Earnings Call: Q3 2014

Jun 23, 2014

Good afternoon. My name is Sahid and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technologies Third Quarter 20 14 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. It is now my pleasure to turn the floor over to your host, Mr. Ken Bedard Sir, you may begin your conference. You very much, and welcome to Micron Technologies third quarter 2014 financial release conference call. On the call today is Mark Durkin, CEO and Director Mark Adam's President and Ron Foster, Chief Financial Officer And Vice President of Finance. This conference call, including audio and slides, is also available on our website aticron.com. In addition, our website has a file containing the quarterly operational and financial information and guidance non GAAP information with reconciliation, slides used during the conference call and a convertible debt and capped call dilution table. If you have not had the opportunity to review the third quarter 2014 financial press release, it is again available on our website at micron.com. This call today will be approximately 60 minutes in length. There will be an audio replay of the call access by dialing 404537 3406 with a confirmation code of 5694 9074. This replay will run through Thursday, June 30, 2014, at 5:30 pm Mountain Time. A webcast replay will be available on the company's website until June 2015. We encourage you to monitor our website micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will be attending. You can also now follow us on Twitter at Micron Tech. Please note the following safe harbor statement. Looking statements regarding future events or the future financial performance of the company and the industry. We wish 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 with that, I'd now like to turn the call over to Mark Durke and Mark Thanks, Kipp. We had another outstanding quarter benefiting from strong market demand as well as solid operational execution. Our revenue was just under $4,000,000,000, while gross margins were stable at 34%. We had very strong free cash flow at $880,000,000, based on operating cash flow of $1,460,000,000 less CapEx of $576,000,000. I'd like to spend some time touching on a few key areas of focus we wrap up fiscal 2014 and continue preparing for fiscal 2015 and our brief industry update Ron Foster will follow a financial summary. And before turning to Q And A, we'll close our prepared comments with Mark Adams, covering additional details of our operational performance and market conditions. Key focus areas for the management over the remainder of this year and for 2015 include completion of the planned 25 nanometer DRAM conversion, beginning the 20 nanometer DRAM ramp, this is critical to improving our relative cost position. Active management of our DRAM product mix as we balance servicing demand growth in categories such as server and mobile, while also maximizing our margin profile across other long term strategically important segments Continued execution of our ongoing and capital efficient 16 nanometer planar NAND conversion. Investment in tools and engineering resources to support the initial deployment and ramp of our innovative 3 d NAND technology. Increased sales of 16 nanometer TLC NAND based products, growth of a robust enterprise SSD product portfolio continued development of our capability to deliver higher value system level solutions, including investments in advanced packaging and controllers and investment in newly emerging memory technologies to ensure we remain at the cutting edge of innovation. As you can tell, we do not plan to rest on our laurels. For 2015, as well as for the longer term, we will continue to be measured and prudent in our capital spending. We will also maintain flexibility to regulate capital expenditures based on the return profile of the investment, including of course the impact of any change in market conditions. We will provide more detail on our specific CapEx plans at a later date, but as we work through finalizing our plans for 2015, It is notable that an increasing amount of our spend will be targeted toward non supply related investments. These include investments for tooling and alternative memories, advanced test and packaging capability, and additional system level product capabilities, including those for controllers and SSDs. We will also be aligning our Micron Memory Japan and Micron Memory Taiwan tool sets with other fans around the world. In support of enhanced operational efficiency. We have no plans to expand wafer production wafer production and we expect the bit growth we generate from technology in calendar 2015 will be in line with growth for the market for DRAM, which we are forecasting in the low to mid-twenty percent range and in line with growth for the market for NAND, which we are forecasting in the low 40% range. Our long term outlook for memory industry conditions also remains favorable. The supplier base is consolidated in DRAM and stabilized in NAND, and we believe that in both markets, industry is at a stage of maturity, such that each supplier has sufficient scale to compete, driven by a slowing rate of technology migration for a supply bit growth trends have stabilized at a level below historical average. There are there appear to be only limited additions of new wafer capacity on the horizon. Applications requiring memory continue to grow and our customer base continues to diversify. We remain committed to delivering differentiated and system level products meet the needs of this increasingly interesting and valuable market. We continue to forecast long term demand in line with or above supply for DRAM. Similarly for NAND, beyond 2014, we expect industry supply growth to remain in a similar range. Although as 3 d production becomes more predominant heading into 2016, we may see a slowdown in supply growth given the technology complexity and additional cleanroom space required. We expect long term NAND demand to be in balance relative to the supply going forward. I'll stop here and turn it over to Ron and Mark before returning for Q And A. Thanks, Mark. Our third quarter of fiscal 2014 ended on May 29, We've posted to our website a file containing the financial information I will cover, including GAAP and non GAAP results, certain key metrics for the third quarter as well