M&A Announcement

Oct 18, 2018

Press Release

Good afternoon. My name is Latif, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technologies Update Call. All lines been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. Thank you. It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Head of Investor Relations. You may begin your conference. Thank you, Latif. Good afternoon, and thank you for joining our call regarding Micros intend to acquire Intel's interest in our IIM flash Technology joint venture. On the call with me today are Manish Padia, Executive Vice President And Global Head of Operations, and Dave Zinsner, Chief Financial Officer. Our CEO Sanjay Mehrotra is unable to join the call today due to prior commitments related to the events planned Mark at 40th anniversary. Today's call will be approximately 20 minutes in length. Our call today will be focused on discussion regarding our intend to acquire I'm Flash Technology, and we will not be answering any questions that are unrelated to today's announcement. This call is also being webcast from our Investor Relations website at investors. Micron.com. A webcast replay of this call will be available on our website later today. As a reminder, the matters we will be discussing today include forward looking statements. These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer to you to documents we find with the SEC, specifically our most recent Form 10K for a discussion of risks that may affect our future results. Although we believe that expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results levels of activity, performance or achievements. We are under no duty to update any of the forward looking statements after today's date to conform these statements to actual results. I'll now turn the call over to Manish. Thank you Farhan. Thank you to everyone who's joining us today on short notice. I'm pleased to share with you our decision to exercise our call option to acquire Intel's interest in the I'm Flash joint venture, which includes the manufacturing facility in Lehi, Utah. We believe that this acquisition will accelerate our commercialization of 3 d XPoint and future emerging memory technologies, which will benefit our customers and provide an attractive return on investment to our shareholders. This acquisition provides Micron with a well established development and manufacturing facility that is equipped to produce 3 d Crosspoint memory, and a highly skilled workforce with a proven track record to 3 d Crosspoint solutions and confidence in our emerging memory technology roadmap, which will enable our customers to create significant value in a broad range of markets particularly artificial intelligence and big data analytics applications. I'm Flash Technologies also referred to as IMFT, a joint venture that Micron established 3 d Crosspoint products, and our agreements with Intel allow IMFT to only manufacture products that are based on jointly developed technology. Earlier this year, Intel and Micron announced that we have decided to end our joint development of 3 d XPoint after the completion of our 2nd generation node which is expected to occur Michael will continue to pursue our own roadmap of emerging memory products, and we plan to introduce new products that will be based on our independently developed technology. Through this transaction, Micron will secure capacity for 3 d Crosspoint production and will gain the flexibility to develop and manufacture other technologies at this facility. Keep in mind that Lehigh Facility is the only fab in the world that currently manufactures storage class memory and volume. After closing, employees of IMST will become part of Micron and will help us accelerate our technology roadmap on 3 d Crosspoint and other emerging memories. Following the close of the transaction, there are certain supply agreements that come in effect and will extend for a period of 1 year. We will also continue to have the opportunity point products in late calendar 2019 with revenue ramps starting in calendar 2020. The expected closing of transaction lines up well with the start of our production With that, I will pass it over to Dave to go over the financial considerations of this intended transaction. Thanks, Manish. Turning to financial implications, given that we already consolidate IMFT in our financial statements, We don't expect a meaningful impact to our profitability in the near term. We expect to continue to have the under utilization charges consistent with current levels through the end of fiscal 2019. Having said that, ownership of the Lehigh fab gives us greater operational flexibility to better manage our utilization after the close of and the timeline to close the transaction is between 6 12 months after to date Micron exercises the call. Intel will choose the exact closing date within that 6 to 12 month window. At the time of the acquisition, We expect to pay approximately $1,500,000,000 for Intel's non controlling interest in I'm Flash and the elimination of I'm Flash member debt. While this debt at the time of closing might change, IM Flash member debt was $1,000,000,000 at the end of fiscal 2018. We expect to use cash on which we continue to fund to be $10,500,000,000, plus or minus 5 percent in fiscal 2019. And our long term CapEx model should remain unchanged in the low 30s as a percent of revenue. To summarize, for our $1,500,000,000 investment at the close of this transaction, we're getting full ownership of a fab in which Intel and Micron have jointly