Earnings Call: Q2 2015

Apr 1, 2015

Good afternoon. My name is Haid, and I will be your conference facilitator today. At this time, I would like to welcome everyone Micron Technology Second 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, Mr. Kent Bedard. Sir, you may begin your conference. Thank you very much, and welcome to Micron Technology's second quarter 2015 financial release conference call. On the call today is Mark President's CEO and Director Mark Adams, President and Interim Financial Officer and Mark Heil, Corporate Controller And Interim Principal Financial and Accounting Officer. This conference call, including audio and slides, is also available on our website at micron.com. In addition, our website has non GAAP information with reconciliation, slides used during had an opportunity to review the second quarter 2015 financial press release. Again, 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 the call accessed by dialing 404 5373406 with a confirmation code of 60634 46. This replay will run through Thursday, April 9th at 11:30 pm Mountain Time. A webcast replay will be available on the company's website until April 2016. We encourage you to monitor our website aticron.com throughout the quarter for the most current information on the company, including information on the very financial conferences that we will be attending. You can also follow us on Twitter microntech. Please note the following safe harbor statement. During the course of this meeting, we may make projections or other forward looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to the documents the company files on 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 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. And now I'd like to turn the call over to Mr. Mark Durkin. Mark? Thanks, Kate. I am pleased with our team's performance this quarter. Our diverse product portfolio and balanced customer base produced solid financial results. Revenue was within our guidance of $4,200,000,000 and GAAP net income was $934,000,000 or $0.78 per share. Gross margins in DRAM and trade NAND were in line or better than guidance. Importantly, starting to see the early benefits of our NAND product and technology repositioning. Free cash flow is approximately $400,000,000 in the 2nd fiscal quarter, based on operating cash flow of $1,250,000,000 less CapEx of $855,000,000. We finished the quarter with $6,350,000,000 cash and short term investments after for our business despite short term headwinds in certain segments. We expect to continue generating strong operating cash flow as we optimize technology, operations product and segment mix. Micron's fiscal Q3 guidance is $3,800,000,000 to $4,050,000,000. Midpoint of the range is about 6% lower than revenue in Q2. This guidance indicates a willingness to hold inventory if needed. Let me talk a little bit more about technology. Today, the significant majority of our mobile DRAM and non inotero production is on 25 nanometers. Advanced DRAM technology deployment is going very smoothly. The 20 nanometer yield ramp is exceeding both our plan and results achieved on previous process node introductions. We continue to expect commercial volume in the second half of twenty fifteen with the majority of our DRAM pits on 20 nanometer in the first half of calendar year 16. 1x nanometer DRAM development is also proceeding well and we recently started early silicon in Hiroshima. We are currently in pilot production of our Gen 1 32 layer 3 d NAND with early sampling in progress We expect to be in full production of both MLC and TLC versions by calendar Q4 of this year with system level solutions following soon thereafter. 3d will be a meaningful percentage of our trade NAND supply in calendar 2016 and will represent a majority of our bids during 2017. Our Gen 2, three d NAND technology is progressing nicely in R&D. Turning now to bit growth, we expect our calendar year 2015 DRAM bits produced to be up mid teens although product mix adjustments including an increased mix of DDR4 and mobile DRAM could impact bit growth. Mixed adjustment decisions are based on margin optimization and strategic positioning and are not necessarily aligned with maximizing bit growth. In 2015, we are focused on technology enablement and we are comfortable growing bits below the market in the near term in favor of driving long term market opportunities for Micron. 2016, as we see the benefit of 20 nanometer conversions, we expect to be in line with or slightly above the industry bit growth. We expect our trade NAND bit growth to be below market in calendar of 2015 as we tune our product portfolio to more value added applications and prepare for planar capacity to 3 d NAND could support 40 percent to 50 percent bit growth per annum over an extended time horizon. Exact timing of these investments is dependent on market conditions and the expected ROIC, but this is an exciting initiative for the company. With respect to capital allocation, we continue to believe in the long term value of investment in our business to drive manufacturing efficiencies and future growth. We also continue to prioritize appropriate investments in R&D, including memory subsystems and systems development and manufacturing capacity. We are actively managing our cash balances including the deployment of $2,800,000,000 over the past 6 quarters to reduce dilution associated with convertible debt. We also repurchased approximately $200,000,000 of common stock in fiscal Q2 under an existing $1,000,000,000 stock repurchase program Now for an update on our finance team. We have a number of outstanding CFO candidates under consideration and are working to identify the best fit for Micron. While we work through that process, the finance team is reporting to Mark Adams as interim CFO. Our finance leadership team has decades of collective experience at Micron and other leading companies. The team includes, among others, Mark Heil, Micron's longtime controller and current interim principal financial accounting officer. I've I've asked Mark to cover the financial portions of our prepared remarks today. Before I turn the call over to the rest of the team, I'd like to reiterate that there are a number of significant factors that we believe will deliver growth, margin improvement and strong financial results for Micron Ford the end of 2015 and heading into fiscal 2016. Among other things, these include 20 nanometer DRAM, 16 nanometer TLC NAND, 3 d NAND, mobile NAND, EMCPs, enterprise SSDs and the Innoterra contract change. I'll stop here and turn it over to Mark Kyle and Mark Adams before returning for Q and Thanks, Mark. The second quarter of fiscal 