Earnings Call: Q2 2014

Apr 3, 2014

Good afternoon. My name is Kate, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Micron Technologies Second Quarter 2014 Financial Release Conference Call. All the 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, Keith Bedard. Sir, you may begin your conference. Thanks, Kate, and I'd also like to welcome everyone to Micron Technology and quarter 2014 financial release conference call. On the call today is Mark Durkin, CEO and Director Mark Adams, 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 at Mike dotcom. Excuse me. In addition, our website has a file containing the quarterly operational and financial information and guidance UnGAAP information with reconciliation, slides used during the conference call and a convertible debt and capped call dilution table. If you have not had an opportunity to review the second quarter 2014 financial press release, it is also available on our website at micron.com. Call will be approximately 60 minutes in length. There will be an audio replay of this call accessed by dialing 404 5373406 with a confirmation code of 12756761. This replay will run through Thursday, April 10, 2014 at 5:30 pm Mountain Time, a webcast play will be available on the company's website until April 2015. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the During the course of this meeting, we may make projections or other forward looking statements regarding future events the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to the documents the company files on a consolidated basis from time to time with the Securities And Exchange Commission. Specifically the company's most recent Form 10 k and Form 10 q. These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward looking statements. These certain factors can be found in the Investor Relations section of Micron's website. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievement. We are under no duty to update any of the forward looking statements after the date of And with that, I'd like to now turn the call over to Mr. Mark Durkin. Mark? Thanks, Kim. I'd like to start today with an overview of the key developments during the quarter, followed by a few strategic you can industry thoughts. And then I'll turn it over to Ron for a financial summary. And before turning to Q And A, we'll close with our prepared remarks with comments by Mark Adams, covering additional details of our operational performance and market conditions. We had another outstanding quarter benefiting from a favorable industry structure market conditions as well as solid operational execution. We achieved record revenue of over $4,100,000,000 while gross margin improved to 34% and our earnings per share improved sequentially on both GAAP and non GAAP basis. We had a very strong free cash at $85,000,000 based on operating cash flow of $1,390,000,000 less CapEx of 562,000,000. The company's focus is to drive operational excellence, deliver differentiated and system level products to diverse market segments, and manage capital allocation all with a goal of maximizing long term shareholder returns. Ron and Mark will cover some specifics related to our execution in these areas. I believe we're executing well on multiple fronts, but we still have room for improvement in others, which we will also discuss. Our outlook for memory industry conditions remains We believe which was not always possible in the past. In terms of DRAM, it appears that Hynix's Wushi fab is back online and the supplies in the market. Low supplier and customer inventory across multiple segments coupled with our reduction in DRAM capacity as we convert Singapore demand has led to an overall stable supply situation and we continue to see favorable market conditions in what is generally a slow seasonal period. We expect to see DRAM industry wafer production down mid single digits in 2014 as a result of DRAM, in process complexity as geometry shrink. We expect total industry bit supply growth in the low to mid-twenty percent range for 2014. This is slightly lower than our prior to 30% range, driven by relatively stable wafer output coupled with slowing process technology migrations compared to historical trends. We continue to forecast 5 year DRAM demand CAGR in the mid-twenty to 30% range, which implies continued favorable market conditions and likely a reduction volatility compared to historical DRAM trends. For NAND, we're projecting industry growth for 2014. This includes an increase in industry wafer production of just over 10% with the remaining supply growth coming from technology. We expect 2015 to be in a similar range, but we could see a reduction in the growth rate beyond 2015 as 3 d production becomes more predominant and there is a subsequent reduction in wafer output given the additional cleanroom space required for 3 d NAND. We are forecasting a 5 year NAND demand CAGR in the high 30% to low 40% range. As you've seen recently in NAND, additions to industry capacity can cause volatility in the market, given the challenge of matching long term capacity decisions with short term demand trends. However, we are very bullish about the future of NAND Flash in believe that this will be a very healthy market. Micron NAND process technology positioning remains strong. During the quarter, we continue to make progress on ramp and yields of nanometer and industry leading 16 nanometer technologies. The product team has also delivered some exciting new products and innovations to our customers including the market's best performing PCIe SSD solution. We're taking steps to better enable our high performance MLC and SLC components in value added segments in markets such as Enterprise SSD, Mobile E MMC and our mobile applications and continue to add resources and controller, firmware, software and packaging technologies to support this effort. Relative to Micron Memory Taiwan, formerly known as Wrexchip in Taiwan. And since the end of last quarter, we've been engaged in the purchase of residual shares not previously owned by Micron. As a result of these additional