invested over $6,000,000,000 since its inception, and are reducing member debt to 0 on our balance sheet. In addition, we're bringing on board a highly skilled team of IMFT employees who will help us accelerate technology development and commercialization of our emerging memories. This investment also exciting technologies for our customers, Latif, with that, we'll open it up for questions. Questions. Our first question comes from the line of Amit Darianani of RBC Capital Markets. Your line is open. Yes, thank you guys. I guess just a question for me. Dave, I think in the past, you guys have talked about 100 point headwind from the model from underutilization of these assets. And I think you and Manicio talked about operational flexibility that's enhanced once you are done with this transaction. So is the sense that 100 basis points of margin had been good abate a lot sooner than calendar 'twenty, I guess, perhaps when you start to get some revenues over there? Or how do I think about that margin headwind and what is operational flexibility for why do you guys from here? Yes, to your question. So, obviously, from here until whenever the close occurs, we would expect, to continue to have roughly that 100 basis point or so headwind from the underutilization of our capacity at the IMFT fab. And then really, like I said, we do get some flexibility, which we'll try to manage. I think it's a little early to tell exactly what sort of we might get. Clearly, the most impact we can have is when our products get introduced and we start to ramp those. And as Manish mentioned, we expect to introduce products in late 2019 and start to see those ramp in 2020. And I'd say that's probably the bigger factor in terms of seeing those the patient charges go away. Perfect. Thank you. Thank you. Our next question comes from the line of John Pitzer of Credit Suisse. Your line is open. Manisa, I'm just kind of curious relative to the supply agreement, that 12 month agreement, I'm assuming kicks off when the deal closes. 1, is that correct? And 2, just relative to your own progress of controller technology on 3 d XPoint, how do we think about kind of the timeline for you to have product in the market and qualification? And kind of where are you on the controller technology, especially for using 3d in a DIN format, 3 d cross 1 in a DIN format? Thank you. So, thanks for joining, John. Yes, that's correct. That the supply agreement that we referred to would begin at the closing of the transaction with continue for 12 months. And there are certain terms around how that supply from us to Intel would work. And with regard to our progress, as we've mentioned, I mean, we're making good progress on developing our system level products, which include the capability for a controller to, be working with our memory to be able to be used in different types of system applications. And we feel like we're on track to be able to have introduction of those the end of calendar 2019. Next question? Our next question comes from the line of Ramesh Shah of Nomura. Good afternoon. Thanks for doing this call. So, Dave, you mentioned that you're paying about $1,500,000,000 for the asset and then you're also taking on an incremental $1,000,000,000 of debt. Can you just talk about, valuation and why it made sense from that perspective. And then as a follow-up, you alluded to the fact that you're going to be selling wafer intel for up to a year. Can you quantify for us how much you think you'll be able to recover by supplying wafers to Intel? Thank you. Okay. So let me go back and clarify a little bit what I Ed. So as far as the actual purchase price, it's $1,500,000,000, that would include the reduction of any IMFT debt that's outstanding at the time of the transaction. We don't know exactly what the amount will be at the end of the transaction, but what we can tell you is at the end of the fiscal year that we just ended. It was $1,000,000,000 on the balance sheet. The valuation is mechanical and that it's term and based on the agreement, what we call it for, it was, it represents the intel's portion of the contribution into that into the ImF keypad. And so we repay that. But what we did do is we ran the calculus on whether we thought that felt like a good deal. For us. And as I mentioned, we're going to get, a fab that's $6,000,000,000 has been invested in We think the ROI on this is going to be very good based on our projections. And we get essentially 100% ownership of the only 3 d Crosspoint fab right now in the world. In a location that's perfect for us proximity wise to our Boise location, where a lot of tech development is being done And then on top of that, we have a very skilled workforce there that has been doing this for a decade that, that I think really makes this attractive for us. So in any event, that's the that's kind of the puts and takes of it. As Manish mentioned, we do have this supply agreement I think it's early to tell exactly how much supply. There's some mechanics within the agreement, but can have, slight modifications to it based on how things go. So we'll kind of see how it goes. Like I said, I think for us financially, the probably relatively neutral to us, initially. And then, of course, as we ramp up our products, it's going to be very positive for us and a very good return ultimately. Great. Thank you. Thank you. Our next question comes from the line of Aaron Rakers of Wells Fargo. Your question please. Yes, thanks. Thanks for taking the question and also congratulations. I think in