Earnings Call: Q3 2013

Jun 19, 2013

Good afternoon. My name is Diane, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technologies Third Quarter 2013 Financial Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. Thank you. It is now my pleasure to turn the floor over to your host, Kipp Better. Sir, you may begin your conference. Thank you. And I'd like to welcome everyone to Micron Technologies' 3rd quarter 2013 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 micron.com. If you have not had an opportunity to review the third quarter 2013 financial press release, again, it is available on our website at micron.com Our call will be approximately 60 minutes in length. There will be an audio replay of the call accessed by dialing 404 5373406 with a confirmation code of 918 62727. This replay will run through Wednesday, June 26, 2013 at 5:30 pm, mountain time. A webcast replay will be available on the company's website until June 2014. We encourage you to monitor our website at micron.com information on the company, including information on the various financial conferences that we will be attending. Please note the following Safe Harbor statement. During the course of this meeting, we may make projections or other forward looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to the documents the company files on a consolidated basis from time to time with the Securities And Exchange Commission, specifically the company's most recent Form 10 K and Form 10 Q. These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward looking statements. These certain factors can be found in the 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. I'll now turn the call over to Mr. Mark Turpin. Mark? Thanks, Kipp. I'd like to start today with an overview of the key developments during the quarter and a few strategic and industry updates. Then I'll turn it over to Ron for a financial summary. And before turning to Q And A, we'll close with Mark Adams covering more details of our business unit and operations performance and market conditions. Our 3rd fiscal quarter was highlighted by continued improvement in memory market fundamentals and Micron's financial position. The DRAM business had significant revenue and margin expansion in the personal systems segment, which achieved the highest revenue in almost 3 years. In NAND, we had another quarter of strong unit growth in the SSD segment and took advantage of improved market ASPs generally. We remain focused on making capital and segmentation decisions to optimize margin and free cash flow over time. As you have noticed in the release, revenue in the quarter was up about 12% with strong growth in both DRAM and NAND. Gross margins were also up significantly from 18% to 24% highlighted by DRAM, which was up over 16 percentage points for the quarter. Trade NAND margins improved by about 5 percentage points and still represent our highest margin product category, followed by DRAM than NOR. Operating cash flow of $624,000,000 exceeded our disciplined exceeded our disciplined and measured capital expenditures of $235,000,000. I previously mentioned that we were taking steps to enable some capacity fungibility between different memory technologies. We're moving forward with plans to convert a significant majority of our DRAM capacity in Singapore to NAND. We believe customer demand and margin opportunity in NAND over the next 12 months, coupled with a highly attenuated capital investment relative to greenfield capacity, make this a sound financial decision. A measured transition will likely occur over the course of the next year or so depending on market conditions as we continue to monitor the demand and margin profile of our various products and segments. The impact of this conversion will be included in the guidance we provide. During the quarter, we closed on the previously announced sale of our 200 millimeter image sensor fab in Avizano and took another step to streamline our operations through restructuring our R and D relationship with STMicro Integrate Italy, and also discontinued operations of our LED pilot line in Boise. We will continue to look for opportunities to improve our operational structure and performance including the wind down of some remaining 200 millimeter capacity as we migrate more products to 300 millimeter. We've made good progress towards closing the acquisition of Alpida and believe the principal hurdles to closing are mostly resolved. We've obtained regulatory clearances, bondholder challenges of the plan of reorganization in Japan have been denied and the waiting period for challenges to the recognition motion in the U. S. Bankruptcy court has expired. As a result, we're optimistic that closing will occur during our fiscal Q4. LPDA's financial performance has been strong in recent periods and continues to improve, reflecting a strengthening DRAM market as well as LPDA's strong mobile DRAM presence and operational improvements. During last quarter, Micron and LPDA entered into a joint development agreement that has enabled more seamless integration of our technology roadmaps, and we're encouraged by the early productivity of the cooperation. Following the close, our overall trade memory wafer capacity will increase by about 45% from today's level without impacting industry supply. This deal will provide significant revenue and margin leverage for Micron as we our position to benefit from low cost scale, enhanced product and customer breadth, and improved operational efficiency. We believe conditions remain positive for continued improvement in the memory