purchases, to date, we have purchased all but about 0.5% of the outstanding shares. Total consideration paid for the incremental 10.6 Finally, I'd like to update you on a litigation matter related to Innoterra. As you may recall, in the fall of 2008, Micron purchased Keymanda's shares of Innoterra. In January of 2011, the trustee for the key bond of bankruptcy proceedings filed suit against Micron and Munich, seeking among other things to undo the share purchase agreement from that transaction and via the end of tariff shares transferred back to the commander of state. On March 13, we received a decision from the court in Germany. On the one hand, the decision rejects the trustee's claim for the alleged value of participating in the Innoterra JV. On the other hand, a part of the decision that is intermediate and not yet enforceable would require Micron Semiconductor BV to retransfer the purchased in Otero shares to the commander of state. The Court also determined that the Patent Cross license agreement that was entered into at that time is canceled. The material portions of the decision are not currently enforceable nor in our view probable. There are not any material adjustments to our 2nd quarter earnings. We believe the court's findings against us are wrong and will of course appeal. In conclusion, let me confirm we're very pleased with the results of the quarter and the outlook for Micron and healthy memory industry dynamics. We remain focused on optimizing value for our shareholders and worldwide customers in 2014 and beyond. I'll stop here and turn it over to Ron and Mark before returning for Q And A. Thanks, Mark. Our second quarter of fiscal 2014 ended on February 27, as is our practice, we've posted to our website a file containing the financial information I will cover, including GAAP and non GAAP results, certain key for the second quarter as well as guidance for the third quarter of fiscal 2014. For the second quarter on a GAAP basis, we reported income of $731,000,000 or $0.61 per diluted share on the 2nd sequential quarter of record net sales of $4,100,000,000. On a non GAAP basis, net income for the 2nd quarter was $989,000,000 or $0.85 per share, which is $108,000,000 higher than the 1st quarter. Non GAAP adjustments the following: $80,000,000 in accounting losses recognized on the convertible note transactions. This includes losses in the 2nd quarter on the conversions that were initiated first quarter as well as losses on the conversions that were initiated in the second quarter. I have more on this in a few moments. $42,000,000 non cash flow through of LPDA inventory step up related to the acquisition. Substantially all of the inventory step up has flowed through to cost of goods sold and we don't anticipate non GAAP adjustments for this in the future. Q2 adjustments also included $44,000,000 in non cash amortization of debt discounts and other costs. This primarily consists of the imputed on the convertible notes and the LPDA installment debt. In the second quarter, a 30 $3,000,000 as assets and liabilities. $55,000,000 in non cash taxes related to the LP to operations in the quarter. And finally, $42,000,000 share anti dilutive effect of capped calls based on the average stock price during the second quarter of $23.06. In the third quarter, we expect the following non GAAP adjustments Approximately 40 of the third quarter to also reflect $8,000,000 of losses as the debt conversions initiated in the second quarter are completed. We estimate a $5,000,000 to $10,000,000 expense for the tax effects netted $60,000,000 $70,000,000. Also, the anti dilutive effect of our cap calls will be based on the average share price for the quarter. Assuming a $24 share price, this would equate to a reduction in diluted shares of $40,000,000. Please refer to our convertible debt dilution payable, which is on our website. Let's turn now to our results by technology and our guidance. DRAM DRAM revenue in the 2nd quarter reflects stable bid sales and stable average selling prices. We experienced favorable overall market conditions and gross margins improved about 5 percentage points to the high 30% range. Gross margins benefited from record sales in the server segment and increasing mix of PC and networking sales as well as a shift to lower cost and higher margin wafer sales in the mobile segment. If our share of in Oterra's income in the 2nd quarter were recorded in our DRAM gross margin we add back percentage points higher for the quarter a quarter to date ASP down low single digits on mix effects and cost per bit down low single digits. Key items affecting our DRAM guidance for the third quarter are continued favorable market conditions and generally flat like for like product ASP trends quarter to date. Limited impact going forward of selling through stepped up inventory acquired with LPDA and lower costs of product coming from era as a result of a greater discount percentage is prescribed in the pricing formula. Turning now to NAND. On the trade NAND side, sales volume increased primarily as a result of the continued conversion of our Singapore fab operations to NAND. Trade NAND gross margins in the 2nd quarter were in the high 20% range, down approximately 5 percentage points quarter over quarter. Selling prices came under pressure during the second quarter, partially due to seasonality and partially due to increased sales in the channel for our incremental production NAND bit cost reductions were achieved through higher sales volumes, advanced technology products. And cost efficiencies associated with expanding production in our NAND focused Singapore operations. Trade gross margins for Q3 using quarter to date ASP and projected mix for the quarter indicate down a couple of points compared to Q2 based on bid production is expected to be down high single digits quarter to date ASP down low single digits and cost per bit flat. The key trends affecting this guide our to quarter to be in the form factoring cycle times, which impacts our Q3 bid production as we ramp to higher volumes. In Nora, as we indicated