Earnings Call: Q3 2015

Jun 25, 2015

Good afternoon. My name is Karen and I will be your conference facilitator today. At this time, I would like to welcome to the Micron Technologies Third Quarter 20 15 Financial Release Conference Call. All lines have 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, Kit Betard. Sir, you may begin your conference. Thank you, and welcome everyone to Micron Technologies third quarter 2015 financial release conference call. On the call today is from Mark Durkin, CEO and Director Mark Adams, President and Ernie Maddick, our newly appointed Chief Financial Officer. This conference call including audio and slides is also available on our website at micron.com. In addition, our website has a containing the debt and capped call dilution table. If you have not had an opportunity to review the third quarter 2015 financial press release, it is also available on our website at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of the call accessed by dialing 4045373406 with a confirmation code of 6 3:6:9:5:5:8. This replay will run through Thursday, July 2nd at 11:30 pm, Mountain Time, a webcast replay will be available on the company's website until on the company, including information on various financial conferences that we will be attending. You can also follow us on Twitter at Micron Tech. Please note the following Safe Harbor statement. During the course of this meeting, we may make projections or other forward looking statements regarding 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 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 achievements. We are under no duty to update any of the forward looking statements after the date of the presentation to conform these statements to actual results. With that, I'd like to now turn the call over to Mr. Mark Durkinmark. Thanks, Kim. For our fiscal Q3 2015, Micron posted total revenue of $3,900,000,000 within our revenue guidance of $3,800,000,000 to 4,050,000,000. Revenue was sequentially lower as expected in fiscal Q3 due to near term market headwinds driven primarily by weakness in the PC sector. Net income was $491,000,000 and earnings per share were 0.42 dollars. Non GAAP net income or $0.54. Free cash flow was approximately $600,000,000 based upon operating cash flow and capital expenditures of approximately $1,300,000,000 7 $30,000,000 respectively. The team executed well in the challenging market conditions during Q3 as we supported our customers across a broad range of market segments. Micron is a memory company that produces technologically advanced components, systems and subsystems for the global marketplace. As such, it's important that we that regardless of near term market conditions, we remain focused on the long term. We are continuing to deploy advanced process technology to enable edge products for our customers and to drive ongoing manufacturing efficiency for Micron. Our customers are looking for a partner in memory development, in the marketplace. Today's customers are also looking for ways to gain more innovation and efficiency in their own system design as memory is being deployed in more ways than ever previously imagined. From cloud servers to mobile infrastructure and automotive design to industrial and medical devices Micron Memory is a preferred memory partner and is at the heart of technology product innovation. Turning to overall market conditions. We expect stabilizing DRAM ASPs across the broader market over time as we manage our product mix distribute our capacity to a We are forecasting DRAM industry supply bit growth in the mid-20s in calendar 2015 and in the low to mid-twenty percent in calendar 2016. We currently believe that DRAM demand in calendar 2015 in aggregate will be at or exceed supply. For NAND, the market continues to consume plainer NAND at increasing rates and we look forward to volume production of Micron's differentiated high performance 3 d NAND later this year. We expect NAND industry supply bit growth in the high 30% range this year and in the mid 30% range next year. We believe supply and demand are in balance this year and unrestrained demand is above supply in future periods based on currently known capacity plans. We are making good progress with fab expansion in Singapore. We expect the market will demand all of the 3 d NAND output we can produce given the attractive cost and performance of our technology and an elastic storage market we will sell into. Advanced technology deployment requires focused investment and carefully managed transitions. To effectively execute next generation technology production at scale, we are converting tools and systems today to allow for indication in the future. These activities drive future growth and margin expansion opportunities in our business, although they often limit short term bit growth and cost reductions. Are continuing to make leadership. As always, we will manage our capital to deliver long term returns and shareholder value. For today's call, I've asked Mark Adams to summarize our operational and BU results. I'd also like to welcome Ernie Maddick, our CFO Ernie possesses outstanding industry experience has hit the ground running and we're excited to have him on the team. He will cover Q3 financials and Q4 guidance. I'll return to the end of the prepared remarks with a quick summary and lead to into Q And A. Mark? Thank you, Mark. I will begin