industry. We're forecasting DRAM industry supply up in the mid-twenty percent range this year and low to mid-20s in calendar 2014. For NAND, we're forecasting supply up in the mid-thirty percent range this year followed by the low 40s in 2014. We believe this historically slowed supply growth coupled with memory demand growth in mobile and infrastructure related markets such smartphones, storage and servers creates a favorable balance. We're well positioned to capitalize and look forward to driving profitable growth in the coming quarters. I'll stop here and turn it over to Ron and Mark before turning for Q And A. Thanks, Mark. Our third quarter of fiscal 2013 ended on May 30, Our website has a schedule containing certain key results for the third quarter as well as guidance for the fourth quarter. That information is also presented on the following slides. For the third quarter, we reported net income of $43,000,000 or $0.04 per diluted share on net sales of $2,300,000,000 These results compared to the previous quarter's net loss of $286,000,000 or $0.28 per diluted share on net net sales of $2,100,000,000. The consolidated revenue growth and improved operating results reflect the significant improvement in the memory markets, particularly for DRAM product, The effect of this improvement can also be seen shown on the slide, which largely reflects our share of the net loss from Inotera with a 2 month lag. In their 2 most recent monthly reports, Inotera has reported positive net income, which will be reflected in the next quarter's results for Micro. Related to Mark's earlier comments on our continuing efforts to optimized our operational footprint. These actions have resulted in restructuring charges. This quarter, we separately presented those charges as a restructure and asset impairment expense on the face of the income statement. Expenses and asset impairment charges associated with restructure activities from prior quarters have been reclassified to present the operating results simplify the presentation of noteworthy items and those items that are not representative of the company's trended economic performance, we are presenting a schedule of net in for the affiliation do not include all their related income tax effects as the amounts are generally de minimis due to our net operating loss carry forward and our global tax structure. The restructure activities quarter associated with the estimated loss on the sale of our 200 millimeter imaging fabrication facility in Avazano, Italy to Elk Foundry. This traction this transaction closed in the third quarter. For the 1st 3 quarters of the fiscal year, the Imaging business reported approximately $60,000,000 of operating loss in our Micron results on sales of approximately $220,000,000. In addition to the restructure charge. Going forward, there'll be no future revenue or losses from sales of imaging Approximately $26,000,000 in the 3rd quarter for the loss on the transfer of certain assets approximately 500 employees in Agrata, Italy to ST microelectronics is also included in the schedule. And approximately $25,000,000 in the 3rd quarter to write down certain production assets used in the LED technology development, which was terminated in the 3rd quarter. Other recurring items presented in the reconciliation include the amortization of debt discount and other costs This adjustment which flows into interest expense on our financial statement is substantially comprised of the imputed interest to value the debt component of our convertible notes at fair value. This item will be ongoing as long as we have these convertible notes and discounted debt such as the LPDA installment payments. Foreign currency activity, including the impact from our hedging programs, is also included. The largest impact in this area is from the hedge of the LPDA Rex Chip acquisition, which has been heavily impacted by volatility in the yen exchange rates. Other items called out in the of our outstanding 2014 convertible notes and 2 favorable items in the tax provision resulting from the resolution of an uncertainty and tax rate change, both occurring outside the U. S. So adjusting for these items, non GAAP EPS improved from $0.06 loss in our GAAP results in the second quarter to an income of $0.15 per share in the 3rd quarter. As we have mentioned previously, we may undertake additional restructure activities and we continue to optimize our manufacturing and other operations. Let's turn now to operating results and outlook. Note that none of the guidance we are providing today includes any direct effect from the LPDA rexchip acquisition. DRAM revenue in the 3rd quarter increased 23% compared to the previous quarter as a result of a 16 increase in bit average selling prices and a 6% increase in bit sales. The increased selling prices for DRAM products was favorably affected by more in Oterra volume sold into higher value segments, along with general improvements in the market. DRAM bit cost decreased 5% quarter to quarter, driven primarily by the higher concentration of lower cost products from In Oterra. The cost of DRAM products purchased from MenoTera increased in the third quarter compared to the 2nd quarter, but was still slightly lower than the cost of the rest of the company's DRAM production on a per bit basis. So guidance for Q4 DRAM is as follows: Using quarter to date selling prices and projected product mix for the quarter, ASPs could would be up mid to high single digits compared to the Q3 average. Projected bid costs are expected to be flat relative to Q3, Projected production volume is