in our Q2 guidance, NOR sales continued their quarterly decrease with a market shift in wireless applique to NAND. Q3 NOR revenue is expected to be in the $100,000,000 to $110,000,000 range. Longer term, we expect to see revenue stability and growth in gross margins with vast majority of NOR sales in the embedded market now and our plan transitioned to 300 millimeter production. Looking at other P and L and cash flow results and guidance, the company generated $1,400,000,000 in operating flow in the second quarter. As a reminder, the Q1 operating cash flow included a deposit from a customer of $250,000,000 associated with a long term DRAM supply agreement. So on a normalized basis, we're seeing continued improvement in operating cash flows. Ended the quarter with cash and investments of just over $5,000,000,000, up about $650,000,000 from the prior quarter. This amount includes just over $2,000,000,000 at LPDA and at subsidiaries, which is not available for general purposes across the rest of the company. Expenditures for property, plant, and equipment in 2nd quarter were $565,000,000 and we are on track to be within our guided range for the fiscal year of $2,600,000,000 $3,200,000,000. During the year, the company is focused on reducing the potential dilution associated with our convertible notes through a series of financial transactions. As we outlined at our Analyst Day in February, we intend to migrate our debt mix towards more straight debt over time where the straight debt as investment grade like covenants and competitive rates. In the second quarter, as part of our overall capital strategy, company completed an inaugural high yield debt offering that satisfied these objectives raising $600,000,000 of straight debt with net proceeds to be used for the retirement of our 2014 convertible notes. In the second quarter, we called for redemption of the 2014 notes as well. Given the settlement period required for their conversion, all of the remaining 2014 notes will be settled in the third quarter. As a result, our cash and debt balances will be reduced by approximately $700,000,000 in the 3rd quarter from settlement of these notes. Year to date, once we settled the remaining 2014 notes in the third quarter, the net financial effects of the debt structuring transactions, including the issuance of the high yield debt, increases our debt slightly by approximately $40,000,000 utilizes approximately $1,300,000,000 of cash and reduces equity by approximately $1,100,000,000. Most importantly, we will have reduced the dilution exposure related to our convertible notes by approximately 68,000,000 shares, which adds to the 40,000,000 shares of CAPP call coverage we have in place, assuming a $24 stock price. Now I will turn it over to Mark Adams for his comments. Thanks, Ron. Overall, we were pleased with the team's execution in Q2. In a quarter that at times has proven to be a weaker demand period due to seasonality coming out of the holiday season. Our DRAM business continued to deliver strong results with stable revenue and strong gross margin expansion. Supports customers in our DRAM solutions group, wireless solutions group and embedded solutions group. We had record bid shipments in DRAM specialty markets, including server, consumer and graphics segments. Our server business at achieved 68% year over year bit growth in the 2nd quarter. Micron continues to provide our key server customer with unique solutions to help memory computing enablement with key server volume production. We continue to see strong growth in the public clouds market indicating a 3 year DRAM bit demand CAGR of 76%. Our networking business continues to be a segment where our capacity yields attractive returns. Our strong position in networking applications is a result of our technology leading solutions and excellent customer relationships. HMC enablement is also ongoing with major networking customers as a path to provide higher bandwidth performance. DDR4 enablement with our key Chipset partners will drive further differentiation for network solutions. Demand drivers such as LTE rollout in China and continued cloud and data center growth fosters a healthy demand outlook for the back half saw major customer qualification of our G DDR5 product and positive yield improvement on our 25 nanometer process. We had an impressive quarter in the Digital TV segment highlighted by a major win for our new IO product, with a key consumer electronics partner. In addition, we saw better than expected sales at major game console customers. The desktop and notebook segment remained in good balance during our second quarter and pricing was up quarter over quarter. As we commented during our last call, we will continue to optimize our computing versus mobile capacity as driven by market dynamics with the goal of generating volume was up 11% when compared to Q1. This upside was driven by improvement in overall cycle times as well as continued favorable demand and supply balance in the market. From what we can tell DRAM capacity in the industry has normalized following the recovery of one of our competitors fabs in China. Despite this capacity recovery, DRAM market conditions remained favorable and inventories in the channel remain relatively tight below normal levels. On the mobile front, our WST group had an outstanding quarter with operating margins of 20%. Like for like, mobile DRAM prices were relatively stable quarter over quarter. But our blended ASP was down primarily due to increased sales of mobile DRAM wafers also referred to as known good die. WNSG revenue was down for the quarter as we adjusted our product mix, but the business unit was significantly more profitable Inventory of mobile products in the market remains tight and demand signals from our customers are strong. Coming out of Mobile World Congress, we saw continued impressive memory growth in the low and mid range price phone segments as a number of customers announced products with 2 gigabytes of mobile DRAM, a density historically found only in high end smartphones. Our Infedded Solutions