and conclude my portion of the call with commentary on each of our 4 business units. On the technology deployment front, We remain focused on 3 major technology initiatives completing the ramp of our 25 nanometer DRAM technology driving scale output of our 20 nanometer DRAM technology and the launching of our 3 d NAND technology. We are currently shipping early production 20 nanometer DRAM and will continue to ramp throughout the remainder of this year. We are for low volume production of 3 d NAND in the second half of twenty fifteen, ramping to a significant percentage 18. Now let me discuss our DRAM and NAND businesses. Let's begin with our DRAM business, which represents roughly 61% of our total revenue in fiscal Q3. We delivered DRAM solutions to a variety of market segments. While PC bills declined well below seasonally slow demand in the first half of the year, we saw relative stability in other end markets. And responded to these conditions by adjusting our production mix throughout the quarter. As a percent of DRAM revenue in mobile was in the high 20% range. The PC segment was in the low 30% range. The server business was in the low 20% range. And networking graphics and AIM comprise the remainder. We continue to move production from DDR3 to DDR4 to meet growing customer demand across our customer base for long term more stable business. Moving on to our NAND business. Trade NAND revenue represented 32% of total revenue in fiscal Q3. Performance was consistent with due to mix shifts in favor of longer term design win opportunities for both Micron managed NAND and MCPs for mobile and SSDs for our storage business. These products represent strong growth opportunities for us going forward. As a percent of trade NAND revenue in fiscal Q3, Consumer, which includes cards USB and components, was in the mid-forty percent range. Mobile including MCPs was in the low 20 percent range SSDs were in the high teens. AIM and other embedded markets combined to roughly mid teens, We saw a 3% uptick in NAND component pricing in the quarter as we moved more debates to our own SSD and mobile business and reduce the supply available to the transactional channel market We continue to better position In fiscal Q3, these efforts reduced our MLC shipments into the existing TLC enabled Components channel by approximately 30%. Moving on to our business units. CMbu, for our compute networking business unit, revenue was $1,500,000,000 in fiscal Q3, with operating income of $266,000,000. CMU was impacted by lower ASPs driven by softness in demand from the PC segment. Consistent with our statements, on the last earnings call, we have reduced output targeted at the PC segments in favor of faster growing more stable segments. We expect better relative performance for PC bills in the second half of calendar year of 2015, along with continued DRAM content growth. Resulting in PC DRAM bit demands up slightly for the year. CMBU Enterprise customers continued their transition to DDR4 technology, including 8 gigabit DDR4 to support workloads that require both higher performance and higher density modules. We continue to believe that applications such as in memory database computing will drive substantial growth. In the networking segment, We see continued LTE deployments in emerging markets which should represent additional opportunities as we move forward. Cloud Server represents a high growth segment with analysts projecting 50% bit growth year over year. Growth in our graphics business was driven by sales into game consoles and high performance graphics cards. This segment is transitioning to GDDR5. We also commenced shipments of our first 20 nanometer graphics products. I mentioned our commencing 20 nanometer shipments earlier in my script. These initial products primarily in support of CMBU. For example, our compute customers in the PC segment. Revenues in Micron Storage Business Unit was $901,000,000 in fiscal Q3, down 6% Sequentially as we opportunistically shifted more NAND bits to higher margin businesses such as our mobile embedded business units. Gross margins were up slightly in the quarter as we continue to focus on improving our storage business. Operating margins were slightly microon storage business, we made good progress on key milestones in our third quarter. We announced availability of our new 16 nanometer TLC planar NAND components in fiscal Q3 and already have several channel customers buying our TLC who will input them into SSDs, consumer drives, memory cards and other products, offering high density storage products to market based on this technology. Our SBU Enterprise And Data Center businesses both grew 45% sequentially, albeit from a lower base. We are pleased with the progress of our collaboration with Seagate and then we'll have our first SaaS S and D launch resulting from this partnership later in the summer. We have begun early sampling with customers and already have secured 2 qualifications slots with major OEMs. And finally, we will release our own consumer SSD based on TLC NAND Technology in the second half of twenty fifteen. We expect to have roughly 50% of our SSDs on TLC by the end of fiscal year 2016. Revenue in MBU mobile business unit was $938,000,000 in fiscal Q3, up 10% sequentially. Operating income was $296,000,000 or 32 percent, up from 31% in fiscal Q2. The mobile market supply demand balance remains healthy. Our mobile business continues to benefit from increasing content growth across the a range of mobile products. 