2015 ended on March 5th. When comparing the Q2 results to the first quarter, Recall that the first quarter was a 14 week period rather than our normal 13 week period. The results for the second quarter include net income of $934,000,000 or $0.78 per share on net sales of $4,166,000,000. Gross margin came in at 34%. Our reported income from equity method investments for the second quarter was $208,000,000, substantially all of which was attributable to Innoterra. Our share of Innoterra's results includes a benefit of $65,000,000 from their release of evaluation allowance on their deferred tax asset that was reflected in their December 31, 2014 year end results. Aside from recurring items, the benefit from in Oterra's tax adjustment is the only other noteworthy non GAAP adjustment this quarter. So non GAAP income for the second quarter was $941,000,000 or $0.81 per share. Relating to our non GAAP guidance for the third quarter, Please refer to the dilution table anti diluted effects of our capped call that various assumed stock prices. Looking at the results and other guidance for the third quarter by product line, Let's start first with DRAM. DRAM revenue decreased 13% compared to the first quarter, reflecting a 9% decrease in bit sales volume and a 6% decrease in average selling prices. Lower bit sales were largely attributable to the extra week in fiscal 20 excuse me in fiscal Q1. DRAM gross margin was better than anticipated being stable compared comparing Q1 to Q2 as bit cost decreases nearly offset decreases in selling prices. DRAM gross margins for the third quarter, using quarter to date ASP in projected mix for the quarter should be down compared to Q2 based on bid sales that are guided to be flat Average selling prices down high single digits and cost per bit down low single digits. Key items affecting our DRAM guidance for the third quarter include bit production up high single digits over each of the next couple of quarters as 25 nanometer yields continue to improve. This increase is net of anticipated effects of increased mix of mobile and DDR4 products, which generally have lower bit than cities. Our sales guidance anticipates taking strategic action to reduce PC DRAM sales this quarter given the recent demand and price weakness. Therefore, we're guiding bit sales to be flat for the quarter. We believe the TC DRAM segment will show improvement in the second half of the calendar year based on a stabilization stabilizing demand profile. Fiscal Q3 to date mix adjusted ASP is below the 2nd quarter average due to pricing pressure and TC RAM over the past several months and a high volume of products sold in DiForm. On the Tradenan side, Revenue increased 3% in the 2nd quarter with a 12% increase in bit sales volume, partially offset by a 9% decrease in the average selling price. Trade NAND gross margin declined to the low 20% range as cost reductions per bit only partially offset decreases in selling prices. Trade NAND gross margins for the 3rd quarter using quarter to date ASP and projected mix for the quarter are expected to be relatively stable compared to Q2 based on mid production down low single digits. ASPs up single digits primarily from a higher mix of mobile products and comp per bit up mid single digits also primarily on mix. Key trends for the third quarter affecting the guidance are like for like pricing relatively flat, relatively stable component and client SSD markets, lower bit sales into the component spot market, has a negative effect on bit growth and cost per bit, but improving effect on average selling prices. And finally, continued focus on mobile and NAND and manage NAND products, which has an improving effect on margin with increases both in ASP and cost per bit. On a consolidated basis, we're guiding total revenue for the third quarter to be in the range of $3,800,000,000 to $4,050,000,000. Looking at other P and L and cash flow results and guidance. SG and A is expected to be relatively stable over the next several quarters and the 180,000,000 to $190,000,000 range. Research and development expense in the second quarter was just below our guided range, primarily due to a lower volume of wafers used for development. We expect R and D expense to trend up slightly over the next couple of quarters in line with development activities. Company generated operating cash flow in the 2nd quarter of $1,250,000,000 and ended the quarter with $6,350,000,000 in cash and marketable investments. During the second quarter, we received $1,000,000,000 in proceeds from the issuance of high yield notes, our 3rd successful offering of straight debt with near investment grade terms. We anticipate utilizing proceeds to repurchase or convert outstanding convertible notes and other debt and for other general corporate purposes. We also replaced our $255,000,000 Singapore based AR backed credit line with a $750,000,000 line. No amounts have yet been drawn under that facility. The second installment on the LPDA creditors debt of approximately US150 million dollars was paid during the to the board authorized $1,000,000,000 share buyback program. Expenditures for property, plant and equipment year to date are $1,500,000,000 and continue to expect expenditures for the fiscal year to be between $3,600,000,000 $4,000,000,000 with a stepped up level of spending in the latter half of the fiscal year as we execute on 20 nanometer DRAM and commenced 3 d NAND investments. Now, I'll turn it over to Mark Adams for his comments on the operating results. Thanks, Mark. Good afternoon and thanks for joining our call. I'm going to change my format a little today and begin by providing some thoughts around both our DRAM and NAND business and respective markets followed by a deeper dive into our business units. Fiscal Q2 showed some seasonal weakness, which is not uncommon coming out of the holidays. Considering the timing of Chinese New Year's within our quarter, I was pleased with our operating performance. The strength of our diverse product portfolio contributed to relatively stable gross margins quarter on quarter. We saw some pricing pressure in the PC segment, but generally all other market demand remained healthy. DRAM represented 65% of our total revenue in mobile represented mid-twenty percent similar to Q1. The PC segment represented low 30%, down from mid-thirty percent from prior quarter. The server business was about low 20%, up a few percentage points, while networking, aim and graphics were each below 10 percent similar to the Q1 mix. We are allocating less production to the PC segment and continue to shift more bits towards other faster growing segments. We also continue to move production from DDR3 to