to ideally design wins that we should be looking for to enable that category to ramp?

Mark Durcan (President and COO)

This is Mark. Let me cover the NAND mix piece anyway. The SLC as a percent of the mix dropped a couple of percent on a wafer basis, but the MLC grew roughly 6% as a percent of the wafer mix, with the remaining difference being a reduction in three-level cell. I don't think we want to pin the exact percentages for you, but on a wafer basis, to give you a sense of how that moved around. Again, the absolute value of the SLC was not decreasing. It was really that was driven primarily by growth in total wafers out and total bit off.

Uche Orji (Analyst)

Okay, that's clear.

Steve Appleton (Chairman and CEO)

Sorry, the second part of the question was?

Uche Orji (Analyst)

Yeah, the second part of the question was, you know, how should we think about your growth in 3-bits to sell going forward? What are you able to use that in the embedded market as, say, from Alexander, it's good right now?

Mark Durcan (President and COO)

Yeah, I would look over the next few quarters for the 3-bits per cell to be relatively flat as a percent of our mix, although we are working on a number of solutions that over time could drive that number up in some of the embedded applications.

Mark Adams (VP of Worldwide Sales)

Yeah, I think one more comment to check on that. When you refer to SanDisk using this in the embedded market, I think that their overall capacity is still, you know, they've been saying they're more OEM-focused in their revenue in that way. They still have a fairly healthy retail business that can consume 3-bits and not pay a penalty for performance. What the market, the production capacity that we're seeing in 3-bits, we're utilizing through our Alexstar channel today. As far as industrial strength applications, 3-bits is not showing up. I think for us, a large part of our capacity is not necessarily just solely dedicated to retail. It's in other unique value-add application markets.

Uche Orji (Analyst)

Can I just ask one more question first, please? We've seen some production cuts, and you know, Powerchip has been talked about in the press, and perhaps also NAND has been talked about as possibly cutting back. With the way demand is and given the level of inventories that you have, what will it take for you to cut back on production as a way to sort of help credit inventory? Is there any trigger that you monitor at this point? The module makers, what is their strategy right now? Are they buying or are they just sticking on their hands?

Steve Appleton (Chairman and CEO)

On the production cuts, we've seen the same data that you have or the same announcements. In terms of Micron, we're, I think, still pretty good in terms of the variable cost versus ASP. As a result, we don't have any plans for any production cuts, and I'll let Mark answer the next one.

Mark Adams (VP of Worldwide Sales)

With regards to the module manufacturers or assemblers, they were partially responsible for the uptick towards the end of August. I think part of it was they carried a fair amount of inventory into the summer, and that sold through slower than they had hoped. They managed their inventories fairly well towards the end of the summer, which reflected in relatively tight supply that drove some of the modest uptick in pricing we referred to. As we're now kind of in a wait-and-see mode to see how they fare going into the holiday season and the aftermarket. Of course, we have our own Crucial business, which competes in that space and is doing fairly well. We probably need more data points before we are able to tell you long-term how that will play out.

Uche Orji (Analyst)

Great. Thank you.

Operator (participant)

Thank you, sir. Our next questioner in queue is James Schneider with Goldman Sachs. Your line is now open. Please go ahead.

James Schneider (Analyst)

Good afternoon. Thanks for taking my question. On the DRAM pricing side, you're talking about quarter-to-date pricing down about 10%-15%, which seems to be a little bit worse than what we've seen in terms of the PC DRAM on the spot market. Can you talk about some of the mix that might be going on on the server, especially area that might be contributing to those differences in trends?

Ron Foster (CFO and VP of Finance)

Let me just add one thing. That is relative to an average for last quarter, so keep that in mind. I think Mark Adams would like to add some commentary around your question about server.

Mark Adams (VP of Worldwide Sales)

Yeah, I think also when you look at pricing trends over a longer period, say a year or four quarters, what typically obviously leads you in either direction, down or up, is the commodity pricing. There is some correlation between the commodity pricing and the direction of our other application ASPs. That being said, as Kipp noted, we saw some of those modestly decline, which gave us an average when compared to prior quarter, isn't as kind of in the trend line of the commodity pricing. I think commodity pricing wouldn't be down to your point nearly as much as we're suggesting the overall ASP is. 10-15% is our blend based on the average of last quarter. Some of our higher specialty markets, higher priced specialty applications coming down a little bit. We think that that's reflective in the calculation.