3 to 4 gigabyte phones announced at Mobile World Congress in March are now hitting the market. Low to mid priced phones targeted at emerging markets are being built with significant memory content, including DRAM specs at 1 gigabytes above. We are also seeing a pull in of next generation 4g LTE Chipsets in reference designs that double the content of both DRAM and NAND from 2 gigabytes to 4 gigabytes of DRAM and from 8 16 gigabytes NAND to 1632 gigabytes configurations. Micron continues joint validations for low power DDR4 across chipset platforms. LP4 adoption is currently limited to the very high end of the market today, but will be adopted more broadly in calendar 2016. Additionally, mate, the rapid adoption of EMCPs in the high growth mid range market creates a significant opportunity for Micron, as the MCPs regard both low power DRAM and NAND, demonstrating the strength of our portfolio. Microas embedded unit business unit posted revenues of $483,000,000 with operating margin of 20%. Sales of our automotive grade EMMC hit an all time high We introduced our auto grade low power DDR4 and our high performance G18 parallel Nor flash devices in fiscal Q3. These products enable improved performance and power reduction for critical applications and high temperature rugged environments. Ebu also experienced strong demand in the gaming business. Demand for high density 45 nanometer nor flash solutions are being driven by regulatory change in the Japanese gaming sector and we expect this elevated level of demand to continue. It's also worthy to note that EBU shipments of NAND increased 27% from the prior quarter. Now, continue our commentary on fiscal Q3 results and Q4 guidance. I'll turn the call over to Ernie. Thanks, Mark. It's a pleasure to be joining the Micron team, and I look forward to meeting many of you at our upcoming Analyst Day in August. The third quarter of fiscal 2015 ended on June 4 and the results include net income of $491,000,000 or $0.42 per share, a net sales of $3,900,000,000 in gross of 30 dollars in by product line starting with DRAM. DRAM revenue decreased approximately 13% compared to the 2nd quarter, reflecting approximately a 10% decrease in per approximately 6%. As was previously noted, we adjusted our output mix during the quarter and exited with relatively flat DRAM inventory levels. On the Tradenant side, which includes our growing MCP business, revenue increased approximately 3% in the 3rd quarter with average selling prices in increasing approximately 6%, partially offset by a slight decrease in sales volume. The increase in the trade and end average selling price was mix related as margin improved slightly compared to the exceeded the higher related costs. $300,000,000 in cash and marketable investments. During the third quarter, we received $1,000,000,000 in proceeds from the issuance of high yield notes and we deployed $782,000,000 to repurchase a portion of the outstanding Series C and D convertible notes. Cash expenditures for property, plant to be within our previously forecasted FY15 range of $3,600,000,000 to $4,000,000,000 SG and A expense for the expense was above our guided range, primarily due to higher volumes of wafers used for development of new products and technologies. Now looking to guidance for the fourth quarter. DRAM gross margins for the fourth quarter using quarter to date ASP and projected mix for the quarter should be down mid down mid to high single digits and cost per bit up low single digits. Key items affecting our D guidance for sizes and therefore produced fewer bits per wafer. Fiscal Q4 quarter to date mix adjusted ASP is below the 3rd quarter in mobile and specialty DRAM remains relatively stable. We have and will continue to carefully balance output volumes between our end markets. The trade NAND gross margins for the fourth quarter using quarter to date average ASP and projected mix for the quarter are expected to be flat compared to the third quarter based on good production down low to mid single digits, while ASPs are relatively stable and cost per bit is approximately flat. Key trends for the fourth quarter affecting this like for like pricing down slightly offset by average selling price improvements on changes in mix and continued focus on mobile and managed NAND products. These project products generally have both higher ASPs and cost. On a consolidated basis, we are guiding total revenue for the fourth quarter in the range of $3,450,000,000 to 3 $700,000,000. Looking at other P and L and cash flow results and guidance, SG and A spending dollars. For non GAAP guidance for 4th quarter, please refer to the dilution table posted along with other materials for this call on our website. The dilution table reflects Thanks, to our customers across conditions in fiscal Street and our company. Operator, I think we're ready to begin Q Our first question comes from the line of Harlan Sur from JP Morgan. Good afternoon and thank you for taking my question. DRAM revenue bit shipments were down slightly quarter on quarter. Can you just tell us what your bit production growth was? I think You said you didn't build any inventory. Also, I think you previously talked about high single digits production shipment growth over the next couple of quarters, but the May quarter results and the August quarter