DDR4 as our customer demand grows. Although these manufacturing moves generally weigh on production bit output guidance, our DRAM process transitions will more than make up for the bit her wafer effect. As a result, we are guiding to high single digit sequential output growth for each of the next couple transitions over our second teen conversion to 20 nanometer across our fab network. DRAM technology enablement remains a key focus for our teams. We are pleased with the market acceptance of our DDR4 technology as major OEMs are adopting Micron's products for their value added segments. Our 8 gigabit DDR4 parts in particular from the enterprise server and networking customer base. DDR4 ASPs remain in a premium to DDR3. Demand market has gone through some challenging quarters of late. But we have seen signs that the market pricing has stabilized. As a percentage of total revenue, trade NAND represented 29% with gross margins down slightly quarter on quarter as we guided during our first quarter call. Within trade NAND, The sale of components represented about 50% in the 2nd quarter. SSD units approximately 20% Our mobile man was roughly low teens while aim and other embedded were roughly in the mid single digit percentages. We continue to leverage our industry leading MLC NAND Flash in key segments that demand higher performance. We are significantly reducing our NAND supply to the spot market, down 30% quarter over quarter. And as a result, our trade and NAND bid growth in the coming quarters will be limited. Working with our partner Intel, we recently showcased our new 3d vertical NAND technology, an innovative manufacturing approach that extends more law trajectory for flash storage cost and performance. Micron's high density 3 d NAND flash devices will enable small form factor drives with 1 terabyte of storage and standard 2.5 SSDs with greater than 10 terabytes of storage. We expect the improved performance of Micron's 3 d NAND technology to open up expanded segment opportunities. We plan to commence early three d production in the second half of the calendar year. Our 16 nanometer TLC part is coming along nicely and we are on track for initial component shipment in late May early June. Now moving on to our business unit discussion. In our computing and networking business unit referred to as CMBU, our revenue was $1,800,000,000 in fiscal Q2. The PC notebook business saw reduced demand and pricing pressure, yet turned in operating profit off only slightly at 27% Interestingly, customers took forecast of delivery, which we interpret to be generally positive as it pertains to overall channel inventory and future shipments. We saw continued growth in our server business driven by cloud Computing And Enterprise. Server DRAM bit growth is forecasted, up roughly 40% year on year in 2015. The growth in server memory is based on increasing server workloads that require high DRAM performance and density. We continue to invest in the expansion of our server business as this segment offers a growth demand profile that is less sensitive to price fluctuations. The networking segment delivered strong gross margins while achieving flat revenue quarter over quarter despite ASP pressure in the broader DRAM market. Demand remained stable driven by LTE build out in the emerging markets. Demand for DRAM supply from growing data communications, video and gaming content is estimated at roughly 20% in calendar year 2015. We believe this will drive higher demand from Micron's memory products and networking going forward next year. Our graphics business led by GDPR5 is another growing specialty DRAM market for Micron. Last year, consoles doubled their memory content per system and there will be additional content growth this year as the use of the piece devices continues to expand beyond gaming to compute and home entertainment. Graphics products for the PC segment also reported growth in Q2. Demand for overall DRAM graphics is projected to be up 25% year over year in 2015. Now revenue for our storage business unit or referred to as FPU was up was recorded at 954,000,000 and Q2 down slightly quarter over quarter. Although our SBU operating margins were down quarter over quarter, we believe the business is stabilizing. And it should improve going forward. We announced 3 new enterprise products, a co developed SaaS Drive, a new PCIe Express Drive, and a new database solution. We also to sell high performance MLC components and accelerates our expansion into the enterprise SaaS SSD market. Micron's current client and enterprise drives are based on our award winning 16 nanometer NLC technology. Which more and more of our customers are seeking due to superior performance compared to competitors' cleaner TLC drives. We see a value segment in the channel for Planner TLC SSDs and are expecting late Q3, early Q4 calendar year shipments of a Micron branded 16 nanometer TLC clients drive. The mobile business or MBU had another strong quarter. MBU revenues came in at $856,000,000 with operating margins at 31% in Q2. We have indicated on prior calls that our main focus on mobile is optimizing the business for profitability and diversifying the customer base. The team has done a nice job in executing to these objectives. We continue to see strong demand for our mobile products. One example is the increasing prevalence of 3 and 4 gigabyte low power DRAM configurations and the super mid and high end smartphone segments. We also continue to see significant growth opportunities for Micron in the ENCPs. ENCPs generally include 1 to 2 gigabytes of low power DRAM and 8 to 16 gigabytes of NAND in an integrated package. With our innovative DRAM known good die offering and 16 nanometer NAND technology, Micron is uniquely positioned to capture this growing opportunity as ENCPs replaced AMMC in the large segments. Revenues in ENCP were up 70% quarter on quarter as mobile NAND bit shipments nearly doubled when compared to Q1. We remain bullish on memory content in mobile as the evolving system architectures steadily increased density requirements in all handsets segments. Higher performance 64 bit application processor SoCs supporting FTROS platforms, the richer applications as well as large screen sizes and more came in all contribute to increased memory density to deliver a more rewarding experience. Our embedded business posted revenue of $502,000,000 and in operating margins were up slightly quarter over quarter to 23%. Automotive segment continues to drive the EPU performance with a revenue increase of over 10% when compared to the same quarter in fiscal year 2014. We continue to invest in custom segment solutions to drive our leadership in the