as guidance share on net sales just under $4,000,000,000. On a non GAAP basis, net income for the third quarter was $913,000,000 or $7.9 per share. Non GAAP adjustments netted to $107,000,000 or $0.11 per share in the 3rd quarter and included the following. Restructured charges in the quarter of $9,000,000 were primarily related to idle charges associated with shutting down operations in Israel and Italy. Amortization of debt discount and other costs of $36,000,000 in the 3rd quarter include imputed interest on our convertible notes and the discount on the LPDA installment debt. The $16,000,000 loss on restructure of debt arose from the conversion and of convertible notes in the third quarter. I will touch on this further in a few minutes. Non cash taxes from the legacy LP operations were $49,000,000 in the third quarter. Cash taxes for the year are in the low single digit percent of pretax income range. As previously indicated. Finally, there's a $38,000,000 share anti dilutive effect of capped calls based on the average stock price In the fourth quarter, we expect the following non GAAP adjustments. We anticipate incurring restructure costs in the fourth quarter for employee termination benefits in the range of $15,000,000 to $25,000,000, primarily in Italy. Approximately $40,000,000 amortization of debt discounts on the convertible notes and the LPDA installment debt during the first quarter 4th quarter. We expect the 4th quarter results to include an approximately $90,000,000 gain associated with Oterra's GDR offering last month since it was executed at a price above the carrying value of our investment. As of the end of Q3, the carrying value of our 33 percent equity interest in the total value of in Oterra was approximately $700,000,000, compared to the market In addition, ON Semiconductor recently announced its pending acquisition of Aptina Imaging, of which we own an approximate 27% interest on a diluted base The transaction is expected to close either late in our fiscal fourth quarter or in the first quarter of fiscal 2015. And is subject to customary closing conditions and regulatory approvals. We expect proceeds from the transaction of approximately $100,000,000. The carrying value of our interest in Aptina has been written down to essentially 0 through the recognition of our share of Aptina's losses over time. Accordingly, virtually all of the proceeds we received from the sale to ON Semiconductor will be recognized as a gain at the time of the closing. Non cash taxes related to the LPDA acquisition of between $65,000,000 $75,000,000 in the 4th quarter. And also that anti dilutive effect of our CAPP calls will be based on the average share price for the quarter, assuming a 30 $2 share price, this would equate to a reduction in diluted shares of $27,000,000. Please refer to our convertible debt dilution table, which is included in the earnings call data file posted on our website. Let's turn now to our results by technology and guidance. DRAM revenue decreased slightly in third quarter compared to the second quarter. Both average selling prices and cost per bit decreased in the low single digit range, resulting in relatively stable margins comparing the past 2 quarters. Like for like product prices were generally stable, but we did see a mix shift from mobile and computing into server products as we balance equator was $135,000,000, substantially all of which is attributable to Inoterra. If our share of Inoterra's income were recorded in our DRAM gross margin in the 3rd quarter, DRAM margin would be approximately 5 percentage points higher. DRAM gross margin for Q4 using quarter to date AS P and projected mix for the quarter should be flat to up slightly compared to Q3 based on bid production up low single digits ASPs are flat and cost per bits down low single digits. The key items affecting our DRAM guidance for the fourth quarter are continued favorable market conditions in DRAM. Overall stable DRAM volumes, however, with higher volumes of mobile in anticipation of customer demand stable server volumes and decreased volume in PC. And stable to slightly increasing Turning to NAND, on the trade NAND side, sales volume decreased in the 3rd quarter with our shift toward SSD sales. Which have a longer backend manufacturing cycle time. This also contributed to a slight increase in NAND work in process inventories. Trade NAND gross margins in the 3rd quarter were stable quarter over quarter with generally flat mix adjusted prices and costs. Trade NAND gross margins for Q4 using quarter to date ASP and projected mix for the quarter are expected to be down a couple of points compared to Q3 based on bit production expected to be up low to mid teens, ASP down low to mid single digits, and cost per bit flat compared to Q3. Key trends for Q4 affecting this guidance We expect an increasing mix of high density NAND sales at generally lower ASPs but still reasonable margins. And we get more bits. Continued growth in client SSD volumes was some initially higher bomb costs that impact margins. And the effect of a legacy pricing arrangement with a customer that's trending lower through the first quarter of 2015. On a consolidated basis, we're guiding total revenue for the 4th quarter in the range of $4,000,000,000 4th quarter gross margins textured products not included in our DRAM and NAND guidance that I just went through. Looking at other P and L and cash flow results and guidance, the company generated $1,500,000,000 in operating cash flow in the 3rd quarter and ended the quarter with $4,800,000,000 in cash and marketable investments, including $2,600,000,000 held by LPDA and its subsidiaries. Expenditures for property, plant and equipment in the third quarter were $576,000,000, and we are on track to be within our guided range for the fiscal year now estimated to be between $2,800,000,000 $3,200,000,000 with over $1,000,000,000 of expenditures planned for Q4. Actual spending may vary based on the timing of payments and our tool receipts. The beginning of our fiscal year, we've utilized approximately $2,100,000,000 of cash to convert or repurchase $1,000,000,000 of face amount of convertible notes and to reduce the share dilution associated with our convertible notes. This represents approximately 83% of our year to date free cash flow, defined as operating cash flow