James Schneider (Analyst)

Fair enough. That makes sense. As a follow-up on the NAND side, as you look at the environment right now, could you maybe comment and give a kind of a first bogey on what you expect in 2012 your NAND bit production to do through calendar 2012, you know, either a year from today or for the full calendar year?

Ron Foster (CFO and VP of Finance)

Yeah, we'd really like to stay away from a year-over-year comparison because I think, as Mark Durcan has noted, we can make a lot of changes to the mix. What we'd like to stay with is something more in the short term. We're looking at mid-single digits for our next fiscal quarter, and something more in the double digits for the quarter after that. Please keep in mind, we can move these bits around quite a bit.

James Schneider (Analyst)

Any take on the industry growth for next year in NAND?

Ron Foster (CFO and VP of Finance)

Yeah, I think NAND's looking up probably around 65%-75%, depending on some of these things we're talking about: SLC, MLC, TLC mix as we go through in 2012.

James Schneider (Analyst)

Great, thanks very much.

Ron Foster (CFO and VP of Finance)

Yep.

Operator (participant)

Thank you, sir. Our next questioner in queue is David Wong with Wells Fargo. Your line is now open. Please go ahead.

David Wong (Analyst)

Sir, thank you very much. Have you taken any reserves that might be applied against a fine related to a negative verdict in the Rambus antitrust case? How much of SG&A is currently going towards legal costs associated with litigation?

Steve Appleton (Chairman and CEO)

The reserves that we take are on the basis of anticipated litigation costs. We have not taken any reserves with respect to any kind of judgment or verdict. Of course, until we have that, we have no idea knowing what that might be.

David Wong (Analyst)

Okay. Can you give us any magnitude of what your legal costs are running on a per-quarter basis?

Steve Appleton (Chairman and CEO)

Ron can jump in here in a second, but obviously, they vary. It's dependable when you're in trial. We've just got through a trial, and so our costs for this last quarter up through really about a week ago are going to be, I think, a little bit higher than normal because we're actually in litigation.

Ron Foster (CFO and VP of Finance)

Yeah, we don't actually break down those pieces in our SG&A structure. Bear in mind that we try to estimate each quarter, give a little more color on how this works, the cost to adjudicate or settle items, as Steve mentioned, in a particular quarter. We look forward to the estimated cost of adjudication through all the events we have. We have a number of events that are detailed in our filings, our Q and K filings that you can look at. We estimate all those and try to accrue the cost estimates. In each quarter, we true up those estimates. Obviously, when we're very involved in a significant suit, we will true up those things on a more timely basis.

We did have some increase in this quarter on a number of categories as we were looking at the go-forward adjudication costs to work through these numerous events, not just the one Rambus item.

David Wong (Analyst)

Okay. My final question. For the commodity DRAM and for your NAND, are your current contract prices above or below spot prices?

Steve Appleton (Chairman and CEO)

I'm sorry, can you repeat the question?

David Wong (Analyst)

For commodity DRAM and for NAND, are the contract prices that you're getting from your big customers, are they above or below what we see on the day-to-day spot prices?

Steve Appleton (Chairman and CEO)

Today, they're slightly below, and that's just normal for the cycles that go on in pricing in the market. The spot market normally leads you in one direction or the other. In this case, the spot has come up a little bit, since as we've noted a few times in the call, the OEM contract pricing is lagging slightly.

David Wong (Analyst)

Great, thanks very much.

Operator (participant)

Thank you, sir. Our next questioner in queue is Kevin Cassidy with Stifel, Nicolaus. Please go ahead.

Speaker 21

This is Dean [Ramalhos] calling in for Kevin Cassidy. Good afternoon. My question is, can you elaborate on plans to accelerate mobile DRAM and other non-commodity DRAM products?