embedded memory market across all EBUU segment including IMM, industrial, medical and multi market, gaming and the connected home. We are seeing strong market reception of Micron's next generation serial Nora Flash product family and should benefit from the signing of an open industry standard digitization agreement. We initiated qualification sampling of 1632 gigabyte emmc version 5.0 to customers in of our auto IMM and gaming customers. A complete portfolio of memory solutions, including DRAM NAND and NOR, along with industry consolidation is strengthening Micron's embedded value proposition as a stable memory focused solutions supplier to the embedded market In fact now DRAM and NAND now make up more than 70% of our overall embedded business and growing. Closing, we are confident in the long term dynamics of the memory industry and remain focused on optimizing our margins and returns over the long term. With that, I'll hand it back over to Ken. Thanks, Mark. We now like to take questions from callers. When asking you questions so we can hear you more clearly. And with that, please open up the lines. Our first question comes from Arlen SIR from JP Morgan. Your line is open. Please go ahead. Hi, good afternoon. Thanks for taking my questions. Good to see your DRAM bit supply and trajectory. I know that there was some concern that 25 nanometer and 20 nanometer transitions and some of the initial prep work may have in inhibited some of the supply growth here in May, but it's good to see that back on our growth trajectory. Can you just help us understand what are the drivers for the bid supply decline in NAND in the May quarter? And do you guys expect the resumption of supply growth starting in the August quarter? Well, there's a couple of things. 1 of the primary issue is the mix issue as we shift our products, direct more towards mobile and product SSDs. The second factor is we're getting our factories ready for both transition to new process technology 16 nanometer TLC as well as prepping for in Singapore prepping, starting to be the process for 3d manufacturing. Okay. Thanks for that. And then I think on the last call, you talked about relatively high levels of inventories of SSDs coming out of fiscal Q1. What's your assessment of SSD inventory levels exiting Q2? And then if you can just give us an update on your 16 nanometer SSD products, I think you might have mentioned it. Sorry if I missed it, but I think you were talking about last time sort of ramping 16 nanometer SST kind of second half of this year? That's right. Our assessment is that the industry inventory position on SSDs is improving we actually think the pricing in the NAND business has stabilized quarter to date. And relative to Micron's performance, we've got a number of that are going out in called OEMs that are based on our 16 nanometer MLC. Interestingly enough for us We're seeing a lot of people or some of our customers revert back to an MLC based SSD drive based on some of the issues that have come up with competitive offerings on performance and endurance and reliability. Next question comes from Steven Fox from Cross Research. Your line is open. Please go ahead. Thanks. Good afternoon. I was wondering if you could dig in a little bit to the storage business unit. The business swung to losses. I think you've partially explained that, but maybe we could talk about that a little bit. And then, you've given some reasons why those it should reverse back to profits. But I was wondering if you could talk through maybe a roadmap to getting to acceptable margins and where you see maybe margins exiting the calendar etcetera? Thanks. So, this is Mark Adams. I'll take the question. The we try to avoid speculating on future pricing in projecting margins out in the future. But I will comment that we continue to feel really good about the execution of the team and delivering against closing the gap competitively. And for all the reasons we've talked about in the past, those signs are happening. I talked about in my earlier comments how our mobile NAND business is growing quarter over quarter had a very successful growth trajectory. I think that 16 nanometer MLC SSC that I communicated just a second ago are pretty good. Our alliance with Seagate and the SaaS development and getting access to the SaaS market earlier than we otherwise would have as pretty good. And as we commented into the market last week in our announcement with Intel on the 3 d NAND technology, we still continue to feel that in a very competitive and market leading position in 3 d NAND. So with all those things in place, we're pretty bullish about NAND and we continue to think we're going to close the Great. That's very helpful. Thanks so much. Thank you. Our next question comes from Mark Delaney from Goldman Sachs. Your line is open. Please go ahead. Yes, thanks very much for taking the question. I was hoping you could elaborate a little bit more on your outlook for the DRAM industry for the second half of the year. And if you could just talk, I know you don't want to give specific pricing guide if you at least just talk to the trajectory or the linearity of DRM ASPs over the course of the second quarter and what sort of that may or may not give you as you look into second half overall DRAM supply demand trends? Well, Mark, this is Mark Adams. I think that, we remain bullish in general on DRAM going forward for the following reasons. First of all, we think that the second half of the calendar year is going to be pretty strong mobile. And all signs are indicating to that. We do think that the PC some PC capacity needs to be shifted over there rest that opportunity and that will balance out some of the current market conditions around PCs. I'm not sure how to call the PC market other than to say that we think it could improve from here because it's not doing so well. And we think the back half of the year with Microsoft new OS and holidays and so on and so forth. We think it's just got to be better hopefully than it is today. Beyond that, when you look at our business, We think as we've talked about in the past that it's a more rational industry. And with that it's coming better behavior, as Mark talked about earlier, we're going to do the right things to run our business. And if that means not selling inventory below acceptable prices, we'll do it. So I look at all that, I think about other end market growth, I think we're in we're still in a pretty bullish, perspective of how DRAM will play out in the second half here. Yes, that's helpful. And actually kind of gets to my follow-up question, which is around your comments you're making about holding inventory. Can you elaborate a lot about how long you think you could hold inventory and then you just talk about what would have to happen if you're sitting on inventory and market pricing and continue to decline. Just how quickly you have to true up your inventory with pricing in the market? Well, interesting. I mean, comment on one thing around inventory. 