up high single digits. Key themes influencing this guidance for DRAM are First 4 gig DDR3 volume continues to ramp in our system comprising over 1 half of the DRAM bit sales in the third quarter and increasing into the 4th quarter. This transition from 2 gigabit to 4 gigabit has the effect of lowering ASPs and costs with some margin improvement. We're seeing a somewhat higher percentage of our total bid production from in Oterra with improving product mix and costs that move directionally with prices. As a reminder, the cost of products purchased from Minotera is based on a moving average market minus model with a 1 month lag while we account for the change in as a result of higher output capacity there to NAND. This transition will continue through the next year or so based also on market conditions. Turning now to trade NAND, bit sales in the 3rd quarter increased 8% compared to the prior quarter, primarily as a result of a higher per bit average selling prices. We continue to see growth in SSD sales and we built some WIP inventory to support strong demand over the coming quarters. Trade NAND bit costs in the 3rd quarter were relatively flat compared to the 2nd quarter due to a higher SSD production and some costs related to the start of NAND production in the Singapore DRAM fab. Using quarter to date selling prices and the projected mix for the quarter, trading and ASPs would be down mid single digits. Bit costs are expected to be down high single digits, while bit production is expected to be up high Key trends affecting for Q4 guidance are we expect a higher density product mix in NAND lowering both the ASP and cost per gigabyte, while increasing volumes. We expect also to sell more NAND into SSDs, with greater capacity per We continue the migration to 20 nanometer process technology, resulting in lower costs and increasing bid output into both component discrete sales and SSDs. Nor sales were relatively flat comparing the third quarter to 2nd quarter, in line with our prior guidance. Nora revenue, which has been fairly stable over the past few quarters, is expected to decrease by about a third in fourth quarter, as the wireless business accelerates its transition to more NAND based solutions With positive net income, approximately 23,000,000 shares to the denominator in the EPS calculation for the and employee stock options is determined using the treasury stock method. The amount of dilution will vary primarily based on the average traded share price for the period. For example, 23,000,000 shares being added to the denominator of our diluted shares. Has the share price been $14 average for this last quarter approximately 105,000,000 shares would have been added to the denominator. SG and A expense in the third quarter was just below our guided range. We expect SG and A expense in the 4th quarter to be between $135,000,000 $145,000,000. R and D expense was $226,000,000 in the 3rd quarter is expected to be between $230,000,000 $240,000,000 in the fourth quarter. There was no DRAM development cost sharing with non GAAP in the third quarter as the joint development program with non GAAP was discontinued earlier in the year. The level of R and D expense in any given quarter and vary based on the timing of product qualifications and the volume of development wafers processed. The company generated $624,000,000 in cash flow from operating activities in the 3rd quarter, as Mark mentioned, reflecting improvement in the operating results compared to the prior quarter. The 3rd quarter ended with cash and investments including non current investments of just over $2,900,000,000. As Mark summarized, expenditures for property, plant and equipment in the third quarter were $235,000,000, and we expect expenditures for the fourth quarter to be between $300,000,000 $500,000,000 which will result in fiscal 2013 total spending below the low end of our guided range for the year. We are deferring some capital spending in the second half of our fiscal year as we anticipate changes from the LPDA transaction We expect a pickup to spending in 2014 as we integrate the 2 companies. As previously indicated, we expect capital intensity of the combined company Cash flow from investing activities in the 3rd quarter includes the cash payments on currency hedges of approximately $200,000,000 which includes settlement of the previous hedges associated with the LP direct ship acquisition. Similar to the discussion in our conference call last quarter, At an exchange rate of per U. S. Dollar, the U. S. Dollar equivalent price for the LPDA acquisition, including the installment payment to creditors would be approximately $400,000,000 lower relative to the price when we signed the sponsor agreement last summer. In addition at the expiration of the initial hedges earlier in third quarter, we into a series of new hedging transactions to mitigate the effect of currency 1,000,000,000 yen due at closing, plus the first $20,000,000,000 installment payment to the creditors in the reorganization process due in December 2014. The total hedging cost for this structure is capped at approximately $30,000,000, of which approximately $24,000,000 was accrued in the 3rd quarter. Post closing, we currently plan to implement a natural hedging strategy to offset the foreign exchange exposure on the longer dated installment debt by utilizing yen denominated assets such as cash. In May of this year, on, you made an additional investment in Oterra, which reduced our ownership from approximately 40% to approximately 35%. Because the price of the shares sold to Nanya was above