group recorded revenue of $365,000,000 with continued strong operating margins, of 16%, which would have been higher if not impacted by IL charges in our nora manufacturing network. These charges should wind down over the coming quarters. ESG had a record revenue for Q2 in the Automotive segment. On the product front, we had greater than 40 percent quarter over quarter revenue growth in AMC for the embedded market with NAND and low power DRAMMCPs also growing in the industrial segment. We remain bullish on the market demand in confident in our product rent as we drive our embedded business in Q3. Our trade NAND revenue was over $1,000,000,000 in the quarter, up 11% as we continued the conversion of Fab 7 in Singapore from DRAM demand. This conversion is now essentially complete as of Q3, although we will have a small amount of legacy specialty DRAM remaining for other quarter or stated a requalification of NAND material for products like SSD, Consumer Products, and EMMC solutions. These qualifications are often dependent on our customer's qualification cycles as well as timing related to product builds and thus can last a few quarters. The result is we end up with more products sold in component form compared to our long term target for the NAND business. We are continuing to shift our overall NAND production to our industry leading 16 nanometer technology, which in our early ramp is shipping into consumer markets such as memory cards, USB storage devices, and embedded consumer products. These transitions in our manufacturing output will enable a lower cost product mix in the future. We are currently in a qualification process at Tier 1 OEMs for our 20 nanometer M550 SSD products. And anticipate shipping and volume for the back half of calendar 2014. Our crucial branded M550 client S shipments will begin in volume in Q3. Beyond SSDs, our Consumer Product Group had some major wins at new retail customers with Lexar branded USB and card products. Given current market pricing in the component channel, we feel these end markets will offer a better alternative men selling inventory in the NAND market. Despite the market's office in NAND, we remain optimistic on a larger demand profile for the end market segments. Both from a unit growth and a density per unit perspective, the client and enterprise SSD business can continue to represent strong growth segments. NAND storage upgrades in the high end smartphone market as well as unit content growth in mid range smartphones fuel the overall mobile market as a large and growing consumer of NAND. In addition, density NAND and NOR applications to higher density flash memory. We remain focused on adding additional value to our NAND technology by building the right organization capabilities and skillsets to deliver premium and solutions to our customers. To that end, We are pleased to welcome Darren Thomas as our Vice President of Micron Storage Business Unit. Darren most recently serves as the Vice President of storage and networking products at Dell. He brings a unique customer perspective and understanding in different ways the market will utilize flash memory and the storage systems architecture going forward. We continue to invest in our underlying end technology as well. Our 16 nanometer NAND yields have been very positive and position us well from a cost perspective. We are currently planning to ship 16 nanometer TLC in calendar us. We are excited about our 3 d NAND technology aimed at high performance applications, still targeting volume production planned for fiscal 2015. While our DRAM business is performing well, we are committed to improving the long term margin structure of this business. On the technology front, we are expanding the migration of 25 nanometer in manufacturing beyond PC and mobile with a focus on server level quality with our top customers. Our 20 nanometer process migration DRAM is still on track to commence at the end of this calendar year. All of which should improve our overall cost position in DRAM. Organizationally, driven by our opportunity to serve a more diversified set of end market We've implemented a new structure starting in Q3, aimed at better responding to application market segment and customer specific requirements. We will engage our customers through 1 of 4 market facing business units. Computing and networking, or CMbu, mobile, MBU, storage SBU, and embedded Ebu. Tom Eady, who previously ran our embedded business, is now willing to lead the computing and networking business. Mike Rayfield will continue to lead our mobile business and Darren Thomas, as previously mentioned, will run the storage business. Jeff Vader, who has been the vice president of marketing for ASC has been promoted to run the embedded business unit. In support of these market phasing organizations, we have set up 3 engineering groups, including DRAM, nonvolatile memory and advanced controller development, help deliver the right customer and market specific products. The combination of the 4 market facing business units With the named engineering organization, we'll form what we now call the Memory Solutions Group, which will be led by Brian Shirley in his new position as Vice dollars did. We continue to see overall good balance in the memory industry, and we are investing in opportunities to differentiate our products and with our customers. With that, I will hand it back over to Ken. Thanks, Mark. We will now take questions from callers. Asking you questions so we can hear you clearly. Our first question comes from the line of John Pitzer with Credit Suisse. Your line is open. Yes, good afternoon guys. Congratulations for the results. I guess my first set of questions revolve around the NAND business. Maybe for Mark Adams. Mark, can you just help me understand a little bit better within the February quarter? You guys kind of significantly beat the bit production guidance you gave you sort of missed on the bit cost reduction. I'm just kind of curious, the reason behind that typically you would expect that a bit production were higher perhaps costs would have