Mark Adams (VP of Worldwide Sales)

Sure. As you might imagine, that's like a historical look back. We've sold a fair amount of DRAM capacity into the computing sector and most notably the desktop client notebook market. Over the years, we've spent a lot of time focusing on new application segments. I think now more than ever, especially with the new business unit structure that we've set out as a company and the acquisition of Numonyx and the market segments that they were serving in joining with Micron, we've got a number of new application markets that are serving that same capacity. When you split that out, markets like amusement and the server and networking segment and 3D graphics, if you look at automotive, there's just a number of different sectors that we serve that maybe a while back you would have said were primarily dedicated to the PC space.

The evolution of the applications we're serving are much more dynamic and are leading us to try to optimize our capacity for the most profitable long-term and most profitable customer relationships and long-term business. I think that effectively shows up when you look at our share at some of these segments: automotive, networking, and server.

John Pitzer (Analyst)

Okay, thank you very much.

Operator (participant)

Thank you, sir. Our next questioner in queue is CJ Muse with Barclays Capital. Please go ahead.

CJ Muse (Analyst)

Yeah, good afternoon. Thank you for taking my question. I guess first question on the NAND side, I was hoping you could help me understand your thoughts on profitability there. Your cost-down efforts came in better than what I was thinking. Intel mix is heading lower, and that's offset a little bit by the SLC-MLC mix shift. Curious, you know, as that trend goes forward over the next few quarters, you know, how should we think about the uplift to earnings for just NAND by itself and then the contribution to the overall company? Again, we don't like to give you guidance on margin per se. Let me maybe go back, ask a previous question that might at least help you put this in at least a quarter of margin ranking for the quarter we're just reporting. Specialty DRAM is still the highest, NAND second, NOR, and then PC DRAM.

Ron Foster (CFO and VP of Finance)

As Mark noted, we do have some pretty nice operational cost downs coming. We do have some levers in different parts of our business to continue to look at a pretty favorable NAND business, but we're certainly not going to give you any guidance as to operating margin or gross margin to it.

Mark Durcan (President and COO)

Okay. Ron, one thing I can add to that is if you just look at our NSG results, which is our commodity NAND business, we're still running a profit, and that's despite the mix shifts that was already commented on in terms of the ramp-up IMFS and the higher MLC content. Our core commodity NSG product line, as well as all the other NAND business that goes through NSG, is still showing a positive operating profit. Of course, we have NAND that goes through our other two businesses, wireless and embedded, which can have reasonable margins as well.

In addition to the IMFS performance, which we have improving and have already recounted how that's going to help us going forward, and the cost structure of IMFS is already below the average of our other fabs, we're showing profitable performance across all of our NAND businesses right now if you look at the aggregate total. The improving performance in IMFS will only help that. Of course, it's all predicated on pricing assumptions, which right now look flat.

CJ Muse (Analyst)

Sure. That's helpful. As a follow-up question, you talked about the industry bit growth for NAND tracking 65%-75% for 2012. Curious, can you grow in line with the industry with the capacity you have at IM Flash Singapore and the $2 billion CapEx budget you've outlined, or would you need to add capacity there?

Mark Durcan (President and COO)

Yeah. This is Mark Durcan. I keep commenting on bit growth over the next couple of quarters. I would say if you want to take a longer-term view, keeping in mind that quarter to quarter, the numbers will be pretty bumpy, we should be averaging in the high teens in terms of our trade bits into the market, the bits that Micron sells for profit. We should exceed industry growth.

Steve Appleton (Chairman and CEO)

Thank you.

Operator (participant)

Thank you, sir. Our next questioner in queue is Hans Mosesmann with Raymond James. Your line is now open.

Hans Mosesmann (Analyst)

Thanks. Can you comment on some of the supply dynamics in DRAM? There's some supply that may have come off, maybe some is coming back in next year. What's that dynamic as we look over the next 18 months in DRAM specifically? Thanks.

Steve Appleton (Chairman and CEO)

If you think about the comments we had last quarter, I think they're still consistent for this quarter, which is why I made the statement that we didn't think that we're an oversupply-driven challenge right now. It's mostly a demand-driven challenge. If you look at the CapEx, the CapEx and the capacity going into DRAM has already started to decline. In fact, if you look at the peak of the CapEx in the DRAM, which would have been 2010, moving into the first part of 2011, it did peak, and it's starting to come down quarter by quarter. We only got to a level that was probably just over half of what we had peaked before in the 2006-2007 timeframe.