guidance certainly doesn't seem to be suggesting this. So is the Micron team still targeting bit any growth in the mid teens range this year? Maybe this is Mark Durkin. Maybe I'll start with the last part of that question. And then, Mark Adams in comment a little bit on the mix effects and what happened with DRAM sales bids. So for 2015, I think it's still fair to say that had we not had mix adjustments, as we move through the year, we would still be driving to a high teen number for DRAM bit growth. But obviously the number for the year is now going to be less than that given the changes we've made as we move through the year. As we think forward over the longer term, clearly, we've said in the past and we continue to reiterate that we'll be higher than market as we through calendar 2016. On the NAND front, we've been less than market in 2015 and we're still evaluating exactly what our capital plans look like for 2016. And we'll dial those based on market conditions as well as ongoing evaluation of the technology introductions in Singapore relative to the 3 d NAND and deployment of advanced technologies there. Mark, if you want to take the DRAM sales pitch and the mix effects that drove that, maybe that's best approach. Sure. We've said all along that we will obviously take in the market dynamics into play as we think about how we allocate our capacity and given some of the headwinds in the PC market, we redirected some of that capacity to either more strategic long term markets such as R4. And then some of the PC compute bits, just a more attractive long term stable market a good example of that would be cloud servers. Another example would be our mobile business. And, we think those are the right things to do, but they do have a lowering effect on the bid growth. Okay, great. And then just my follow-up question on the NAND front. So I think the team is starting to make the move to 16 nanometer TLC or driving some production of 3 d, obviously, that would be a bigger part of the mix in the second half of this year and next year. But the team is still looking for a decline in production growth in the August quarter. When what's your sense on when we should expect the production to start to inflect higher for your NAND business? Well, again, that's going to depend on the details of the mix decisions we make. What's been going on here over the last quarter or 2 is that as we transition to higher percent of SSD sales, we build WIP. And so, the time the product takes through the line increases and that create a dip over a confined period of time as we build that whip. Mobile is a similar type of effect as some of that output goes out in MCPs as well. Okay. Thank you. So I think that the longer question is exactly when will we see NAND bit growth? Well, I think you'll see that emerge as we move through the next number of quarters. Thank you. And our next question comes from the line of Rohit Shah from Nomura. Yes, thank you. Mark, you mentioned that for this year, your expectation is that DRAM demand will exceed supply. But ASPs year to date in DRAM are clearly worse than expectations. How do we reconcile that? Yes. What I try to indicate is that I think in target for the year. The demand is going to exceed the supply, which I think your takeaway that would be that we believe that demand is going to be higher in the back half of the year as we said on the last call and as we continue to believe And so that as you cube that up over the entire year, you will come to the conclusion that the growth that we continue to see in some of the other markets mobile data center enterprise server, etcetera, and networking will offset what's been a slow PC period. Even PCs, I think our view is that by the time we get to the end of the year, not with outstanding the decrease in unit sales. There'll be a small net growth in bits into the PC segment. I guess what I'm alluding to is that if you look at the trend over the last few periods and your DRAM bit growth relative to peers, I'm just curious to what extent do you believe that the industry is still being rational? Well, I think I think it's fair to say that, that probably nobody expected the PC segment to be as slow as it's been. And think it's also reasonable to expect that, in an industry with a number of high growth segments, balancing supply and demand is never going to be precise. And so, ripples in the relative balance of supply and demand I believe are inevitable in a market like this. And What I would say is that that probably, supply got a little bit further ahead of demand than many of us anticipated, but that it's not necessarily an indicator of a deliberate strategy by any particular player in the marketplace. And our next question comes from the line of Mendi Hosseini from SIG. Taking my question. Why don't you go back to prior your question? And and in that context, when we go back to when industry consolidated, we all expected that mobile and servers are going to be the more of a secular growth driver. And these two segments, obviously, carry a guide penalty. And given the consolidator industry, why is it industry more proactively seeking higher margin? If there is a mix issue in the near term, it's just to me that these headwinds are more structural since the demand drivers are actually in the mobile and server. So I wanna if you can help you better understand how the industry is gonna overcome