less CapEx. Our dilution management strategy has year to date add eliminated approximately 89,000,000 shares associated with our convertible notes, assuming the stock price of $32. Specifically in the third quarter, we used approximately $1,000,000,000 to convert or repurchase our 2014 convertible notes and a portion of our Series C and D convertible notes. In addition, the company unwound a portion of the CAPP calls to retire another 3,000,000 shares. Collectively, these transactions in Q3 reduced fully diluted shares associated with our convertible notes by approximately 26,000,000 shares at a $32 stock price. We intend to continue to opportunistically with investment grade like covenants and rates and reduce our convertible debt. Now with that, I'll turn it over to Mark Adams for his comments. Thanks, Ron. On our last call, I introduced our new organization structure, highlighted by the formation of 4 market facing business units: computing and networking Otherwise, CMbu storage referred to as SBU, mobile, MBU, and embedded ebu. I will review our performance in first quarter under the new structure and then end with some technology and operating highlights. From our third quarter before handing it back over to Kipp. For comparative basis, we will use restated numbers for prior periods as if we operated had a strong 3rd quarter characterized by improving demand and favorable pricing. Appears to be more favorable pent up demand for corporate refresh on desktop and notebooks seem to be leading to better than expected sector performance. PC DRAM pricing is improving both at major OEMs and in the channel as current forecast remains strong for Q4 and through the holiday season. Demand for server DRAM is also increasing. Server bits were up 30% quarter on quarter, driven by data center and enterprise growth in density per unit memory content, leading to enhanced system level performance. Demand for our networking products remained healthy as well, driven by LTE build out in China and other emerging markets. Networking DRAM pricing improved quarter over quarter, driven by a richer mix of products and continued strong demand. Finally, our graphics business had record shipments and revenue in the quarter with strong sales of GDDR5 products, driven by key OEM penetration in both PC and console gaming. On the technology front, We continue to drive innovation with products such as DDR4 for servers and high performance desktop applications. GDER5 into high performance gaming PCs and workstation graphics and hybrid memory cube for high performance solutions and networking and computing. For example, DDR4 is in qualification at Tier 1 OEMs for both server and computing customers. We see initial DDR4 shipments in fiscal Q4 2014 and forecast that DDR4 will represent approximately 20% of CMBU DRAM output and close to 10% of our overall DRAM output in the second half of fiscal year twenty fifteen. As we projected on our second quarter call in April, Q3 represented a turnaround quarter for our storage business unit in overall SSD volume. We were able to drive customer qualification 7 conversion as well as launch our first 16 nanometer based products for key channels and customers. Revenues for client and enterprise SSDs each increased by well over 50% compared to our 2nd quarter. We launched our first 16 nanometer client SSD, drive the MX100 at CompuTech and have received strong customer commitments out of the gate for a performance leader in the SSD value segment. We also see OEM growth with the 510 and the M550 client drives and have a strong customer interest and terabyte class client SSDs for immediate workflow, cloud, and other applications where high reliability and performance coupled with terabyte class capacity and competitive pricing are critical. We launched the M500 DC SATA Enterprise Drive for data center applications, and received a large volume commitment from a major search company to address We are aggressively working on our development of our 16 nanometer TLC roadmap in an effort to drive our overall NAND cost competitiveness. We expect line based TLC SSD by spring of 2015. We continue to grow our controller and firmware organizations to help align our PCIe and SaaS roadmap to enterprise customer requirements. We believe our innovative 3 d NAND technology will enable a highly cost effective solution and a competitive advantage in high performance applications. We remain bullish on and feel the organization changes we have made coupled with technology investments will enable us to drive improved results through the course of fiscal year 2015. Our mobile business had an outstanding quarter highlighted by an 18% operating margin in a business that just 12 months ago was underwater. We continue to focus our mobile business on generating maximum returns as opposed to simply market share growth. The team has done a nice job in balancing out the demand from our 2 one OEMs, while 2 taking advantage of a more segmented attorneys in the tier 2 China market. The low power DRAM category remains favorable demand supply balance, and our known good die business is constrained due to the growth in mid and high end phones related to LTE builds for China. The mobile team has qualified E MCP products at key OEM customers, and we are beginning volume shipments in our fourth quarter. We expect that E MCP and E MMC mold products will scale significantly to approximately 25% of the overall mobile revenue We have also commenced sampling low power DDR4 to our partners and chipset vendors and expect to see shipments towards the end of fiscal year 2015. Our embedded business had another strong quarter with revenues of $467,000,000 profit up 21% driven by growth in DRAM NAND and NOR product sales in the quarter. Revenue was up 34% year over year, in the new embedded business classification. The Automotive segment continues to benefit from memory content growth fueled by both infotainment and advanced driver assistance systems. Our commitment to the unique needs of this market in areas such as quality, reliability, product longevity and service has enabled us to grow our number one position in the market. The broad category of industrial and multi market, otherwise referred to IMM showed strong double digit growth quarter over quarter, in part fueled by the integration of connectivity and