our carrying value per share, Micron will recognize a non operating non cash gain of approximately $49,000,000 as a result of the transaction With the 2 month lag in equity accounting for in Oterra, this gain will be recognized in operating results in our 4th quarter. And with that, I will turn it over to Mark Adams for his comments. Thanks, Robin. I'm going to provide some more detail on our third quarter operating performance as well as share some comments about Our NAND Solutions group recorded revenue of $730,000,000, up 2% when compared to our 2nd quarter Total trade NAND gross margins were up 5 percentage points quarter over quarter, reflecting improved ASPs and stronger penetration into enterprise Ds. Our branded FSD business was $178,000,000 in Q3, an 11% quarter over quarter increase. When you combine sales of our Micron branded SSD drives with Flash Memory, we shipped to our strategic third party SSD customers. Shipments to the SSD segment represented over 60% of our trade NAND capacity. We continue to migrate the SSD product family to our 20 nanometer flash memory technology with the announcement of our M500 currently targeted at client and web 2.0 applications. In addition, we launched the industry's 1st MLC based PCIE Accelerator Drive with the Micron P40 for 20 M initially targeted at database applications. We have hit bit crossover on our 20 nanometer process technology. 20 nanometer Production will continue to expand over the next couple of quarters. We plan to commence the ramp of our 16 nanometer technology early in calendar year 2014 and anticipate a faster ramp that occurred at the 20 nanometer node given solid SSD and other socket enablement. In addition, we are pleased with our progress on 3 d NAND development and we remain focused on driving support for higher end storage applications. From a pricing perspective, as We will see a lower ASP per gigabyte due to density growth per unit and lower costs associated with the technology. The effect is a slight downward movement on ASPs offset by improved costs, with a net positive benefit to our gross margin. Due to this mix effect, our quarter to date mix adjusted trade in ASPs are forecasted down mid single digits based on quarter to date pricing, with expected continued improvement in margins. In short, we remain optimistic for a strong second half of the calendar 2013 for Flash memory. Sales for our DRAM Solutions group came in at $924,000,000, up 23% quarter over quarter The increase in sales were driven by a 16% increase in overall DRAM pricing, coupled with a 6% increase in DRAM shipments when compared to Q2. Our overall DRAM gross margins came in just above the 24% corporate average, up over 16% from our 2nd quarter, We achieved outstanding results in all of our premium DRAM segments with a non PC business representing about half of our gigabit shipments. Our server business recorded record shipments with a total sales of over 260,000,000 gigabit equivalents driven by increased entities for both revenue and bit shipments. DRAM bit shipments and networking were up 19% compared to our 2nd quarter and now represents 16% of our DRAM revenue. We had another strong quarter and made progress to expand beyond the large OEM business to smaller customers and distributors in the sale of our networking portfolio. Sales of our networking products through distribution are up 139% year over year. We also had a strong quarter in our Consumer Graphics segment, which continues to be an attractive premium market, in particular, looking forward with the upcoming launch of next generation gaming consoles. DVR3 volume represented 75 percent of our overall DRAM production as DDR2 is addressing more of a legacy market requirement. We are optimistic we will begin the calendar year 2013. We are getting positive market feedback from Micron's DDR4 samples at our key OEM customers. RL DRAM continues to be a to gain momentum and we had strong design in activity with enablers and OEMs for Hybrid Memory Cube. From a market standpoint, U. S. Carrier CapEx for LTE, deployment is strong, and data center networking remains a bright spot for investment by key OEMs. DRAM pricing continues to be favorable. We have seen good progress in narrowing the gap between spot market sales and our OEM customers who negotiate contract pricing. As we mentioned on the last call, the PC segment is a lower percentage of our DRAM business at about 40% of revenue, Our specialty business typically lags in market in terms of price movement in either direction and thus had a limiting effect on our combined DRAM pricing. As such, the current spot market price increase in pricing, while still positive, have less of an impact on our overall DRAM ASCs. Channel inventory stayed tight throughout the quarter. We currently are on allocation on a number of DRAM products and have not seen any signs of a letdown in demand heading into the summer months. The DRAM supply and demand remained a favorable balance and we think the situation will remain for the 2nd half of calendar year 2013. Sales by the Wireless Solutions group were up roughly 30% quarter over quarter as we saw increased demand supply for mobile DRAM and NAND products remained tight due to strong demand for tablets and smartphones. Our low power DDR-three sixteen gigabit product is in the design phase at the top smartphone manufacturers. Our NAND based MGPs have gained strong traction in the overall market, with growing share in the China smartphone market. Our portfolio of eMMC and EMCP products is expanding with strong presence across all of our customer