2, if you didn't really ask for, but I'll get to your answer. Channel inventory has increased a little bit since the first quarter. Now my interpretation of that is pretty positive. The people who accumulate this inventory in the channel, that's how they make money. They make money by taking inventory and waiting to sell on a better market. And the accumulation of it's not dramatic, but it's probably now 4 to 6 weeks in DRAM and NAND And as you think about that, they're buying memory at current market pricing and then they're betting on a rebound. And these are some people who've been in the business for quite some time. Happen to believe that's a pretty positive sign. Now relating back to your question on how we can do that? Well, I'm not give you a number or weeks on hand or what have you, but we do believe that given the diversity of our end markets, it's more a matter of how we shift our capacity and not that we sit on a bunch of old aged inventory, we would just move our capacity to better end markets. Thank you very much. Thank you. Our next question comes from Monika Garg from Citi. Your line is open. Please go ahead. Hi, thanks for taking my question. Just for clarification, you are guiding high single digit for production of width, but for more for shipment and revenue purposes, it's flattish? That's right. Right. All right. So the second question I have is, you know, if you look out to date, ASP guidance of DRAM, you're guiding minus 9% It was about minus 6% last quarter. When do you think we see some stabilization in, you know, PCBM pricing And also if you could talk about, pricing in the other segments of DRAM like mobile DRAM and server DRAM going forward. Sure. So, Monica, this is Mark Davis again. Relative to pricing, you know, it's hard for us to get on that and try to make projections out the future. What I would say is the comparison between the 9% 6% Q2 and Q3 Remember, 6% was off a much higher base coming into Q1. And so the 9% and 6% are not really apples to apples We do believe that for the reason I stated earlier that the overall DRAM business will remain in pretty good shape. We don't see massive price pressure in any of the other segments. Our down 6% actually interestingly in Q2 was PC down a lot more than 6% and the other segments flat to even some better. So what I would say there is that we don't see a lot of pressure in the other segments at this point. Now remember, each of the businesses this is what's great about diversification. Each of these businesses act differently, meaning, for example, the commodity component DRAM business is what it is and we've known it to be as a lot smaller portion of our business. But when you look at things like mobile, mobile different business. It's a design in business with more concentrated customers in the number 10 to 15 major customers that we sell to. And we negotiate with them and we negotiate more long term So that's a different business. So the pricing dynamics are much different. The fact that pricing stayed good is a great sign for us in mobile. And our costs are going to get better and we we grow our market share, we're going to continue to expand that business. And that's true. We look at each of the segments whether it be embedded, mobile, networking and automotive. That's all true in terms of how we look at we take each of them as individual segments that run differently. Thank you. That's all for me. Thank you. Our next question comes from Mehdi Hosseini from Susquehanna. Your line is open. Go ahead. Yes. Thanks for taking my question. Here. First, given your ASB cost and the production and shipping trend, how should we think about trends in DRAM margin profile by different segments, particularly for PC, mobile and server DRAM from the reported quarter to the current quarter? And I have a follow-up. Hey, Mehdi. This is Kipp. We're not going to dive into a gross margin by segment. But we'll give you another chance to ask a different question if you like. Sure. How should we think about the impact of field building inventory since you think demand is going to be higher. How should we think about the impact of the inventory of that on margin profile? The current quarter? Well, I think the answer, Mehdi, it's Mark Durkin. I think the answer is the same. We're not going to try and margin. But the fact that we're talking about this and by the way, it's nothing new, but the fact that we're talking about our willingness to hold some inventory here. It's really reflective of the fact that we've got a lot of confidence as we move into the back half of the year a lot of signals. Mark talked about a bunch of them. I'll say even within the compute business, we're getting signals from some customers that maybe they want to look at longer term ordering patterns, etcetera. So we've got a lot of confidence that this business is going to be pretty solid in half of the year. That's probably about all we can say about it. Fair. And looking into the NAND and aligns with Seagate and the recent optimism about 'eighteen and especially with looking into the 48 layer. And the fact that Intel also has some collaboration with West Vintage. How do all these dynamics play out into 2016, but maybe 48 layer 3 d NAND would become cost effective to commercialize. You have direct alliance with Seagate and you have indirect supply into WesternDISH through Intel. Any thoughts or any qualitative assessment that you can offer looking into it next year, given this kind of a dynamic? Yes, let me just say this, Mehdi. We compete with Intel in the marketplace. Have for a long time. And we expect that Intel product, whether shipped by Intel or by Western Digital will be competitive or will be competing with Micron Solutions in the market in 2016. Now the good news is we think we've got a great 3 d NAND solution and we also have a lot of capacity at Micron. And so we think that over time we're well positioned to do well in that business. But if 3 d NAND is going to be the Shoptech Technology is going to be the catalyst, how are you going to be able to manage the conflict of interest when you're effectively supplying these 3 different entities? Well, it's, remember, Mehdi, it's the partnership we have with Intel is the co development, the core technology. That's a big piece of the solution. Other areas are the SaaS controller, the firmware, the