been better. If you can help me understand that better, that'd be helpful. Typically, as we've made this conversion, early ramp production costs that go into our product costing. It was pretty close to our guide for the quarter and we overall kind of are still ramping. As I mentioned earlier, we're not fully ramped at the facility. So we anticipate that they'll big continued improvements. But at this point, it's kind of the process of kind of ramping that facility in higher cost early stage. And then Mark, a longer term question on NAND, as you think about where your margins are today versus your competitors, Can you talk about maybe the 2 or 3 things that you need to do to bring your NAND margins up to kind of industry average? Sure. Well, I think that the things that we think about at Micron really are how we package our products and the around controller and firmware as it relates to not just SSD and storage, but also EMMC and the mobile phone and embedded business and how we optimize those products. Secondly, we had a customer base that primarily was requiring MLC products in the past. And our utilization of TLC in the future will be a big benefit to us I mentioned, we expect to have our 16 nanometer TLC products in calendar Q4 in the channel. And also I bet. There are some interesting choices we've made that, that were probably right for the time in the past. But when you look at a market like retail where now there's really 2 primary players, we're seeing a pretty stable business there and one that we'd like to continue to grow. And so our market segmentation away from getting away from just component trade sales, if you will, to things like growing our retail and our channel SSD business where by the margin and ASP uplift. And those are kind of the 2 or 3 things that I think are most important to us. And then guys, my last quick question here on the DRAM front. You guys, I think slighted server DRAM bits up pretty significantly year over year. I'm kind of curious, the impact you guys see coming from in memory database saw Intel bring out a new class of Xeon Chip, but really the only incremental benefit was how much DRAM that could address you you've Oracle talk about having to put more DRAM into their data appliance tools. How big is that market today? And could that drive significantly better kind of enterprise demand for DRAM that you guys are predicting right now? Yes, absolutely. And we think that we're pretty well positioned to take advantage of that, not just through those ships that you've mentioned, but through advanced technology we're developing in Micron. So we think we see it as a pretty critical part of our overall strategy we'll continue to kind of keep you updated on our product development. Thanks guys. Congratulations. Our next question comes from the line of Kevin Cassidy with Stifel. Your line is open. Thanks for taking my question. And along those lines for the server applications, the EDR4 announcements that you had, are you expecting to ship that for revenue in the June quarter or in the May quarter? Yeah, we are targeted to ship that in early volume material in the quarter to commercial applications for our customers. Is that sooner than you had expected? I'm not afraid about what we thought. Okay. And and maybe as you're moving from the 25 nanometer and and starting with your 20 nanometer, what what kind of cost reductions are you expecting from 25 to 20 nanometer. Kevin, as we've talked about in the past, it's pretty hard to do a year over year on these because these transitions are shifting out. It's so lengthy if you will. But generally, if you take the process node changes, that's what you would hope to get. Our next question comes from the line of Johr with Morgan Stanley. Your line is open. Great. Thank you. Looking to production growth in NAND down high single digits in May, I understand your response that it's sort of strong the longer SST lead times, but I'm still surprised you go from up 35% in February with Stry pretty steep kind of growth each month to down high single digits. Can you elaborate a little bit more on what's happening there? Yes. I mean, the biggest part for us is as we look at the markets that we're serving, we take a look at that business and look at the opportunities to place these bits into the channel and segments. And certainly SSDs offer us a larger cycle time, as far as the product builds in manufacturing. And so that's driving a lot of it, to be honest. That's where we see our growth in terms of products. And I think it's going to reflect in a much higher improved performance in SSDs in Q3. Okay, great. Thanks. And then with the growth or the TLC that you talked about kind of being more aggressive in the back half. What are the markets where you think you'll see that deployed first for you? Well, I think today, if you look at those markets really for high volume low end consumer business. I do think that you'll see eventually client SSDs in TLC out in the future and a lot of companies have been talking and trying to develop that. We think we have a good path to that over time. I think early application for most of the consumer and retail. Great. Thank you very much. Our next question comes from the line of Monica Garnes with Credit Crest. Your line is open. Could you provide more details regarding your share of Innovara and the lawsuit of Kimo with Kimorla, which you just talked about in the mix. And would that mean that you will have to transfer the whole share? If you challenge that, then how long do you think it could take to resolve this? Yes. Mark, since this is an ongoing case I'm not going to answer too many questions about that, but let me just reiterate, we believe the decision contains significant errors and that the proceedings were fundamentally flawed. I'll give you an example. The court heard only from trustee witnesses, no witnesses from Micron, no expert testimony. So as I said before, we'll definitely appeal. The other important thing that you should know is that the interterra supply and take relationship is not dependent on Micron's