base. From a market perspective, we saw improved pricing trends in the Tier 2 China market and then expanding to our larger OEM customers. As I've mentioned on prior calls, we are in the turnaround mode in our wireless business that are making progress as we reduced our operating losses by about $25,000,000 when compared to Q2. We are very excited about the future combined mobile offering of the combined Micron alpido wireless group and continue to receive strong support from top mobile customers. Our embedded solutions group had another record revenue quarter eclipsing the $300,000,000 mark. The embedded business maintained strong gross margins in Q3, We continue to invest in growing our presence within this category. ESG's Automotive segment increased market share highlighted by our automotive EMMC product portfolio and setting a record shipment to automotive in the quarter. We are seeing a rapid transition from NOR to low density NAND in the embedded market. In fact, our embedded NAND business roughly doubled quarter over quarter from Q2 to Q3. Despite this, we keep pockets of solid NOR margins and are on track for qualification of our 300 millimeter 40 5 nanometer NOR technology in early calendar 2014. Overall, demand for ESG products is increasing, and we are optimistic for a strong Q4. Our Q4 results reflected improving memory market and good execution in key operating areas. We continue to manage our S. Line is reflected by our SG and A and R and D staying in alignment with last quarter spending and our guidance for Q3. We continue to drive inventory inventory turn performance down. Inventory stays flat despite higher cost of goods in the quarter. We successfully concluded the sale of our Amazon imaging fab and are continuing to explore ways to optimize our manufacturing footprint to apply to align with future capacity needs. Despite the current market conditions improving, we have managed also to reduce our overall headcount by 7% compared to 2nd quarter. As we look to invest in high value differentiated memory solutions, we also remain committed to driving maximum efficiency in our operations. Our management team has been working diligently on integration plans with Alpida. The teams that worked well together we are excited about the opportunity for the consolidated business going forward. After the close of our LPDA transaction, we will have increased our trade memory capacity over 90% compared to early last year, all with existing industry capacity. Our customers are supportive and encouraged about the prospects of a scaled micron with Alpida and are seeking a new level of strategic alignment for advanced memory solutions. Micron's customers understand memory is evolving to new applications and form factors Moving to a more solutions orientation. We are measured in our approach to capital spending as we transition technology nodes over the next 12 to 18 months The market for both DRAM and NAND remains in good balance, and we are optimistic for a strong Q4. With that, I will hand it back over to Kipp. Thanks, Mark. We will now take questions from callers. And just a reminder, if you are using a speaker phone, please pick up the handset when answering the questions so we can hear you clearly. With that, please open up the phone line. Thank Our first question comes from Glenn Young from Citi. Just a question about, the opportunities, demand opportunity from gaming. We've seen those game consoles go from quite a low amount of gear quite a high number now. To what extent do you think this is a meaningful demand driver for DRAM in the next few quarters? I think it's Lenis and Mark Adams. I think it's all pretty positive for us. When we look at the gaming sector and compare it to other other segments, it's still a pretty positive segment for us. Looking at the densities kind of on average about 8 gigabytes It's all pretty favorable. And of course, going to the holiday season, we're pretty excited. Can I ask you another question about cost then? Just thinking about in Ontario, I recognize in Ontario costs are below yours. And over time, it's a bit of a drag on the net cost down of the two companies. But is there a point at which the costs come together? And at that point, do we then kind of revert back to more normal cost declines in DRAM? Glenn, this is Mark Durkin. It's not likely to happen in the short term and that's primarily because there's a pretty significant difference in the mix that runs at Innovara today versus the mix that runs other places So you look at a micron DRAM today, it's there's a lot of networking, server, consumer, gaming products that aren't necessarily found in Ontario that typically drive pretty good ASPs, but also maybe not advancing to the leading its notice quickly. So, but we're not particularly concerned that the cost profiles don't marry up The other thing to keep in mind, obviously, is that going forward, Elterra costs to Micron are going to track, with the end markets and those are going to move over time. As we bring LPDA into the fold, we will have wholly owned DRAM capacity. There'll be it'll be much more leading edge and cost efficient to service some of those more high volume markets. Perfect. Thanks very much. Thank you. Our next question comes from Joe Moore from Morgan Stanley. You said that NAND was the most profitable category, but it doesn't look like it that far apart. If you look at DSD being a little higher than NSG, and I know that doesn't map exactly to the chips. But they're pretty close and now you've got DRM prices going up and NAND going down. So going forward, how do