emerging machine and machine usage with industrial applications. We also saw strong performance We continue to see strong sales and growth in the MMC for embedded applications as well. With the sale of our north fab in Israel, Our idle fab charges will wind down over the next couple of quarters, and thus we anticipate improving gross margins for Nora going forward. It is worthy of note that when you factor in products such as SSD, mobile, EMCP, and EMMC, as well as EMMC for the embedded market, significant portion of our business is now packaged with the controller and in some cases with a NAND DRAM combination. We think this dynamic to continue to be an increasing part of the new memory paradigm. Our manufacturing team had a tremendous progress improving our overall operational competitiveness. Front end cycle time across all products have improved over 30% since the beginning of our fiscal year. In addition, we set a record of 15 As our business continues to expand into diversified end markets such as enterprise, networking, mobile, automotive, and gaming, We continue to invest in our test assembly and supply chain capabilities to support an expanding set of customer requirements. We have seen strong improvements in the throughput volume of an increasingly differentiated set of products in Test And Assembly, in setting a record for assembly yields over 99% during Q3, as well as improved our online on time delivery performance despite a constrained memory market. Overall, the memory, the pricing environment for our products remains favorable. PC demand is better than expected, and our mobile supply is constrained. In both cases, We have large customers looking to lock in long term pricing and supply commitment from us. On the NAND front, pricing is relatively stable on a like for like basis, despite moving our portfolio to higher density storage products, in some cases, with lower average ASPs. We feel this positions us better for the future in these critical growth markets for NAND. We also project dramatic improvements in our mobile NAND business with EMMC and coupled with DRAM and EMC products for fiscal year 2015. In this segment, we can leverage our portfolio, brand breadth of NAND and DRAM to drive the profitable growth. In closing, I want to congratulate our team for a strong 3rd quarter performance. We remain bullish on the health of the overall memory market. Our product mix continues to evolve to solutions optimized, to specific end market needs, and we continue to drive higher levels of efficiency, and effectiveness. We look forward to questions. Thank you, sir. And our first question comes from John Pitzer from Credit Suisse. Your line is open. Please go ahead, sir. Yes. Good afternoon guys. Can you hear me okay? Yes. Perfect guys. A quick question here first on the DRAM front. I'm just kind of curious when you pricing in the fiscal third quarter and the guidance in the fiscal fourth quarter. I would have thought just given pricing trends in the industry, and more importantly, some of the mix drivers for you like DDR4 that you would perhaps have seen better pricing on the DRAM side of the business. Can you just help me understand a little bit about what's happening on the mix side and that's driving the guidance for sort of flat pricing for the fiscal fourth quarter. Well, yeah, I think to identify that it really is obviously all mix driven for us. Some of which is related to of the specialty markets lagging in the pricing catch up relative to the PC segment. One of the things we've stated on prior calls is that each of these businesses is obviously is very unique with the unique set of customers and we're committed to all the markets. We've seen tremendous server growth and we expect that to continue to improve over time. But in general, what we're just seeing is a mix effect drive basically, a stable pricing relative to where we are today. Thanks, Mark. That's helpful. And then maybe as a follow-up guys, just on the ramp of the 16 nanometer TLC in NAND. As that happens over the next couple of quarters, can you help us or help me get a better understanding of the magnitude of the cost things. And maybe you can talk about, you know, if if you had an optimal mix of TLC today, how much better would the profitability be in the NAND business at the operating or gross margin level? Yes. I mean, a range to expect on TLC, at the bid level, somewhere a 15% to 20% improvement. And, as we're, we're not we're not specifying the actual day, but we look to be in the market, not just with components in the early part of the calendar year, but we should have a strong SSD play in the later part of the first half. Perfect. Thanks guys. Thank you. And our question comes from Kevin Cassidy from Stifel. Your line is open. Please go ahead. Thanks for taking my question. You had mentioned long term commitments. Can you say how long those the long term is? Is it 6 months? Is it a year? Right now, the commitments we're looking at are somewhere between 90 days 6 months. In mind you, we're pretty careful about this because, these agreements have to be favorable for us over the long term. And so we have to lock into both the capacity supply piece of it as well as We do these where we have confidence that the long term relationship will drive the right behavior between both parties. Okay, great. And maybe on the follow-up, You had mentioned that DDR 4 was gonna become 20 percent of the CNDU's shipments in the second half of twenty fifteen. Is that at the cost of PCs or I guess is that just the mix shift you're making? It's really just going to start out more in server upfront. And, we will only do this, and our current plan has generating higher margins in this DDR4 category. And we will we certainly won't do a bit margin adverse We feel pretty confident. We're going to drive differentiation with our customers and allow them to drive performance. And so right now, that's where our plan has and we feel pretty confident we're going to drive to that result. Okay. Thank you. Thank you. And our next question comes from Steven Fox from Cross Research. Your line is open. Please go ahead. Thanks. Good afternoon. Just one clarification first on the long long term agreements. Are you saying that you've locked some in or are planning to and what kind of commitment would that be relative