ownership of these shares. And so, we have other shares that we own. Above and beyond these shares. And whether we did it, we didn't, the relationship stands above and beyond the ownership. Thanks. And then just the last one, the NAND side. Could you maybe talk about how much percentage of output is at 16 and how much at 20? And then when do you expect but I'm assuming you will do some note revisions starting 2015 for 3 d math. So kind of would it be first half or second half twenty fifteen? Well, I mentioned that 3 d NAND was a 2015 shipment. So that's not within 2014, We're roughly in this profile, Monica. We're roughly about today during Q2, thirty two percent, 25 nanometer, 60 percent, 20 nanometer. And from that SLC and what have you. And in Q3, we intend to keep moving slightly towards a 16 nanometer mix, sorry, 20 nanometer. Next question comes from the line of Vijay Rakesh with Jernigy. Your line is open. Hi guys, congratulations. I had a solid 80% quarter here. I just had a couple of on the DRAM side, obviously pricing very stable, with all the concerns. But on the big curve, there's a little light. Can you elaborate, is that there's a tighter tech transitions or capacity? Well, the DRAM bit growth, for us, was kind of more because we had the conversion going on in Singapore, which when you aggregate out some of the other improvement areas in process fit growth, kind of gave us what we had for the quarter. So it's really a combination of the guidance that we gave was pretty pretty accurate relative to Q3 sorry to Q2 and it really related around moving parts Singapore reducing and some of the process improvements elsewhere. Got it. And the situation, I might just add with, I mentioned the Roshima fab and we had a minor earthquake event that had a little bit of short term effect on Got it. Thanks. On the NAND side, what percent was SSD in the February quarter? You just mentioned you're increasing SSD out And what what what do you think the mix would be in with SSDs in NAND? That's in the August. So on our last call, I mentioned that the conversion process of that fab as a percentage of our overall output would have a decreasing effect in Q2 And so it was in our it was in single digits in terms of our overall capacity SFD for NAND. We expect that to be much improved in Q3 relative to going up significantly in Q3 with both commercial OEM relationships as well as channel, somewhere almost approaching half of our end output, getting back to FSPs. Got it. Thanks. Our next question comes from the line of Mehdi Hosseini with SIG. Your line is open. Yes, thanks for taking my question. The first question I have is on DRAM. Can you elaborate on a margin profile difference between mobile and commodity? Yeah. Both are pretty good. Can you elaborate on that? What is the difference? Are they both at the same level? Are you able to get it's the kind of margin that the mobile requires given the die size difference? Yes, a good way to look at it is you can go back. And when we gave you a LPDA specific data in Q1 and can be. And to answer your question, PC is running just slightly behind that on a gross margin basis. Okay. Thank you. And then on the NAND side, you also elaborate on the mix of embedded NAND as overall NAND or as overall revenues? Well, the embedded business, kind of as you can see, you kind of get a sense on the embedded business relative, it's about proportional to what the embedded business is to our top line revenue. And then the NAND business kind of mirrors that with an embedded. And we're seeing, we're seeing erosion for that to grow in a few sure, but right where sits in that is proportional to our revenue. Okay. And then the one final question, it seems to me that the CapEx is pretty much back end loaded. Is that correct, Trung? A little bit. Yes. As I mentioned, we're we're still projected to be within our guidance range at $26,000,000 to $32,000,000. We'd round about $560,000,000 this quarter. But should we assume that you're going to hit the midpoint or more towards the low end given I'm not elaborating on the range yet. It's, that's the range we're giving you, 26 to 32. I'm not going to, I don't have a refinement on that at this point. Okay. Thanks so much. Our next question comes from the line of Alex Blummer with JMP Securities. Your line is open. Thanks for taking my question. Congratulations on the results. I was wondering if you could go beyond your guidance for your high single digits, down high single digits production estimate on NAND. I know that's a production estimate. Within considering sales, would you expect there to be a greater decline than what you're producing a lesser because of MLC to TLC or mix factors? Thank you. Alex, just let me make sure that the room understands your question. Are you asking for a little bit more detail on what we think the relationship between sales bits versus the production guide can be? Correct. Thank you. So Alex, this is Mark Adams. Basically consistent with messages of both at our Analyst Day and on prior calls, we're going to look at this kind of from a what's the best reach and on our capacity and the decisions we're making around inventory. We, we look at the market conditions right now and we see some pockets for stronger margins and stronger ASPs. And that's what we're trying to drive our product portfolio to do. Within a given quarter, we can have an impact on how much we sell and how much channel or to the spot market or if we ship them into SSDs. And so as we go through and look at the market that's really good drives our choices. So it's really not easy to sit here and correlate what that's going to look like. Now having said that, we look at the for those end product segments is very strong. And even in Q3, we think that, the actual system level products, client SSDs enterprise and some of the consumer markets are going to have a very strong quarter. Okay. And is that somewhat should we think about that mix benefit being something of a delta to add to the difference between what you're expecting from ASP declines and what you're