software and the go to market capabilities that each of the other people that you're CK and Western Digital references that comes into the equation of going to market with a full fledged enterprise SaaS SSD. So as we look at that, it's our core technology we've developed with our partner and there's really 2 avenues, one with Intel taking it through their channel and one with us taking it through our channel. And by the way, if they do well, we'll be happy to sell them some NAND Flash. Got it. Thank you. Thank you. Our next question comes C. J. Muse from Evercore. Your line is open. Please go ahead. Yeah, good afternoon. Thank you for taking my question. I guess first question regarding your pricing guide for ERAM down high single digits. Can you talk about what like for like pricing looks like versus mix shift? So, when you think about the pricing like for like, the overall price, I think we guided down was 9%. For the quarter. So high single digits. And, as I said, I made the comment earlier that That was really driven by where we exited Q2 going into Q3 as some of the mix changes to think about our business mobile server and the other markets had pretty stable pricing. So a lot of the fluctuation the guidance we're giving you is coming out of a quarter that started higher ended lower and we're starting kind of from a lower base. Okay, that's helpful. And then as my follow-up, can you walk through, the progression that you see in terms of the 20 nanometer ramp at and then when you expect to actually have shipment and revenues? And then I guess over time, what are the milestones in terms of percentage of your overall DRAM mix, whatever timeframe you want to discuss? So let me characterize it generally for my Kron. And then I think relative to in Oterra, you can get some more specifics from them. But for 20 nanometer, we've said the second half of of calendar 2016 will be, sorry, the second half of this calendar year will be ramping. And by time we get into the first half of twenty sixteen, it'll be the majority of our bit mix. And when you say ramping that is production or that is shipment? That is production. And how should we think about that? There will be let me say it this way then. There will be significant shipments in Q4 of the calendar year for Micron. Great. Thank you. Thank you. Our next question comes from Pajvindra Gill from Needham And Company. Your line is open. Please go ahead. Yeah. Thanks for taking my question. Wondering if you could discuss a little bit about the competitive pricing environment in DRAM and NAND. You gave some highlights in terms of what the actual numbers are. But wondering kind of qualitatively what's kind of what's happening in the market A lot of this positive thesis on the DRAM industry was some sort of rationalization that's occurring in the industry. Rational behavior. So I'm just wondering if you're seeing that continue. If you could describe a little bit about that. Sure. As I've highlighted, today in our script and some of our comments, The real catalyst for some of the disruption here in the just the PC segment was really the demand side. And I think if you talk to other people in that in the PC business, the hard drive guys, the CPUs. The unit decline in the PC notebook segment kind of drove some of this. Now the interesting thing for us is that, none of the other statements kind of showed that. And when you think about where our business is today, where it might have come from years ago is Yeah. Our pricing in one of the segments had some pressure in the first quarter. I'm sorry, in the second quarter. We felt pretty good about the rest of our business and it kind of showed up in our performance. So as I think about pricing for us, we clearly I mean, Micron, if you look at kind of industry pricing and you look at kind of a pricing per gigabit and for example, Micron is clearly the leader in pricing on the ASP curve. And so at least historically we have been and we feel like we are today. And we're going to continue to try to drive it up. And with that, that might mean holding inventory like we said. It might mean moving capacity to other segments server, networking, mobile, so on and so forth. And so that's kind of the picture today. And I think that my comment earlier about what the timing of channel inventory and even our customer reaction. We've had customers try to who initially wanted to get off the quarterly pricing, come back to us in this past quarter, want to go back to quarterly pricing. So we are generally bullish on the dynamics of pricing in the market. And yeah, there was a industry catalyst in the form of demand for PC notebooks that drove a little bit of disruption in the business. We don't think it's major. Yes, it so you can measure it, but the rest of our business pretty good. Okay. Thanks for that. And just on the NAND side, you talked about NAND pricing stabilizing a bit. Just wondering what's driving that stabilization? And can you comment in terms of what percentage of will be TLC exiting this year? And should we start to see NAND gross margins increase as we exit this year? Thank you. Well, as we think about our business, we think about the end markets where they're going and where the products will be generate the highest return and as we achieve our strategic objectives in NAND. And on a competitive basis, okay? We believe we will be closing the gap between our competitors in the second half of our fiscal year and throughout 2015 calendar. We believe that will happen. TLC today is less than 10%. It's not a large number today. And as we ramp our fabs, it won't be materially much larger we will see some growth in the back half of the year, but it won't be materially much larger because we've got other parts of our business, whether it be mobile or I talked about the success of our MLC 16 nanometer product at Tier 1 OEMs. And so we will see TLC growth in Micron, but we're not going to do it just to do it. We need to make sure that we're getting the right value for it. And that's important to us to run our business. Great. Thank you. Thank you. Our next question comes from Tristan Gerra from Baird. Your line is open. Please go ahead. Hi. Good afternoon. Given the strength of the U. S. Dollar, there's been some concern about potential dispecking of the O. M. Content not being TCs. Is that trend that you're currently seeing or expecting in the second half? Yes. I think for us, this question around FX is really more a question around what is worldwide GDP growth going to be. We're global company. We've got global customers. Some will do better in some FX situation. Some will do slightly worse. But unless something dramatic happens to worldwide