to? Some, but not a majority. And we've looked at each of them on their own merit, in terms of the value of the relationship that we're able to drive in terms of the portfolio of our products, as well as market access. Okay. And then just a little bit more color on maybe the mix trends that play out beyond this quarter. Could you just sort of talk about how you think maybe between now and year end some of the mix relates to specifically on the enterprise side. So server DRAM and enterprise SSDs, what's your outlook for demand from those areas for the work and to say through December 31? We still are very bullish on enterprise, DRAM opportunities for us and if you look at the server bit that I that growth, I mean, I don't have the exact number in front of me, but within the last 2 years, we were somewhere around gigabit equivalent,000,000 gigabit equivalents per quarter. I just stated that we were up 30% quarter over quarter. That was slightly below 500,000,000 gigabit equivalents and that continues to grow. The server DRAM business. And we think it's going to continue to grow. Really the density problem box is a big differentiator in terms of performance. And we also think the hyperscale, cloud and data center growth is just going to continue for the foreseeable future. In the enterprise SSD business. We obviously continue to see growth there as well in the end market. We also see that we feel it's pretty early. And there's different formats. There's hybrid drives. There's obviously SaaS and TCIE. And we think there's a we're at the beginning of the long game there with a lot of exciting opportunities and that's that way. So is it fair to say that the mix in those two areas that you just pointed out should be higher by the end of the year versus where it is midyear? Let me jump in a little bit on the server piece. Clearly, there's very strong demand there and we've been we've had more than our fair share of that segment of the for a long time based on service levels and quality levels, etcetera. As we look at each of these segments, though, as Mark has commented, we are going to be careful to make sure that we're looking at the long term ramifications of the relationship with all those customers as well as optimizing our margins It's a matter of balancing that with the return for the company as well. Great. I appreciate the color. Thanks, okay. Thank you. And our next question comes from Mehdi Hosseini from SIG. Your line is open. Please go ahead. Yes, thanks for taking my question. Starting with NAND, I'm a little bit surprised that the cost is tracking flat for 2 consecutive quarter. Can you please provide an update? Is it just a matter of timing before 16 nanometer kicks in or how should we think about this progress? Well, I think you've identified. Thanks for the question. I think you've identified one one element to the equation. The primary driver, as I mentioned in my comments earlier, was that we started to get back into the SSD game in scale. And that that bond cost includes all of the SSC build material. So, that impacts cost that we classify under NAND. As well as what you mentioned is that the ramp on 16 nanometer while going very well, we started we don't set to get the full cost benefit until future quarter. So how should we think about how to differentiate between debt cost versus non debt costs? Which one is having more of an impact? We tend to not want to give that data from a competitive perspective. And it's just the best way to take a look at it is to take a look at quarter over quarter the volume on SSD and how that might trend relative to cost per gigabyte. Got it. And then one question for Ron, thanks for providing guide. I just needed clarification on gross margin. Did you say that gross margin will be down by $30,000,000? And if so, can you explain again what the reason is? Mehdi, what I broke down was, I gave you the DRAM outlook, including the the margin trend and the NAND outlook, including margin trend. In fact, just to comment on that for a minute. And then I gave you another piece, which I'll elaborate on the NAND margin trend. We actually, indicated we were going to probably be down a couple of points Q2 to Q3 and we were actually flat. We're now thinking we'll be down a couple of quarters, predominantly mix driven just so you know where that, where that tie in comes. But as you, as you look at the total Q4 trend, we gave you the DRAM pieces, the NAND the NAND pieces where we think we'll be down a couple of points. And then there's a $30,000,000 effect related to some expected sell through of legacy technology inventory in the fourth quarter. And, that will be basically flowed out in the third quarters, but I wanted to call that out because it's a somewhat unique effect. It's a technology acquired from our Mnemonics acquisition and will be it with new emerging technology over time, but we did have some legacy inventory that we're selling off. And it's related to a specific approach to phase change that we're no longer pursuing in favor of other variance of the technology. So that $30,000,000 is in addition to the guidance on NAND and DRAM I gave you. Got it. Thanks much. Thank you. Our next question comes from Rajvindra from Needham and Company. Your line is open. Please go ahead. Yes. Thanks for taking my question and congrats on solid results. Just a question on the SSD strategy. Given some of the recent consolidation or acquisitions that you've seen from your competitors, I'm wondering what's your response to that and how do you intend to kind of compete on the enterprise SSD space, given the, this recent acquisition and consolidation by your competitor. Yes. So this is Mark. There's been an ongoing activity in this area over a number of quarters, including, as you know, the most recent one. We continue to grow our businesses methodically and organically as well as look at a number of inorganic opportunities over time. When we see one that we think is a good fit for Micron, we will execute on it. But we're not going to comment in advance on which ones those might or might not be? And we're certainly not going to comment on acquisitions by any of our competitors. And, it was touched a little bit on the previous question, but Can you talk a little bit about some of the tangible tailwinds you see on the NAND gross margins over the long