expecting from cost declines Should we not think of that as a 1 to 1 correlation because of those mix factors you're talking about? Alex, this is Ron. I think that reason I gave you a view on sort of the trend of gross margin is we're trying to give you an overall perspective on the business. We have a lot of to move around quarter to quarter between products and customer mix and changes, but in general, we'll be down a couple of points on margin quarter to quarter on NAND. And that's the that's probably the most complete way to give it to you. We have variability. I mentioned terms of SSD flow. We're actually ramping SSDs in the quarter, and it's hard to call how much of that will move out in the quarter in your production versus sales question and how much, flows into the next quarter, but we're ramping and that's the important news. Okay. And real quick DDR4, you said you will be shipping in May. What end market going to be taking that both in May and then maybe in the second half as well? Mostly networking and server customers. Okay. Very good. Thanks so much. Congratulations. Thanks. Our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is Thanks very much for taking the question. On the last call, I know your team had talked about not wanting to optimize margins in the short term at the expenses in the long term margins when you were asked about thinking about your overall capacity between DRAM and NAND. I think you guys talked at that point about expecting NAND margins to catch back up to DRAM when you're discussing this. Now that the NAND margin per your guidance are a bit below where your DRM margins are for next quarter. Has the calculations changed at all in terms of thinking about the mix of your capacity between DRM and NAND? We don't want to try and react with too high frequency, to changes in the marketplace. When we make those kind of comments, we're really talking about long term decisions as opposed to short term opportunities. Having said that, we're always maintaining flexibility in our business, particularly relative to segments and with a lower frequency relative to technologies. I guess the only thing I'd add from an efficiency standpoint, we now have all of our Singapore operations essentially running our NAND and that gives us some real benefits in terms of operational efficiency and cost going forward. And that's also a strategic decision. Okay. That's helpful. And then I think you guys have talked about having some 3 d NAND samples out this year. Can you give us an update on how that's progressing? We have, very good progress. I think on our 3 d NAND technology, we're very excited. We've got functional components with very strong device characteristics and talking about things like Read Window budgets and tightness of programming levels better. So we're very, very excited about it. We've decided that we're not going to sample for now. We like our relative position and where we are relative to what we where we hear others might be. And so we're going to wait until we're a little closer to volume production before we necessarily expose ourselves by getting samples out there in the marketplace. Thank you very much and good luck. Thanks, Our next question comes from the line of Hans Mosesmann with Raymond James. Your line is open. Thanks. On that subject of 3 d NAND. What's the motivation for not sampling at the moment? You just don't want to show your open to Kimono, if you will, to the competition Yeah. Well, our focus is going to be to deliver system level, 3 d N products. And putting a bunch of non enabled components out in the marketplace right now for our competitors to see is of limited value. I think we want to wait until a little bit closer to where we have those system level solutions enabled. And then of course we'll be working closely with our more most valued customers to make sure they understand what's coming down the pipe and the value to deliver for them with it. Hey, can you share with us how many layers you have on your 3 d NAND approach? No, that's the kind of thing we're not wanting to share right Okay. And just one last one on three d just to, if you could provide kind of, like, industry dynamics in terms of the overall ramp of three d NAND, is it as expected, slower than expected? That'd be helpful. Thanks. I think it's about as we've been as we've been indicating for Micron, it's maybe slower than some of the early noise was. We still anticipate, we'll be in the marketplace late this year, but the impact of the marketplace is not really until the second half 15. And maybe with some folks, I think I've heard her talk a little later than that even now. Great. Thank you. Our next question is a follow-up from the line of John Pitzer with Credit Suisse. Your line is open. Hey guys, sorry if I missed this. I'm just wondering on the OpEx guide for the May quarter. Can you help me understand the increase on a down revenue quarter? Is this just pulling in of some projects or how do I think about the OpEx Well, John, this is Ron. The OpEx guide is generally in line with our run rate for the quarter. This this most recent quarter maybe up a little bit higher. And that's usually a function of wafer calls on the R and D side. We were 3.44 in Q2 and regarding $3.45 to $3.55. That's just typically wafer qual costs and that sort of thing that that's cycled differently each quarter. And in SG and A, we're right, we're right in there 177 was this quarter and we're guiding 170 to 180. And then, Mark, I think you said in the calendar fourth quarter, you'd expect to be shipping TLC. Is that into enterprise SSDs as well as talk a little bit about controller technology around TLC? Sure. My point earlier was that the initial applications for our 16 nanometer TLC components will be more consumer and retail oriented upfront To date, no one has had a lot of success, even on the client side, enabling TLC memory. There is a lot of work being done. And your question around controller development is a good one because I think that's where the error correction and capabilities around enabling TLC