GDP growth, we think we're pretty well positioned with manufacturing all around the world and with customers all around the world some of which will do better under certain circumstances and some of which won't. So we're not overly worried about it. Obviously, we have manufacturing in Japan and there's a certain cost reduction associated with the weakening in. Obviously, we got some manufacturing in single for and there's certain costs associated with the strengthening thing. But net net for Micron, these aren't huge effects. Okay. And then, what does the ramp of 3 d NAND means of an equipment? We use 10 points. Is this going to be a significant percentage of your existing equipment? And could this impact the D1 production next year if some of the equipment gets shifted to other memory product lines? Absolutely. We plan a lot of equipment reuse as we as we transition Planner NAND to 3 d NAND. I assume that was the question is 3d NAND? Yes, sir. So there's incremental equipment required as incremental floor space. There is some amount of tooling, all of which can be reused in other parts of our or the vast majority of which can be reused in other parts of business. But generally speaking, we will be trading out planar NAND wafers for incremental for 3 d NAND wafers. And we think that's the most capital efficient way to run the business. Great. Thank you. Thank you. Our next question comes from Kevin Cassidy from Stifel. Your line is open. Please go ahead. Yes. Thanks for taking my question. Maybe along those lines also with 3 d NAND, is that a drag on gross margins as it first ramps into production? And when do you think would be the crossover where it could be a tailwind to gross margin? Yes, sure. It's almost always a short term drag on GM when you make a transition like this. You've got new tools coming in. It takes a while to qualify and get them loaded. Etcetera, etcetera. And there are there's just inefficiencies associated with yield ramps, etcetera. So, we we're pretty comfortable by time we get to late in the year, late in this calendar year, we'll be looking pretty good. Okay, great. And you also mentioned that if, the DRAM pricing isn't what you expect, you're willing to hold inventory. Is there any willingness to cut CapEx, or is that fixed for this year? We would be willing to do that if we thought the market situation were such that that would make sense to us. I can't actually foresee that sitting here today. Clearly as we think about our plans for 2016 and things a little bit further out, we'll take into account where the market goes over the next number of of months and quarters. But as we sit here today, we just told you we think things are looking pretty good. So we're not anticipating making any major changes as we sit on the table today. Okay. Thanks. Thank you. Our next question comes from Daniel Amir from Ladenburg. Your line is open. Please go ahead. Pardon me. Your line is open. Please go ahead. If you have your phone on mute, can you mute your phone, please? Hello? Yes. So in terms of DRAM side, you expressed that PC DRAM you're thinking that's going to decline here in the next couple of quarters. What is the ideal mix that you kind of see your mix of DRAM a year from now? Is it PCDRAM kind of at the 20% level? Or do you expect it to decline and then come back maybe to 30%? I think directionally where you're going initially was right. We think over time it will decline as a percentage of the mix a lot of it does depend on the business, but I think directionally that we think you're spot on. Okay. And then the second question is related to, it sounds like the EMCP business is something that one of your growth drivers here. Do you feel that this is, kind of the leading factor here to drive your mobile business. I mean, it's up 70% Q over Q. In the EMMC space, probably didn't have as a big competitive advantage is now that you have in the EMC piece, given that you have a very good integrated product and with the DRAM side. Yeah, I think absolutely. I mean, in full transparency, we're coming off a somewhat lower base, but I think we've stated in prior calls, they'll stay today we think EMCPs for the mobile business coming out of our fiscal year will be run somewhere around 25%, a little bit lower, than 25%. But somewhere up from 0 in the last 12 months. So we as you identified, it's a strategic play for us leveraging our portfolio and quite honestly given our makeup in the mobile business, we think we've got an advantage over just about anybody in the space. Okay, great. Thanks a lot. Thank you. And our next question comes from David Wong from Wells Fargo. Your line is open. Please go Thank you very much. Can you give us some idea about the ownership of the IP associated with 3 d NAND technology between Micron intel or joint venture entity. If there if there was some concern about someone encroaching on your IP or the possibility of licensing the IP, who does the negotiations or drives the legal action? Yeah. We're not going to talk about intellectual property strategy. David, I can tell you that we do the we fund the development together, we do it jointly and we both own different pieces of the intellectual property. But beyond that, there's not a whole lot I want to talk about. Okay. Well then, can you give us some idea of the proportion of your DRAM production in the May quarter between DRIP PCDRAM server, mobile memory, how you're allocating, you know, what you're actually making? Well, I think we I gave it I'll kind of go back and give you some of the comments I gave earlier. We think that PC DRAM in the quarter will be down from mid-30s in Q2 to low to 30% range. And we think that that will signal increases in other areas such as mobile in the mid-twenty percent server in the low 20 percent of our business. And so we see kind of a blend. It's not just one category picking up for the PC business. Mobile will get some more capacity. Allocate some server some PC business bits to server and we'll look at networking automotive as well. So that's kind of a the full suite of things we evaluate. Okay, great. Thanks. Thank you. Our next question comes from Mark Newman from Bernstein. Your line is open. Please go ahead. Hi, thanks for taking the question. You talked about the inventory on the DRAM side and you're saying your production is going to be up high single digits. What is the what are the assumptions you're using for the the bit shipment for FQ3? Mark, I think in the business, we can't We said basically flat on shipments and we normally don't say a whole lot more in terms of future guidance. But I think you can suggest that from our other comments around, we're going to do