term? And And how do you expect to get those NAND margins, up, whether perhaps closer to some of your competitors? Yes, sure. So firstly, I would as a comment on that, and we think the enterprise market is a very attractive market for the enterprise storage devices and continue to make investments in building out capabilities around our controller team, our firmware team. We've had a very good entry in the PCIe East enterprise storage class products and great performance there. We continue to grow. We're continuing to invest in SAS as well. So we believe that we will grow that business accordingly and be successful in that business. Secondly, as I commented on my earlier comments, We're continuing to drive and accelerate to a TLC roadmap that takes advantage of the cost advantages there. And I'd say finally, We believe that beyond SSD, the mobile, market for NAND will be a good contributor for overall margin over the long term. And that's really how we collectively look at this business. We're in this business for the long term. We're going to make these investments and drive overall, our capacity strategy and market product roadmaps that way. Great. Thanks for taking my questions. Thank you. Our next question comes from Monica Kache from Pacific West Security. Your line is open. Please go ahead. Thanks for taking my question. First is on the CapEx. CapEx is almost double quarter to quarter. So could you kind of give a split between NAND DRAM or is it more abbreviated towards 3 d NAND? For the year fiscal 2014, the, the, number that I gave you was 0.8to3.2. That's over $1,000,000,000 of capital in 4th quarters you observed. It's just the timing of payment schedules, but within the range that we have been guiding for for a number of quarters now. And in terms of the breakdown, it's it's heavier to DRAM. It's probably 40% DRAM 30% NAND and or in a bunch of other, areas, including R And D. Thanks. Then I'll touch on the 3 d9. Could you maybe talk about when you expect to have samples of 3 d NAND? And when do you think you'll ramp 3 d NAND basically conversion from 2 d NAND to 3 d NAND? Monica, we're not, we're not, we commented on a previous call that we would have more to say about that later in the year and we're not planning to make any announcements as to explicitly when we might, sample and announce any products in that area. We have said that we believe that this is going to be material impact on the industry in the second half of twenty fifteen and we wouldn't change that guidance today. Thank you so much. Thank you. Our next question comes from CJ Muse from ISI Group. Your line is open. Please go ahead. Yes, good afternoon. Thank you for taking my question. I guess first question as a follow-up. On the 3 d NAND side, curious, as you think about some of the well known, I guess, issues there at one of your competitors, curious how you think about supply demand heading into next year and whether or not the industry will need to add incremental planar capacity to meet expected demand. The issues around 3 d persist? It's probably hard to speak for our competitors in that way. But I would say that our intent is to keep going down the path of the hour. We've stated, as Mark has commented, we've got a plan in place and we're not making any changes to that plan today. And, as we look at the industry, demand over that period will consider matching up our customer requirements. But in general, we're on a plan with the current 3 d strategy not going to really affect our planer output. Yes. I mean, I think it's let me add a little bit more. It's really hard to look at the NAND business today and the changes coming with 3 d NAND technology and say, makes a lot of sense to make large investments in plainer NAND. So I think to the extent, some of our competitors have issues with 3 d NAND technology. I wouldn't expect to see anybody go in and backfill out with incremental planar NAND. I would just expect the market to be a little tighter as competitors work through that situation. That's helpful. And I guess as a follow-up to your, prepared remarks regarding system level investments, curious, I guess, first, if you can opine on, I guess, where we're on the technology side, whether controller, firmware, etcetera, that where where you think you might need, incremental technology as well as whether you would pursue partnerships or whether it would be pure organic or acquisition driven? This is just a big, big space to cover. When you start thinking storage and all the places it goes and all the end applications and interfaces. You've got mobile applications, you've got client, you've got data center, you've got hardened enterprise. You've got UFS, you've got PCIe, you've got SaaS, you've got SaaS, you've got SaaS, you've got SaaS, you've got SaaS, you've got SaaS, you've got SaaS, it's a lot of engineering resources across a broad spectrum to service all those system level solutions. And so the answer is, yes, all of the above micron needs, incremental controller resources in all those areas, firmware and software resources those incremental control resources. And we're working in all those areas, both organically and inorganically. And we'll continue to do that. So stay tuned, but we're not going to broadcast in advance exactly what we may or may not do. Sure. If I could sneak in one last one. Can you provide an update on where you are in terms of shrink on the DRAM side 25 20 nanometer in terms of, I guess, this year or next year? Sure. So today, as you know, we've got, 25 nanometer product about about roughly 30% of our mobile DRAM is on, 25 nanometer. Today, very little, is on, on the in the PC CDR3 space, on 25 nanometer. Going forward, obviously, that will shift and improve in terms of the mix on the, the 25 nanometer node. And remember, as Innoterra has publicly stated, they are going to bypass 25 nanometer and go directly to 20 nanometer. And we expect and we can't speak for them, but we expect them to be out in the early part of 2015 with early volumes and customer qualification and meaningful volumes in the back half of there 2015. And then over time, we'll begin the migration of our capacity that way as Very helpful. Thank you. Thank you. Our next question comes from Doug Friedman from RBC Capital. Your line is open. Please go ahead. Thanks for taking my question guys