your recent 10 K filing, there's a disclosure that the IMFT sales to Intel were about $500,000,000 for this past fiscal year. As we look out and think about the supply agreement beyond the 12 months, am I to assume that those sales come into the model at a healthier margin relative to what that $500,000,000 would come into the model today. Any kind of color on how we should think about that framework? So again, some of it is dependent on what the partner decides and ultimately in terms of the supply. So I don't know whether it will end up being, different than the $500,000,000, but our best read on it is there will be a material change as we transition from a joint venture relationship to a supply relationship. Obviously, when you have a supply, you get some cost plus opportunity there, but we haven't disclosed those $10,000,000. And as a quick follow-up, could you give any metrics of the Lehi Utah facility? How any kind of wafer starts per month or any kind of framework of what the capacity looks like in that fab? Thanks, Aaron. As you know, this was a fully populated tuning and fab for us. For a better part of the last decade. And then now we've transitioned it fully over to 3 d XPoint technology. We won't get into the kind of the specifics on the capacity, but I will tell you is that we feel, very good about the potential for us both the timing of when we're acquiring this capacity or expected to acquire the capacity kind of lining up with the time that we're starting the revenue ramp of our products. And that we feel between that capacity and available additional space within facility, we can support growth requirements of those products as they become adopted after in 2020 and beyond. Thank you. Thanks. Thank you. Our next question comes from Blayne Curtis of Barclays. Your line is open. Hey guys, thanks for taking the question. I was just kind of curious on future roadmaps, Gen 3 and beyond. You won't comment on what Intel plans to do. And I'm just kind of curious what's the status of the IP that was developed within this flash entity for the 1st few generations. And what access Intel may have to that. Certainly, both parties have developed this technology together and we'll have access rights to the jointly developed technologies, Intel and we would share that. Keep in mind that the technology and the process of manufacturing has all been done exclusively in Lehi facility and in our Boise Technology Development Facility in terms of the core process modules and integrated integration and then volume production. So a significant part of that would come with the IMFT transaction. Thank you. Our next question comes from Weston Twigg of KeyBanc. Your line is open. Hi, thanks for taking my question. Just as a follow-up to that, I'm curious You said, 2nd gen JV we completed by second half twenty nineteen and then you moved to Micron zone roadmap. When you do the ramp in Lehigh for your own production ramp, do you expect that to be on that second gen technology or would you be on potentially your own technology and maybe having to produce the second gen for Intel on your own version of the product simultaneously in the same fab? Yes. So we actually intend to be ramping our those initial products that we've been referring to in introduction in 2019 and ramp in 2020 on the 2nd generation that's jointly developed with Intel. So that this capacity that we're acquiring actually fits very nicely with that production requirement. And then beyond that, we will be introducing our own sort of independently developed, emerging memory technology as a follow on and that would be the for follow on products after those initial ones that are ramping in 2020. Got it. That's helpful. Just real quickly, the follow-up, can you help us understand how much you need to invest in the fab during the ramp to support that 2020 ramp just in terms of maybe a dollar amount or wafer amount? Well, I don't think we're going to give specific details on that. It's far enough there, but I think that the we feel good that the one $500,000,000 relative to the assets to work firing in the capacity that would come along with that for the existing 3 d plus point technology, we'll be able to provide us with a good baseline to be able to begin our production ramp. And when we built our model of kind of low 30s CapEx, all of these kinds of things were contemplated in it. So it's not additive for sure. Okay. Thank you very much. Hello, Your line is open. Thank you for taking my question. Can you give us any more details about the other emerging technology? I think you said it's going to be internally developed or, will you acquire outside of Micram? And is it persistent memory, non volatile memory or somewhere in between? We're not going to give a Tim, we're not going to give a lot of upside that is going to be confidential, but, what we announced earlier this year is that we would be each party would be independently developing the follow on, generation to the 2nd generation of 3 d cost point. And so that follow on generation will be independently developed by Micron. And then we would look to introduce it. And we've believe that the timing the expected timing of the close of this transaction will give us, the Lehigh facility will be terrific choice for us to, put pilot production of that next generation technology, with it being close proximity to the our Boise Development Fabwear, our technology is developed. Thank you. Thank you. Thank you. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect at this time.