We're just not going to get the kind of bit growth that we saw in that timeframe, which is why I've made the statements that I think that we're a demand-driven challenged environment right now. Now, with that in mind, if you look at the CapEx that is being spent and you look at all that data, almost 100% of that CapEx is going into advancing facilities. There's some new silicon, but if you think of what we've been doing with Inotera, with our own facilities, you think about what LP has been doing, what Hynix has been doing, it's all been going into upgrading, if you will, to the next generation of technology, which does drive some bit growth, but you know it's not near the bit growth you'd get from bringing on new facilities.

I think Samsung has had some media commentary where they've had some new silicon, but for the most part, I don't think anybody expects any large amount of new silicon coming online. We're not seeing it in the marketplace. In fact, if you look at the equipment suppliers, they're confirming that their book-to-bills are below one, and there's a lack of demand for equipment going into that segment. I think that, by and large, it will probably not take much of an improving demand environment that would pretty quickly soak up any excess supply in the marketplace.

Hans Mosesmann (Analyst)

Okay. As a quick follow-up, what's the bit growth supply number you guys are working off of as you look into 2012 calendar?

Mark Durcan (President and COO)

For DRAM?

Hans Mosesmann (Analyst)

For DRAM, yeah.

Mark Durcan (President and COO)

Looking like 40%-50%.

Hans Mosesmann (Analyst)

Okay, great. Thank you.

Mark Durcan (President and COO)

You bet.

Operator (participant)

Thank you, sir. Our next questioner in queue is Ryan Goodman with CLSA. Your line is now open. Please go ahead.

Ryan Goodman (Analyst)

Hi, thanks for taking my question. Just on the 65%-75% growth number you put out, that's a little bit lower than you've talked about in the past. I was curious, how has this impacted the capacity expansion plans for IMFS next year?

Steve Appleton (Chairman and CEO)

Really no change. We've always talked about IMFS as being in that 60,000 start range by the end of the year. I think Mark, if he hasn't updated, he's more than happy to. It's going really well to hit a schedule, so we'll hit that pretty shortly. None of the budget in that $2 billion CapEx that we've bogeyed for fiscal 2012 includes a ramp beyond that. The numbers that we used in what I quoted were industry supply numbers, not Micron-specific.

Ryan Goodman (Analyst)

Okay. Right now, the expansion plan is pretty much holding at that 60,000. There's nothing additional in the $2 billion to take that higher than that as of today?

Steve Appleton (Chairman and CEO)

That's correct. Sorry, Mark, go ahead.

Mark Adams (VP of Worldwide Sales)

No, that's what I was going to say.

Ryan Goodman (Analyst)

Okay. Just one follow-on also. You had mentioned a little bit of the pneumonics production was being pulled in-house as a cost driver or a cost saver, I should say. I'm just curious, where are we in that specifically on the NAND side of things? Is that mostly pulled in at this point, or is that one quarter, two quarters away from being fully captive at this point?

Mark Durcan (President and COO)

Yeah, it's primarily in-house at this point, other than a couple of very small volume items where we're through purchasing large amounts of NAND.

Ryan Goodman (Analyst)

Okay. I guess if I could just slip in one more really quick, just on the cash, the cash balance is looking pretty good. Could you give an update just on the mindset on buybacks versus M&A? I know you did a little bit this last quarter on the buyback side, but going forward, how should we be thinking about that? Thank you.

Steve Appleton (Chairman and CEO)

Yeah. Clearly, you know, the weaker the market is, the more conservative we get probably in terms of the ease of our cash. The other corollary with that is the lower our share price, the more we view it as being significantly below book where it sits today. Maybe it might create some opportunity for us to consider the way we should do something like that. Obviously, that's a board decision that will have to be made as we move forward. We've done some of it already, as you've noted. I would say that our balance sheet's pretty strong. As of right now, I think we have pretty good flexibility, whether it's the M&A or any kind of equity restructuring alternative amount for suit.