and congrats on the strong results. If I could dig into the CapEx increase just a little bit more, on the quarterly spend rate, Ron, you did say it had to do with the timing of payments. How should we think about that equipment getting turned on? And is there an inflection at all in the bid growth that we should see in the maybe the Q1 quarter as that equipment gets put in place? Yeah. So it's it's just mainly timing quarter to quarter in variation, but the name of the way we normally recognize, CapEx is when we pay it. So when we actually pay it per vendor agreements, and typically those vendor agreements have qualification processes to enable them via available for production. So it's a it's a function of when they're available for production and we pay according to our vendor agreements. So, yes, as we go forward, that will certainly contribute to what Mark and Mark have been commenting about with bit growth trends over time as well as migrating some of the new product technology areas. But it can vary based upon the qualification scheduling of, of, the technologies and the individual machines. Keep in mind, as, as, as, Mark also mentioned, we've got a number of investment going on in other areas such as 3 d NAND technology, and it has a little bit different timeline, etcetera. So there's a lot going on inside Micron. The timing quarter to quarter tends to vary around, but, I gave you the full full year view, and that was about where we thought we'd be for the year. Just some slipped out of the third quarter into 4th a little bit more than planned. Okay, great. Thanks for that color. And it's a great segue into my next question. There is a lot going on between all the different technology transitions you guys are doing. When we merged Micron and LPDO, we really did not see much in the way of any R and D synergies. Is there a point in time at which maybe the R and D roadmaps start to come together and joint development efforts might increase such that we should see maybe some synergies be realized on the R and D lines. Is there anything that we should be thinking about there? Well, I don't want to forecast too far in the future, but Doug, I think you identified a potential benefit downstream as we remember, you know, LPDA was on a road map to 25 nanometer upon the acquisition. And, we've obviously continued in parallel with a 25 a 20 nanometer investment on the R and D line. I think out in the future, as the market warrants and dictates from a financial return perspective, you can envision us getting to a single architecture, out beyond 20 nanometer. Okay. And with that, would that and that could lead to some sort of an R and D synergy? Yes, it could, Doug, but But keep in mind, we're also making investments in Stornbridge's class memories and advanced, system level solutions, etcetera. So I think the nature of our R and D is going to change we are not as focused on driving there, not R and D line down as we are making sure that we're deploying whatever capital we do spend or whatever corporate resources, we do allocate to R&D that we use them effectively and efficiently. All right. And if I could sneak one more in, can you talk a little bit about the wafer output that you're going to see in the back half of the year, maybe in a percentage Q3 over Q4 and then going forward? And whether those are internally or purchased from in Oterra? I think the best way to characterize that, we see that as generally flat, quarter over quarter. Great. Thank you. Congrats on the strong results. Thanks, Doug. Thank you. And our next question comes from Mark Newman from Bernstein. Your line is open. Please go ahead. Hi, thanks and congrats for the good results again. Questions more on the NAND side. It seems like If you talk about you talked about a few things going on there. It seems like you're having some success on the SSD side, but from what I from what I understand, it seems like the TLC part of the equation seems to be getting pushed out a little bit. So I just wanted to check with you in terms of those two things, the, the movement towards more SSD solutions, what has, worked, what, what, what is kind of what are the kind of stumbling blocks moving further in terms of getting more SSDs, enterprise and computing, PC SSDs, Alvador to improve your mix. And similarly on the TLC side, what is it that is delaying, TLC adoption, did you foresee those things being fixed when and if you could talk specifically through, if those are more controller related or a silicon related on the TLC? Well, maybe I could start with the question on market access and what we think is working. Remember, there were 2 dynamics that were going on over the last two quarters or so. And I commented on in the April call about this. One of which is we were obviously converting a new, a capacity to NAND in our Singapore or 57. And that that material needed to get qualified with our major customers. In addition, we were also shifting from 20 nanometer and 25 nanometer drives to, to new product development on 16 nanometer and 20 nanometer high end drives. That transition at the time of the Singapore fab, slowed our growth, not necessarily driven by market growth, but driven by our ability to get customers' quality and our products ramped at the right time. You saw the improvement in Q3, and that's really It should highlight that our access to the market is pretty strong. Our customers are relying and we drove pretty good results. But so it wasn't something that I would say that we changed behaviorally. It was just some transition, both technology and where the capacity was coming from. And we feel pretty confident we will continue to grow. On the TLC side, I would say that we are now confident with, with our internal testing that we can drive high capacity TLC in the solid state market we were, we were always, positioned as a performance, even on the client's at a high end performance high quality drive with our OEM customers. And, we we wanted to make sure we were able to drive the right volume and the investments in TLC. And we think with our 16 nanometer roadmap, we can do so. And as I said, as I commented earlier, we'll get there probably by, from the in dry format by, spring of 2015. So on the on the on the TLC side, are those more things on improvements on the on the controller side or is that also a