this, especially as migration to 29 only there. It's going to be relatively more challenging and linked here. And in that context, how we could be able to manage margins? And I have a follow-up. So I think the answer to that question is that in an undersupplied market as we had a number of quarters ago, you tend to get margins that are higher in maybe the least attractive long term part of the market. And so if you think about where PC margins were, they were they were higher than we were experiencing both mobile and in server, primarily because suppliers view those as long term lease attractive. And and a market that was maybe less sustainable. And therefore, you see larger price swings as the relative supply and demand balance moves over time. Now as you think about what does that that implies that as companies like Micron and presumably our competitors, over time readjust their supply to to rebalance demand in different segments and pull a supply out of that sector. It creates a it creates an ASP headwind for us because we're moving to products that already had lower margin. And it creates over the short term a more intense competition for those sockets in the high growth sectors. That doesn't say anything really about what will happen over the longer time horizon. Okay. And then I'm still not sure how we would be able to recoup this near term margin headwind. Is that as the market scaling, and I'm still confused. I thought the near term margin pressure is gonna, you know, you're gonna be able to overcome it and be able to better manage margins. Well, I think I believe over time that there is, in some of these other market segments, there is opportunity to differentiate and to innovate and to provide, stickier solutions. There's also a higher growth and longer qualification cycle. So what a company like Micron does is they look at And I think Mark kind of already alluded to this, but I'll re say it anyway. We're looking to place our product, not necessarily in the short term, to pick off the highest margin point. But to make sure we're placing our product where we're going to have growth and stability and where over time we can drive higher margins. And so sometimes you want to be a little bit proactive in Got it. And then quickly on NAND, right now, your plans are to, build the pilot line through that 39 pipeline in Singapore and then what 48 layer stack samples are coming out. And then my impression is that you're gonna add capacity in Singapore. But your flash partner Intel is also very upbeat about the the the 3 d NAND and technology and how they are also, gonna use that technology. So when we look into next year, beyond, how is this relationship gonna work? Because the JVs are in the the JV fabs are located in the US, but you're initially gonna ramp the capacity in Singapore. How will this how will the transaction gonna play out? And when would you actually gonna start adding capacity in the JV locations. So let me, let me correct, like, a couple of things you just to make sure we're clear on what we're doing. And then I'll maybe I'll have a couple of comments on the Intel relationship, but I think that's something that's better done by the 2 of us as opposed to just Micron. So first of all, relative to, what we are doing today, we have, as you know, a significant installed planar base in in Singapore. We have available cleanroom space there to begin the process of, of, converting some of that planar capacity to 3 d NAND and we're under construction of an expansion of that facility so that we can continue that transition of plan and NAND to 3 d NAND into the back half of 2016 and on beyond then. There is also capacity that Micron and Intel owned jointly, in Lehi, Utah. And today, you're correct. That is all plain and in capacity. So one other thing. I think you said 48 layers. We are currently sampling a 32 layer, 3d NAND device. And that is the device that we will initially ramp before moving to a second generation of 3d device starting in the back half of 2016. Now relative to microns and Intel's plan, for production. There's not a whole lot I can say about that today other than to say, it continues to be a very close partnership continue to develop the 3 d NAND technology together. And we have existing long term supply agreements with Intel to support Planner NAND and we anticipate that we will build 3 d NAND for them as well through an agreement out of Singapore. And that's probably all I can say, absent an agreement with Intel to share more information with you. Got it. Thanks much. Thank you. Our next question comes from the line of Kevin from capacity away from PCDRAM towards the more strategic DRAM. Where are you with that? Have you stopped the transition, and what percentage do you think the split will be in the August quarter and going into the November quarter? Well, I'm going to stop short and give you actual numbers on allocation of our capacity for a variety of reasons. But I will tell you that the process is in place. You can see some of the growth we've had in certain sectors as we reported that. And so it's in process. Mobile overall growth rate from a segment and demand standpoint is up 50%. And the PC bits are low single digits, 5% range. So as we think about that. The shift we're making has to respond to that. And we're on that path. As we've said, we started it in Q3 and we'll continue to balance that out as a