that might be reliable enough to ship in that segment. But we still think that's kind of a 2015 calendar year phenomena. We don't see that happening in large scale in calendar 14. Our next question comes from the line of Doug Freeman with R. Your line is open. Thanks for taking my question guys and congratulations on a strong quarter. Can you give me a sense of what your inventory plan might be for next quarter? Sure. This quarter, as you can see, our inventory was flat. And as we look at inventory and we've communicated this message and a good chance to do it again, we're looking at this business, from a returns perspective and not looking to hit some arbitrary inventory numbers in a given quarter. In the DRAM business, It's pretty tight right now. So really tight. Really tight. So we don't feel like we're in a position that, we're going to be holding back inventory. We've got customers from the to support them. And it's a pretty healthy market. The NAND business, as we talked about earlier, we're going to make choices around the customer relationships and the product opportunities, but we're going to temptation to hit again a predefined number in inventory. We're going to run the business to make money and we're going to run it through the right products and then that's kind of an ongoing process we're gonna do. So when I look forward, if you could, so far, you guys have been pretty good in the last couple of quarters about hitting your numbers. Have you reconsidered whether or how close are we to getting actual guidance going forward? Yes. Doug, it's a good question. And we've talked in the past, this is something we were constantly reviewing. I think we believe that's going to be appropriate at some point. We're not ready to do it just yet. And I guess my last question does appear you've talked about your qualifications that are necessary in NAND. I'm seeing some signs that there's definitely different qualities of NAND out in the market. Can you maybe talk about whether there's any concern on your part that the quality of your products that are in the market not be reflective of the quality that you can deliver in the future. And is that does that run the risk of having any potential of damaging your brand? Well, we tend to feel pretty strong about what we've delivered. This being a new category, customers over the last couple of years have been working with companies like Micron to make this world class quality level technology they can bring to both the desktop and to the enterprise. Having said that, we've invested a lot in quality, especially around the SSD place. And our NAND performance been actually counted from key enterprise customers as the highest performing NAND in the market. So as we look at our business, yes, we're learning a new category, but we feel pretty strong about our technology and our products. The areas we've invested the most, for example, PCIE, we've had the highest performance product in the market. From a reliability standpoint, we don't see that as a something that we're explaining anything about in the past. We think it's a pretty good quality opportunity for us to grow and to learn about system level solutions. And we think and I will be the stronger product development future. Great. If I could sneak one last one in on the DRAM front. In last quarter, you talked quite a bit about shipping and wafer format. I believe the demand for wafer format is dropping a little bit how do we think about the trade off of maybe bit growth for those wafers versus margin? How much of a delta is there? In wafer sales versus, component sales and what type of impact does that have on the big growth numbers? Sir, Doug, the margin on the known good dive that Mark mentioned is better, which is why we took advantage of over the last couple of quarters. We're going to ship I think you're right in characterizing that we'll probably ship fewer of those types of wafers which all of that wrapped in by the way because I'm getting some questions on some of the guidance we have adds to this mix effect on in terms of bit growth and cost downs. I think you characterized it right. The known good guy program is more profitable for us than packaged parts. And we have had a pretty strong market for about 6 months to ship more and more wafers into that. And I think now we're going to probably back off of that just a little bit. But as Mark and Mark both alluded to, we're actually shifting mix into customers that are drastically needed and are being short shipped today. So there's plenty of homes for where we mix DRAM. We'll continue to maximize margin with it. Great. Thanks for taking all my questions. Good, Doug. And I think we have time for one more. Our next question is a follow-up question is from Betsy Van Hiese with Wedbush Securities. Your line is open. Congratulations on the quarter and thanks so much for squeezing me in. You guys talked about how tight the DRAM supply is. And as you guys are looking forward and your competitor continues to bring production online and supply and demand come in more in balance, how are you guys looking at gigabyte content and PCs? Are we going to see an increase in that given that things have been so tight and they've been having a hard time getting any components? Yeah Betsy, for the first time, we're seeing 3rd party data that suggests about a 12% to 15% increase in content this year. The numbers would look something like last year's average of about 4.3 gigabytes going to about 4.9 this year. For you. You bet. Thank you. And thank you all. I'd like to thank you for participating on the call today. If you would please bear with me, I need to repeat the Safe Harbor protection language. During the course of this call, we may have made forward looking statements regarding the company and the industry. These particular forward looking statements and all other statements 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 ten Q and 10 K. Thank you. Thank you. This concludes today's Micron Technology Second Quarter 20 14 Financial Results Conference Call. You may now disconnect.