combination to the NAND silicon itself? Well, I think it's a little bit of both. The controller piece has to handle, obviously, the arrow correction element of TLC and that's a little bit different. But I think the reliability of the TLC and the actual testing of it, internally, in our development early stage modeling has got us to a higher comfort level. And then just a follow-up on the SSD portion of the question. Have you shared or maybe I may the percentage mix of your NAND that is going into SSDs? And then if that's also broken out into enterprise versus PC as well by any chance? I'm happy to do that. And let me just clarify. In the past, we've actually included in our SSD revenue capacity we've sold to 3rd party, SSD companies. And we're no longer going to do that. The best way to think about our SSD share today is that of overall NAND SSDs roughly about 20%. That's up from 12% last quarter. And again, for competitive reasons, I just don't want to, I don't feel comfortable breaking up the enterprise client mix. Okay. Great. So it's from 12 to 20% and From our overall NAND revenue? Overall NAND revenue got it. And that's purely your own SSDs not counting going to 3rd party. That's right. Great. And is that any idea where that may go to fiscal Q4 and into next year in terms of percentage of mix? Well, I think it's fair to say that it will continue to grow. We don't want to state any numbers on the call, but it will be an upward growth path from here. Yes. I guess all of this sounds good. I'm just I'm still a little bit curious why, based on the guidance, the next quarter's gross margin looks like it's going to come down, even with your mix improving SSDs. It seems like the ASP part of the part part of the line would be a little bit better. Is there anything I'm missing as to why that ASP wouldn't be better? It's really a function of our growth and our scale and getting big in some large OEM sockets in terms of the SSD qualification and future business commitment. And the second piece on the margin question, As I mentioned, we're now getting 60 nanometer in volume, obviously, and that ramp is on the front end of the cost benefit curve that we would see in future quarters. Thank you. And our next question comes from Vijay Bhakash from Stern. Your line is open. Please go ahead. Yes, hi guys. Just going back on the same NAND question here, when you look at the SST mix going from 12 to 20%, you mentioned some of the front loading of the costs. As those costs flow through the August quarter, do you see NAND margins, kind of bouncing back towards the end of the year, into the number quarter? Well, it's, again, we try to avoid forecasting and going into that kind of out in the future. We'll continue, you know, guys that we're going to continue to drive performance in this business and, we think we've got line of sight on the key fixes to drive better performance over the long term. And when you look at the 16 nanometer mix, on the NAND side, what where are you now, and how much of the SSD goes to 16 NAM adverse should look out towards the end of the year. Okay. So, in terms of where we are in terms of leading edge production for NAND, we were relatively light, relative to, we were at 3% in the prior quarter and roughly more or less less than 20% in the, in Q4, we're projecting on 16 nanometer. So we're still ramping the technology and the product and an SSD is probably behind that as an overall mix. Got it. Last question. I mean, when do you see those cost improvements on the 60 nanometer start to flow through, when do you start to see that manifest on the margin side? Yes, it's probably, the best, the best count I would say is out in the early calendar, 15. Okay, great. Thanks a lot. Think we have time for one more caller. Thank you. And our final question comes from Joe Moore from Morgan Stanley. Your line is open. Please go ahead. Great. Thank you. Now that the transition in Singapore from DRAM to NAND is mostly behind you. Can you talk about how you feel about the DRAM NAND mix today and what would drive you in the next few years to make further changes to change that mix? Well, we feel pretty good about where we're at. We certainly are long term believers in the growth of NAND demand. And as we learn more about what the elasticity of demand there is, I would think that it's more likely that market's going to outgrow see than it is in DRAM. And so while we're pretty happy with our mix today, we don't think in terms of flipping capacity back and forth on a go forward basis. I think we're kind of at least under today's conditions, happy with the mix we've got. And we'll look at, dialing our mix between different segments within NAND and DRAM and we'll look over time at adding the right capacity. More likely that's going to be in NAND and DRAM as we move through time. Okay, great. Thank you. And then separately, you talked about, the potential benefits of moving to more straight debt and investment grade. What would be the things that would negate the timing of that and what it seems like your bonds are trading pretty well now like how do you think about that potential opportunity? Sure, Joe. Obviously, the market is pretty favorable right now. With regard to, straight debt. We did one of the early, offerings in our in our rating class, for high yield debt and it turned out extremely well. We basically got an investment grade covenants and very close to investment grade pricing. Since that time the market's got even better, we never know how long that'll hold, but it's a very it's a very good environment today, especially for Micron. So we're we'll be watching it closely and making moves as we think they're prudent over time in terms of our overall mix. But as I mentioned, in general, we'll be trending towards more high yield given the current condition and rates and pricing and, less than convert. We'll continue to move on those over time as well to reduce them. Thank you. Thank you. 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 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 state that 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. 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 ten Q and 10 K. Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's Micron Technology Third Quarter 2014 Financial Release Conference Call. You may now disconnect.