what's right for the us and drive the right return in margins and there's not going to be a fire sale by any stretch. Okay. Great. And then follow-up question on on NAND Flash, I thought I heard you say components, 50% of NAND. Could you clarify that perhaps I misheard Let me do that. Go ahead. And then I wanted to, I wanted to get some some of these kind of ideas from you about how, how's that going to be fixed over the long term, but it's clearly as you increase the percentage of your solutions and decrease the percentage of worn and components. That's obviously very good for your margins. Basically moving up the value stack to create, to capture more of the value. But in addition to that, it actually helps to consolidate the NAND market by essentially, taking out, the competitors because a lot of those raw NAND customers are actually, actually, at the end of the day, they're also competitors selling flashcards and SSDs. So could you give us some, a bit of a roadmap for how we can expect that, percentage of components to decrease going forwards? Yeah. Sure, Mark. Let me take that. So the data I spoke to in my opening comments was that in Q2, component shipments which is includes cars and components, amounted somewhere around the area of 50% of our overall shipments in the quarter in Q3 alone, that number will be cut by 30% as we start to the transition of what you just highlighted, away from component and card sales to mobile and SSDs. Part of that dynamic by the way in discussing how this plays out is we now will be shipping in the quarter 16 nanometer MLC qualified drives that were in process and didn't have that volume in Q2. So the move from components in cards to mobile and in client SSD based on 16 nanometer certainly is a positive move for us as you say, we move up the stack. And we continue to drive things like enterprise drives both in pcie and SAS, as we explained earlier, that's how you should think about our target. And I mentioned also I think we gave guidance that NAND bit growth will be flat to down in the Q3 timeframe as we think about the evolution for 3d manufacturing setup as well as a switch to some of our capacity towards 60 nanometer TLC. We think that all kind of resonates to a better optimized mix of products for our NAND portfolio. Great. Thanks. If I could ask just one quick follow-up. On for LPDDR4, my understanding is Apple is moving to LPDDR 4 for, the next iPhone, and also I understand 2 gigabytes Do you, have an update on your readiness or your road map for, LPDGR4 when do you think that will be ready? I think that market's safe to say that we feel pretty good about our position there, both existing 25 nanometer LP DDR4 as well as our 20 nanometer LP DDR4 offering. This is less about Micron Readiness and more about customer demand lining up for the back half of the year and beyond. Great. Thanks very much. And it looks like we have time for about one more color. Thank you. And our next question comes John Pitzer from Credit Suisse. Your line is open. Please go ahead. Hey guys. Thanks for letting me stinking me here at the end. I guess I want to go back to sort of this idea of building inventory in the May quarter. I'm kind of curious why that route and not sort of accelerating the transition to 20 nanometer more quickly? Because clearly, I would argue if you had 20 nanometer at a hard larger percent of wafer outs, your cost structure would be better. And I just can't remember a time when building inventory either internally or in the has been a good thing. So I'm just kind of curious why the inventory decision is not a faster ramp of 2020? Yes, John, this is Mark. So we talked this quarter about how we were doing exactly what you just mentioned, which was in fiscal Q2. We made some adjustments in our manufacturing line to start positioning equipment for the 20 nanometer ramp. These things are always about balance. And certainly the market today is not the market of last year or the year before. We have pretty broad diversification of end segments and customers and products where we feel pretty good about there this quarter. Now, we don't know exactly what the market demand looks like this quarter. Maybe we end up not holding anything at all. We've left ourselves some room to maneuver there. But we're trying to strike a balance between what you're suggesting as well as just building product and then seeing what the market looks like. That's helpful guys. And maybe on my follow-up, just on the OpEx line, hence the specifically the R and D line continues to kind of creep higher, especially R and D kind of independent of revenue levels. I'm just kind of curious To what extent is this just kind of a new structural norm we should expect in R&D as you go after a lot of different market segments with a lot of different products? Or would you kind of characterize as the current spend is kind of accelerated or elevated because of the where we are in the 3 d transition or something else or just some long term guidance on R and D and OpEx would be helpful. Yes. So just on the R and D piece, there are a lot of different dynamics in play here. Obviously, we've got a lot of new 20 nanometer products that we're going to want to qualify and ramp. And so we're always I wanted to make sure that we don't let the R and D dollar spend get in the way of qualifying products on a timely basis and getting to the market. And you just suggested we should be doing. So there's that dynamic. There's also I think there is an underlying dynamic of as we start thinking about some of these storage class memories that we talked about making investments in and as we start continue to add resources to positions the company deliver system level products that there are there is a different nature to the R and D spend than there has been historically as well. Now over time, we may spend less on some of the other things we spend R and D dollars on. But what we're talking about right now in terms of over the next number of quarters being a little bit. I think it's more related to some of the short term dynamic around technology ramps and new product introductions. Okay. Thanks guys. 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 repeat the safe harbor protection which 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 the call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. For information on the important factors that may cause actual results to differ materially. Please refer to our filings with the SEC, including the company's most recent 10 Q and 10 Ks. Thank you. Thank you. This does conclude today's Micron Technology Second Quarter 20 15 Financial Release Conference Call. You may now disconnect.