market's warrant. And maybe just as a follow-up, the visibility you have into mobile, there's some concern in the market that you could overshoot and end up with too much capacity in mobile. Can you talk more about your visibility into the mobile market? Well, I think, we talked to a few things as I mentioned in my script, we've actually seen continued growth in content per device. We see that while some people have noticed that the China market starting to mature somewhat. We started see more growth out of India and emerging markets. So, in general, our visibility is pretty good with the level of configurations, both in the the mid range smartphone market. I think those unit growth, there's something around 90% unit growth for the year and the bit growth rate. So our visibility supports the moving on as our capacity towards that. And I think the results of our MBU further reinforces that. Okay, great. Thank you. Thank you. And our next question comes from the line of Daniel Amir from Ladenburg. Thanks a lot. So, if we look at the, you know, Terra deal, from 7, 8 months ago, when you about it. You commented that at that time, if pricing would be the same, would be significantly accretive. How would we look at the deal right now in terms of the pricing at the moment? And, you know, do you do you think something's gonna change there, you know, in the next 6 months? Thanks. Yeah. Well, obviously at lower pricing, the accretion from the new deal, which will begin in the beginning of calendar 20 16 will be less than would have been had pricing been flat. We never assumed pricing would be flat throughout 2016. So I think that the net takeaway is that there's less accretion from the new deal than there was on the day we signed it. It still reasonable to talk in terms of the types of numbers that we talked about when we first introduced the new agreement to you. So it's still accretive at pricing that we're looking at today? Or is that not the case? That's absolutely true. Yes. Okay. Alright. And just to follow-up here, in terms of the factors here for your NAND costs going forward, I mean, should we be really is it really the TLC mix? Is it more of the product mix? I mean, what should we be looking at it and when, you know, you said that you you should start seeing in the next few quarters. What are really the milestones that we're looking at that, you know, this will really start impacting? I think, the risk of repeating our story on NAND I think you've already we've already demonstrated substantial growth in the mobile NAND segment. And our TLC components shipping in Q3 will be the catalyst for our future growth there. As a follow on, we have a consumer TLC drive coming out in the Q1 of our fiscal year. And so when you look at those dynamics coupled with the vertical NAND and enterprise progress we're making, we feel that those are still the pillars to our success in improving our operating performance in the overall NAND business. Okay great. Thanks a lot. Thank you. And our next question comes from the line of Monica Garg from Pacific Crest. Hi. Thanks for taking my question. Mark, you were talking about like move from mobile DRAM to sorry, move from PC DRAM to mobile DRAM has been wind to the margins. So are the margins now similar in PC DRAM and mobile DRAM, or is it, is the move still a headwind? You want to take that Mark? Sure. My monica, this is Mark Adam. The margins are getting closer. And we always the risk of trying to explain that through the past 90 days and what's happened. At the beginning of the quarter, they were certainly further away from each and today they're approaching each other. Okay. Thanks. Then one question on the NAND side. The SBU of operating margins been negative for the last, you know, this quarter or last quarter. You've talked about move to TLC and you also talked about that pricing is benign in the market. So when can we see SBU margins to move higher in the positive territory? Well, I think you'll see that over time, Monica, but don't that our NAND business is actually segregated across the BU. So we sell NAND not only, through the SBU, but there's a significant piece as Mark Adams just mentioned going out of mobile space. We also said there's significant growth in the embedded space for NAND. And then there's a sort of a counter factor, I guess, that you should always be cognizant of that would we sell to Intel through the NAND BU. And sometimes that's there's there are lots of assets to our relationship with Intel, that have benefits to us that aren't always about selling to them at the highest ASP. Bye. Thank you. Thank you. And our next question comes from the line of Timothy Arcuri from Cowen and Company. Thanks so much. I actually had two questions. First of all, dealer costs are being guided up low singles. And I get the mix issue that you cited with mobile and DDR4, but it still seems a little odd given that Innatera is roughly 1 third of the bits and that's still based on market minus. So Is there something behind the scenes happening with costs? And I had a follow-up text. The real answer to that is there's nothing behind the scenes other than what normally happens in our industry on startup. And you've got some parallel startup paths that are influencing costs along with the mix effect that you mentioned in mobile, but you've got DDR4 ramp costs And in parallel, he's got 20 nanometer startup costs that