Operator (participant)

Thank you, sir. Our next questioner in queue is Bob Gujavarty with Deutsche Bank. Your line is now open. Please go ahead.

Bob Gujavarty (Analyst)

Great. Thank you. I was wondering if you could talk a little bit about, you mentioned the retail SSD business. What's your sense of what OEMs are thinking about SSD adoption for maybe this holiday season, maybe more importantly next year? Is it still a bill of materials challenge for them, or have you seen some warming up from them?

Mark Adams (VP of Worldwide Sales)

This is Mark Adams. I've definitely seen some warming up from our major OEMs. I think on the bill of material sensitivity, it's obviously around the client desktop notebook portion of that business. I certainly think as people are looking to kind of differentiate over the holiday and offer, and obviously the tablets are going out with all NAND. When you think of the mix of storage on the client application device in the market, we're seeing more penetration there. I think that pricing still would need to be a little bit more competitive for them to go more mainstream on the SSD configuration. Beyond that, you've noted two things. One of which is on the OEM side is the enterprise continues to grow in terms of focus and energy.

The developments around the silicon continue to mature, i.e., controller development, software and firmware development to make the enterprise more realistic in terms of enterprise cloud performance. Finally, the noted channel piece, it's interesting to note if you look right now in the sales of SSD units, notebook PCs are roughly 45% of all SSDs being sold. Second to that, one might think it would be an enterprise, but it's not actually. Roughly around high 20s to 30% of the SSDs are sold through channel today. When you combine all that, there's a pretty robust appetite for SSDs in the market, good growth in 2012, that's what we can see continue to be pretty strong growth. We think the OEMs will become more involved in the market opportunity.

Bob Gujavarty (Analyst)

All right. Maybe a quick one on DRAM. Is there any opportunity to kind of maybe upsell DRAM beyond just the capacity argument, perhaps specializing on low-power PC DRAM or especially super small form factors or special packaging to get maybe some upsell over just plain capacity commodity DRAM?

Mark Adams (VP of Worldwide Sales)

I think the market loses sight of that because to your question, most people kind of say, tablets are going to eat away at the DRAM market. In fact, we have a little bit different view on that. We think that low-power DRAM application, which of course requires a bigger chipset, and we sell at a premium to the commodity DRAM, is a good opportunity for us. The differentiation there allows us to penetrate tablets. Over time, we think tablets will continue to grow in content per box. Obviously, not the same as a notebook today, but when you factor in the low-power premium and the bigger chipset around low power, the impact on wafer utilization, wafer capacity is somewhat negated. We think there's a good opportunity for us there, and we're pretty bullish.

Bob Gujavarty (Analyst)

All right. Thank you.

Operator (participant)

Thank you, sir. Our next questioner in queue is Betsy Van Hees with Wedbush Securities. Please go ahead.

Betsy Van Hees (Analyst)

Good afternoon. Thanks for taking my call. Kipp, on the DRAM side, you said 30%, mid-30s was DRAM. Of that, how much was specialty and how much of that was commodity PC?

Mark Durcan (President and COO)

Commodity PC is now down to about 15%-16% of total revenues.

Betsy Van Hees (Analyst)

Okay. Thank you very much. Steve, you talked about this was a demand-driven downturn in the DRAM market. Mark, you talked about the PC, or you talked about the tablet market and the fact that this is a double-edged sword for you guys because it's very positive with NAND, but on the other side, it's negative on the DRAM side from a bit growth perspective. When you put those into perspective on the DRAM side, is it really, and we're heading out of peak seasonality. What's going to be the drivers to get the DRAM market back and DRAM supply and demand back into balance?

Mark Adams (VP of Worldwide Sales)

I think, again, it's Mark Adams. I think that, in general, we'll still get to see some PC growth. I think the last number that I've seen on 2012 PC growth numbers is in the 10% range over 2011. I think that, as I just was commenting on around low-power DRAM, it's not exactly a one-to-one trade-off in terms of the capacity utilization. Combined with continued growth around corporate enterprise applications, if you look at, for example, Micron being a leader in the server DRAM business, that's a business where density continued to dramatically increase. I think today, we approximate that on average, servers go out with 25 GB-30 GB per box. In networking, we're seeing increased densities as well. Across our overall landscape, we think that there's plenty of application areas to invest on the DRAM development from a go-to-market perspective.