you think about the relative profitability of the 2? And how do you think about moving capacity over to NAND? Is it possible that DRAM would be more profitable? I think the clarification I'd like to make is that the pricing trend you identified in NAND, I should clarify is really driven by a shift in a mix from SLC and MLC and some other applications. Now we think it's gross margin positive and we think the relative profitability is about the same. And let me jump in here. The we're not going to be moving capacity around on a high frequency basis. The changes we're making are over the long haul. And as we look at the market going forward for NAND, there's just insatiable demand. It looks like there's pretty strong demand growth out there into the future. And, that's why we're making the adjustments. Okay. Great. Thank you. And then at the beginning of the quarter, you had talked about NAND bits being, up sequentially and they ended up flat and pricing being down and then quite a bit higher. What was the change over the course of the quarter? Versus when you give content now? Sure. Ron had mentioned in his comments that, the nature of the SSD business We'll provide some variance in terms of inventory levels and how we stage products for our strategic customers around SSTs. And when you get to category that, as I mentioned in my comments, are up around 60% of our trade and land capacity. That will have a effect on the timing of the shipment Great. Thank you very much. Thank you. Our next question comes from James Schneider from Goldman Sachs. Good afternoon. Thanks for taking my question. I was wondering if you could talk about the DRAM capacity situation for a second. Many of your competitors have talked about transitioning from PC DRAM to mobile. I was wondering if you still see that continuing in the industry at large for the foreseeable future or if you see that reaching equally to be at some point soon? Well, we still are pretty positive on that trend. James is Mark Adams again. We still are pretty proud of the demand watching it. But at this point, we don't see a shift away from that trend. Okay, fair enough. And then just as a follow-up then on the NAND side in terms of capacity, there's been quite a bit of controversy about how much capacity is going to get added this year on the NAND side. Can you maybe give us your feeling about roughly your estimate of how many wafer starts to get added in NAND by the end of 2013? Well, I think we all kind of read the same thing in the press and hear from similar things from various suppliers that are out there talking these numbers. So I can't tell you that I have better insight than that, but I think some of the numbers that have been previously reported were potentially jumping the gun on what Micron might do. So, you should factor that into any thinking you have as to what's happening with NAND supply. And obviously, as I've just told you, we're going to watch what's going on in the marketplace and meter that in a measured way given supply and demand. So I don't I don't I'm not aware of any big new fabs coming in the Nandarina other than the one that Samsung actually has under construction in Xion and I wouldn't anticipate that having a significant impact on the marketplace in 2014. That's very helpful. Thanks so much. Thank you. Our next question comes from Vijay Rakesh from Stornacki. Hi guys. On your gross margins, it looks like it came up pretty nicely on the quarter. Just looking out, you know, given the improving profitability on DRAM and Historically, you guys have hit 30% back in the 2010 timeframe. How do you see that going out? Hey, BJ, as you know, from following us for a long time, we just stay away to steadfastly from trying to predict gross margins. We're going to let you guys do that Would you like to ask a follow-up question, or should we move on? Oh, on Innovatera, I was wondering, It looks like you guys, that's hitting profitability in the last 2 months. How do you see that contribution going forward? Vijay, this is Ron. If you look at the Innovator structures, I mentioned in my comments, we are on an ASP minus arrangement structure, and it's a moving average formula. So as Mark already commented, there'll be a tendency for for the cost to move with the market pricing, what it gives us is stability of a major segment of our DRAM capacity with with pretty good margin structure, but you're not you're going to see the costs move with the price moves in the market. The ASP moves in the market in general. Got it. Thanks. Thank you. Our next question comes from Mark Newman from Sanford Bernstein. Hi, thanks a lot. So could you give a brief update on your on the technology side? You mentioned the EDNAND progress was pretty good. If you've got any further update on that. And I'd like to understand a little bit more about on the NAND side, what what you're doing in terms of or what you have in terms of controller and system expertise. And you mentioned that quite a few of your you're selling your SSD sales were up quite a bit. I think you said 11% increase to 1,000,000. I'd like to get a sense of your controller expertise and how that's helping you, and how you're kind of working on that. To improve it. Thanks. Okay. So this is Mark Durkin. Let me jump in on the technology question first and I'll let Mark address the controller firmware software capability piece of that question. So from a non volatile, advanced, memory perspective. We feel like we're very, very well positioned relative to those we compete against, not only in the NAND arena, but also in some of the