when blended, are providing a little bit of a cost headwind in the short term. Okay. Thanks. And then just a quick question on CapEx. To hit your full $3,800,000,000 midpoint, catalysts has to be like 1516, just in August, which would be like a $6,000,000,000 annual run rate headed in fiscal 2016. How should we think about that? Is that like an anomaly in August, or should we think about that as being close to what the right run rate is as you look into fiscal 2016? You know, Tim, this is Ernie. We, as we've said earlier, we've been looking at CapEx, very careful as we respond to market conditions. And obviously, we still feel that that range of in the $4,000,000,000 or so range for this year makes sense. I wouldn't necessarily imply or project that forward as a run rate into 20 team, we're still in the process of working through our plans. Thank you. And our next question comes from the line of CJ Muse from Evercore ISI. Yeah, good afternoon. Thank you for taking my question. I guess first question was hoping you could dig a little bit deeper on your 20 nanometer ramp both at Natera and internally. And here really focused on when you expect to be cost competitive with Samsung and Hynix. And then as a follow on to that, your plans for 1x and your ability to reduce Samsung's time to market advantage. Would love to hear your thoughts. Yeah. So, first of all, I think the best way to characterize the state of our 20 nanometer deployment today is we're running at relatively low volumes, but it's going really very, very well where we've got low volume, but we're driving fast cycle time through the fab. The run ahead lots the yields are progressing fabulously. And we feel pretty good about the way that ramps going. Both at Innovierra and in Hashima. So of course, as we just said, the costs are higher. It takes a while to work through that, not only because you're driving 2 meals up, but also because at low volume, you don't have fully loaded tools and you have a lot of tools that you're installing that you haven't managed to load yet. And that process is going to take a while until we are really driving to significant volume. Now way to think about that is in terms of bit crossover. And we think that we'll have bit crossover 20 nanometer versus the other nodes in the first half of calendar 2016. And that's probably about as precise as I would want to be about that. Now for 1x, We think that as we closed the LPDA transaction, We added significant technology development resources to our team. We've been running a a higher R and D spend as we ran more resources deployed on multiple technology knows. And the 1X node will be the first one that comes out as a result of both those teams working together. So yes, we expect to close that gap relative to to Samsung. It's not going to necessarily be directly on top of it. But remember, what Micron is doing right now is we're converting a lot of capacity from 30 nanometer to 20 nanometer, which is a double step. And so we're going to get a big bang for that as we move throughout 2016. The step to 16 nanometers smaller to begin with. In particular, if you've looked at some of the early, Samsung samples floating around. You'll notice that there that the architecture changes that they've incorporated don't drive, nearly the size of dye reduction or the bit density increased that you would see going from even 25 nanometer to 30. So we absolutely expect to close the gap with Samsung as we move to 16 nanometer, both in timing and in terms of, all deployed bit density in the market. That's very helpful. I guess as my follow-up, can you talk about within your outlook for DRAM pricing down mid to high single digits, what you're assuming on the mobile side? And if you can comment at all on your positioning within Tier 1 handsets into the back half of the year, would love to hear your thoughts. I'll tell you again, we don't want to we don't get in the business of forecasting pricing too much. Generally, what I'll say character is about the mobile business that it doesn't exactly be days like PT business. That tends to be more of a design win type business. You're designing to a device or platform that has long lasting life cycles relative to interchangeability of PC modules. And in light of that, it behaves a little bit more like a predictable pricing model where there's a sales price and a cost reduction target over through a longer period, maybe 6 months, maybe 12 months. And so the pricing behavior in mobile is somewhat different. And we anticipate that to be similar going forward and it's reflective of our current mobile performance. Okay. So it's fair to characterize mobile declining less than PC? I think that's fair. Thank you. And our next question comes from the line of John Pitzer from Credit Suisse. Yeah. Good afternoon guys. Thanks for letting me ask a question. I guess I want to go back to the question that Curry asked earlier just about DRAM cost per bit going up. I would have thought that given a third of your bits come from in Oterra, And that's based upon market pricing in arrears that the price declines we've seen over the last 3 months would be a sort of tailwind to cost for you guys in the August quarter. And I guess that's wrong. And I guess I'm trying to understand why that's wrong. And more importantly, as you think about the headwinds on the cost side in DRAM in the August quarter, do they begin to