We think that'll all work itself out in terms of overall supply and demand alignment.

Steve Appleton (Chairman and CEO)

Hey, Kip.

Kipp Bedard (VP of Investor Relations)

Go ahead.

Mark Adams (VP of Worldwide Sales)

Sorry, Kip. Hey, one other thing on the equation. Also, keep in mind that, you know, as tablets have clearly replaced some of the notebooks and the PCs, it's actually also driving quite a bit of server connectivity, quite a bit of connectivity to the internet and the infrastructure that then drives demand. I mean, if you look at the servers being put in place by the Googles and the Facebooks, etc., it's actually pretty stunning how much DRAM they're consuming now in order to put the infrastructure in place with which for all these tablets to access. It's not quite the equation that you were describing, although you're right, there's a piece of it that's happening there, but there's another side of it that I think people miss.

Betsy Van Hees (Analyst)

Thanks so much. That was very helpful. That actually leads me into my next question. You were talking about the Google and how they're building their own servers and their need for storage. That brings me to the enterprise side. Could you talk a little bit more about your customer engagements? What type of traction are you getting with the Tier 1 OEMs? Are you shipping in volume production? How are you looking for next year?

Steve Appleton (Chairman and CEO)

I'll let Mark answer most of that question, but I just did want to make the comment that it's an interesting scenario for us where not only are we engaging with what you would think of as the Tier 1 server OEMs, but we are also now engaging directly with some of those companies that I mentioned that are becoming big consumers of this product and actually building their own systems. What do you want to add to that?

Mark Adams (VP of Worldwide Sales)

Yeah, the only thing I would add to that is those types of customers, from a technical competency standpoint, are kind of learning as they go, and they look to Micron to be able to add some value there. If you think around SSDs as an example or overall system performance in DRAM and how the memory architecture lends itself to better performance for their servers, the engagements are a little bit more consultative and technical in nature, and we get a value add to that.

Betsy Van Hees (Analyst)

Thanks, guys. I really appreciate it. That was really helpful.

Operator (participant)

Thank you, ma'am. Our next questioner in queue is Harlan Sur with JPMorgan. Please go ahead.

Harlan Sur (Analyst)

Thank you for taking my question. Based on your analyst day presentation, it looks like about 45%-50% of your DRAM wafer output is still at the 5X nanometer node and roughly 40% at 40. Could you just give us your view on where this mix will probably likely be at the end of the calendar year, maybe including 30 nm as well?

Mark Durcan (President and COO)

First of all, without recharacterizing what you just said, you need to keep in mind that there's a lot of specialty and sort of value-add legacy product associated with that mix. On top of that, I'd add that in the current quarter, we did cross over 42 nm to 50 nm. The majority of our bids are now 42 nm bids. We will see really probably in the fiscal second quarter, not the quarter we're in now, but in the fiscal second quarter of 2012 for Micron, a significant ramp-up on the 30 nm node. The majority of the DDR3, 42 nm, and you'll start to see that shift again when you get another roughly 90-120 days out.

Harlan Sur (Analyst)

Okay. Your answer in terms of the crossover happening this quarter, that's on a wafer-out perspective?

Mark Durcan (President and COO)

That's on a bid perspective. We crossed over in the quarter we just closed.

Harlan Sur (Analyst)

Got it. Okay. Thank you. As a follow-up question, maybe you can just provide us with an update on the 40-nm yields. Are they in line with your cost reduction targets? Maybe you can just articulate what is the team doing differently at the 4X node from a yield perspective versus 5X where you did struggle a bit. Maybe provide us with an early glimpse into your 30-nm yield improvement rates as well. Thank you.