emerging memory spaces. So let me address NAND first. Mark commented earlier in the call on the 16 nanometer rollout there's been a lot of different terminologies out there about 2x, 2y, 1x, 1y. I don't know how that maps to somebody else's nomenclature. But I don't think there's anybody else out there with 16 nanometer, a half pitch product. And I'm pretty confident that that's going to be the smallest cell size NAND in the marketplace here over the next couple of quarters. So, feel pretty good about how we're positioned on playing NAND. Moving to 3 d NAND, we're very happy with the progress we're making on our 3 d NAND programs. We believe everyone's taken a slightly different approach And obviously, we like our approach the best. But we don't have complete visibility into what everyone else is doing. I would say that you're going to see samples in the marketplace from a number of different competitors over the next few quarters. But you're not going to see any significant production occurring until the second half of twenty fourteen. You really won't see anything that has any impact on the marketplace probably until the 2015 timeframe. I'm not saying that, because I think I'm behind anybody else. I'm just trying to give you a sense of what the impact on the marketplace might be. Relative to some of the other emerging technologies that are out there, whether they're, storage class memories or pure NAND replacements, etcetera. We've got a number of different programs going with a number of different partners as well as some purely internal ones. And We really like the way we positioned our company in terms of being able to work on anything that we think is fruitful and do it in a cost effective way as possible with the partnerships we've created. So if you're thinking about who's going to be positioned for any memory technology transitions that are coming down the pipe, we feel very good about how we position the company. Mark, you want to talk about controls? Sure. I think I mentioned I've mentioned in the past couple of calls. Our strategy on controller development around SSDs and around NAND solutions in general has kind of philosophical. We've been we're going to partner externally for entry level client type devices, consumer devices. And for some of the higher value add differentiated products, We're going to invest in our own controller development. And that's pretty much played out, at least to date. For example, I reference a PCIe Accelerator drive earlier in my comments. And that's a controller that Micron developed in house with their own controller team as well as firmware organization. Over the long run, I think you'll see us add to those efforts and teams as we see more opportunities for differentiated solutions on the high end of the storage market. In addition to that, we see pretty good value and doing so more on firmware and on the MNC solution for both the embedded and mobile market. But again, the way to think about it is kind of your differentiated higher end value add solutions we're going to try to do in house with our controller and firmware teams. And on the entry level solutions, be more along the lines of a third party partnerships, maybe with their controller in our firmware or totally outsourced. Thank you. Our next question comes from John Vincent from Credit Suisse. Good afternoon, guys. Let me ask the question. Apologies if I missed this, do you guys talk about industry supply growth expected over the next 12 months and your ability to grow that given the LPDA acquisition? Sure, John. We're looking at DRAM in the low to mid-twenty range for this year and then low-twenty range for 2014. As you pointed out with the Opita acquisition, we'll probably be above that. On the NAND side, we're looking at mid-30s for this year and probably low 40s for next year. Again, we'll probably be slightly ahead depending on the pace at which Mark decides to move the tech fab. And then maybe a question from Mark Durkin. Mark, given that when you look at the DRAM side of the equation for the first time and perhaps over a decade, we seem to have some pretty good demand drivers out there, whether it's the gaming console in the back half of the year or the fact that as you move to multi core chips and handsets, you're just seeing DRAM density go up. At what point would it make sense to actually grow that DRAM asset base more quickly just given how strong the demand signals are? And what would you need to see to really take a meaningful step up in your capital spending at those kind of decisions, it's a multiyear investment payback decision, right? So we have to be sure The we don't see any significant oversupply being created as a result of that activity in the horizon over which we're going to recoup the capital expenditure. So going to be pretty careful about adding additional DRAM capacity as opposed to optimizing the existing capacity we have. Now we've talked about fungibility between the various types of capacity. And and these transitions we're making currently moving from DRAM to NAND are reversible. We typically choose to do that as we transition a technology node. That's the most cost effective time to do it. So we could see some of that actually reverse at some point future, if necessary. We also do have some cleanroom space available so we can probably react a little bit more quickly than some of our competitors. If we decided we wanted to move in that direction, but we don't have any plans at all to do that. We're going to have a little bit of digestion here with LPIDA and optimizing that operation. And