reverse in the November quarter or when do we how do we start to think about kind of the curve in DRAM going back down instead of up? Well, let me take the let me take the first part. And then maybe I'll have you restate the second part. Relative to IMI bits, we're early in the ramp. So don't there's not a lot of, upsurge in IMI bits yet, but it is come And I think the effect will be, as you say, with more volume any given price, we're going to get a larger dollar discount, not necessarily a larger percentage discount. So as we move through the rest of 2015, you do have to contemplate that the discount at IMI is also a function of their cash flow. And that's That stands apart and aside from the effect of market pricing. You also have to contemplate that lower market pricing, a given fixed percent discount is a smaller dollar So all those things kind of go on the hopper side. And I'm not sure exactly how you're doing your calculus, but those are all effects. We will, obviously, as the 20 nanometer becomes a more significant piece of their output, hopefully see an increase in revenue and increase in dollar total dollar discount as that happens. And then Mark, maybe just to restate the second half of the question was Beyond the August quarter, if all else being equal, given the ramps that are causing headwinds in the this quarter. Would you expect cost per bits and DRAM to start trending down or do we really have to wait until you get to that big crossover at 20 nanometer you talked about earlier? I think it's going to depend a lot on mix. Unfortunately, I hate to say that, but we still got, we've got an ongoing DDR4, which drives costs up given the bit density per square centimeter silicon, we've got LP DDR4, We've got mobile DRAM and server DRAM, all of which can drive higher costs. But like for like, fair to say, yeah, costs are going to going to be coming down as we get a little bit further into this 20 nanometer transition. And then for my second question, just to Mark Adams, Mark, just given some of these headwinds in the August quarter, it seems like the P and L is more dependent upon just overall pricing. And you made some commentary about PC production being below kind of seasonally weak sell through for the market and you expect that to reverse. I'm just kind of curious why? What's the catalyst? And importantly, can you talk a little bit about inventory outside of Micron relative to PC DRAM? Sure. Let me comments on the PC business were kind of through our Q3 relative to the performance. We do feel that, whether it be Microsoft Windows 10 or Skylake or other Intel roadmap benefits from PC and pent up then, we just think it should be moderately better than the first half and thus have a better effect on the overall market than and in the first half of the year. So we think we think PC should perform better in the second half. Relative to the DRAM side and given the mix shifting away from PCs, we think that combination leads to more stability in the pricing in the back half of the year. Now you asked about the channel. It's kind of an interesting dynamic. By and large, the OEMs and, major suppliers to OEM, there's one channel partner is heavily invested in a lot of inventory. Now having said that, a number of the other channel suppliers are pretty low actually seasonably lower than the, what we say, the 3 to 4 week normal inventory levels. And so as these things improve and there's balance, we don't we don't think it takes a lot to get more balanced back into the compute segment, and we just have a very positive effect on the overall business. Thank you. And with that, I think we have time for about one more question. Stephen Fox from Cross Research. Thanks. Good afternoon. Hopefully, this isn't too repetitive, but just going back on the DRAM gross margins from a different you're saying about cost per bit with the mix changing, but also as the mix changes beyond the August quarter, shouldn't we expect some sort of rebound in DRAM margins and to what degree? And or are we looking at more of a drag from the 20 nanometer ramp? And then within that answer, can you just maybe talk a little bit more DDR4 and how it's going to ramp on the mobile side? Thanks. So we really want to stay away again from predicting margins for you. But I think it's fair to say, that assuming market dynamics improve, we've got all else equal, we've got cost leverage. Fair enough. And how about just a little more color around DDR4 as it relates to mobile? Well, I think LPDVR4? Yes. I think as I said in my script, it's, it's currently a relatively small percentage of overall bits into the mobile sector. We do see that changing out toward the end of calendar year 2015 into 2016. Today, low power 4 is in the ultra high end. And we feel obviously we're very well positioned in those relationships. It's just a small piece of the overall mix today. And we think that will grow. And we've got a technology and or in design qualifications at these OEMs for that type of success in that product category. Great. Very much. You bet. And with that, we would like to thank everyone for participating on the call today. If you will please bear with me, I need to 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 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. Thank you. This concludes Micron Technologies 3rd quarter 2015 financial release conference call. You may now disconnect.