Mark Durcan (President and COO)

Sure. Without getting too specific about yields, I will say, you know, the 42-nm node ramps have gone better than the 50-nm node. A lot of that, we've had commentary on the previous couple of calls about some of the transition issues we experienced at Inotera with a mismatched toolset and, you know, cycle times around ramping that node as we transition from French to SAT. Beyond that, I think we're pretty happy with where we're at on the 42-nm node now. We still have some upside as we continue to reach what I would call ultimate mature yields, but we're clearly executing much better now than we were six, nine months ago. On the 30 nm DRAM node, we're very happy with the just very early silicon coming out of Inotera. That's going really very well indeed, although we're in the early days there.

MTV ramping and Inotera still running the early lots out, but very impressed with the execution on the early mature yield.

Harlan Sur (Analyst)

All right. Thank you very much.

Operator (participant)

Thank you, sir. Our next questioner in queue is Bill Dezellem with Tieton Capital Management. Please go ahead.

Bill Dezellem (Analyst)

Thank you. What implications, if any, do you see with Hynix's ownership structure changing impact on the industry?

Steve Appleton (Chairman and CEO)

Bill, I don't really see a lot. As you've probably noted or noticed from the media, they're having trouble finding someone that wants to buy them. They've limited it to Korean investors only, which means I don't think you're going to see a lot of change in terms of the company's activities. It's maybe a little more is being made of than really exists around a controlling interest, but frankly, I just don't see a whole lot shifting.

Bill Dezellem (Analyst)

Thank you.

Kipp Bedard (VP of Investor Relations)

Okay, I think we have time for one more question.

Operator (participant)

Yes, sir. Our final question for today's event is Glen Yeung with Citi. Your line is now open. Please go ahead.

Glen Yeung (Analyst)

Thank you. I'm thinking, I guess it was in August you saw a bit per box increase on the commodity DRAM. I wonder if you can just talk to us about what you saw there and whether there's anything to take away from that.

Mark Adams (VP of Worldwide Sales)

Yeah. Hi, this is Mark Adams again. I think my comment at the time was that during the holidays, we continue to see the kind of the entry-level value products around 4 GB, both on the desktop side and the notebook side. It's intriguing that we hear a lot about tablets leading into that and so on and so forth, and that might change strategies or the general overall strategy going into the holiday. The fact remains that it continues to get stronger around this 4-GB platform memory content, both on the desktop and notebook side. You look at the bill of material cost of memory, it's pretty low these days. It's about 3% or so, and that's well below the average that we typically see.

I think the other thing driving that is, I think the success that Apple has had kind of in the performance cube for the holidays, they're not selling a lot of 4-GB and 2-GB units. I think the rest of the industry has to watch that and keep up with the kind of performance vendor, if you will. I think that's driving the content to be in a better place. If you went back 18 months, I looked at this data right before our call today, and if you went back 18 months, we were having the same conversation, and it was 3 GB, and we were all saying, is it ever going to go up? It's up dramatically since then. We don't see on the client side, you know, anything more that continued growth beyond where we're at today.

Glen Yeung (Analyst)

Does Ultrabook give you any reason to be optimistic for this holiday selling season?

Mark Adams (VP of Worldwide Sales)

Oh, absolutely. In terms of memory content, absolutely. We think that 4 GB, again, is the basic minimum there. One of the things that's intriguing is because you're not able to upgrade the Ultrabook, they're going to max out on a point of sale of the unit itself. Thus, I think that you're going to see increased sale in the Ultrabook market of 4 and 8-GB configurations.

Glen Yeung (Analyst)

Is it too early to expect Ultrabook to be a meaningful contributor?

Mark Adams (VP of Worldwide Sales)

Yeah, it'd be hard for me to call. I think it's definitely too early to sell at this point.

Glen Yeung (Analyst)

Okay. Last question is, when you look at 2012 CapEx, can you remind us what the split is between NAND-related and DRAM-related CapEx?

Ron Foster (CFO and VP of Finance)

You bet. It's about two-thirds NAND wrapping up the MSS fab and about one-third DRAM.

Glen Yeung (Analyst)

Thank you.

Kipp Bedard (VP of Investor Relations)

You bet, Glen. 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-K. Thank you.

Operator (participant)

Thank you. This concludes today's Micron Technology 4th Quarter and Fiscal Year-end 2011 Financial Release Conference call. You may now disconnect.