we're going to also be pretty focused on realigning our balance sheet where we'd like it to be for the long haul. And then taking obviously a pretty close look that capital spending before we engage in any. And then Mark, maybe if I could sneak one in just on that balance sheet. Given that the model is now generating significant free cash flow and you're starting to see some dilution from the converse. I'm just kind of curious as how we should think about fixing the balance sheet over what time frame? What kind of looks interesting? And is there anything you can do to help keep the share count down? Well, yeah, let me hit that at a high level and then maybe Ron's got a few additional comments. Obviously, we've done a little bit of, convert repurchase here. Over the last few quarters. And we'll have more appetite to do that obviously as we deleverage the balance sheet have available cash to do so. We'll have to trade that off against the other options of how we return value for the shareholders. But but that's something we'll be looking at. Ron? Sure. On the shared count side, John, we've got In terms of our convertible debt instruments, we've actually targeted those to be light as possible on the equity a lot of them created to be pretty debt like, but yet still leverage the volatility of our stock in the pricing of the instrument So, we're using the treasury stock method on all of our dilution calculations and basically that slows the rate of dilution and that's why I gave you an example of how it'll actually work because you flow that through the divisor on the on the EPS calculation. And going forward, obviously, we have, we've been careful and continue to be careful about equity position. But the dilution effects will play through stock prices, but may I just give you a quick formula so you get an idea how it works and we can certainly give you more information offline if you want. If you take the average share price of the stock in our strike prices tend to be in the 8, 9 kind of range on pricing on the stock. You think that average price minus the strike price divided by the average market price you get a percentage multiply it times your share count on that instrument that gives you the dilution effect. So it's a muted dilution effect unless you get really high up in the stock price. And that's how that works and why we constructed them that way. In addition, we also had an exercise cap calls on virtually every one of our instruments And we've got several $100,000,000, for example, at a $14 strike price that will come in the benefit of cap calls raising that strike price up. That's an economic benefit, but obviously it could accrue to us in cash and we could repurchase shares or whatever mathematically we get the economic benefit and we decide what we want to do with it. So we've done cap calls as well as the that treasury stock method to make it minimized. Helpful, Ron. Thank you. Thank you. Our next question comes from Monika Garg from Pacific West Securities. Hi, thanks for taking my question. First question is I'm trying to understand, I'm comparing the NAND cost declines in 2012, quarterly over 2013. So in 2012, you had a very nice NAND cost declines. In Q1, twenty twelve, it's minus 16 then minus 18 in Q2. Minus 49% in Q3. But if I compare that with 2013, Q1 was cost was up 2%. The 2nd quarter was minus 5 third quarries again, plus 1. So, you know, we understand that the benefits of shrinks is declining But just trying to understand what else could be the reason. Yeah. Monica, a big variable in all this obviously is mix. There's There's a there's lots of flavors in NAND, there's SLC NAND, MLC NAND, TLC NAND. And And that pendulum has kind of swung a couple of times as we've moved through different technology node generations and different applications of Ananda is going into. So if you go In the timeframe you were alluding to, there was a fairly significant swing into the MLC and even at Micron, some relatively small amount of TLC which drives a significant bit cost reduction. As we've moved through more recent quarters, we've actually seen slowdown in some of the technology transitions driven by more highly reliable and non changing bits going into high reliability SSDs, as well as the 20 nanometer conversion that I alluded to earlier, Mark alluded to actually driving potentially higher ramp costs initially as that went in and then going a little bit slower. At the 20 nanometer node than it did at the 34 nanometer node. So a lot of different things to play into that. But generally speaking, we feel like we're doing what we need to do in the NAND business. Yes. Then the last question is on the mobile DM side. So we have seen PCGM pricing significantly up quarter over quarter. Could you talk about the trends in the mobile DRAM pricing, especially given some publicly available data shows that in Q2, mobile DRAM pricing was actually down quarter over quarter? Yes. I'll let Mark address the specifics of more recent moves in the marketplace. But what I would say relative to PC and mobile DRAM pricing dynamic is that obviously, there was a pretty significant, price advantage for mobile DRAM. Earlier in the year. And as more fits have converted from PC DRAM to mobile DRAM to meet that rapidly growing demand, seen PC DRAM start to catch up. Eventually, these things are likely if the market's efficient, for us to equilibrate at an ASP that's about different about equivalent to the difference in cost so that gross margins are neutralized between the two. And that's probably where it'll oscillate around here over the next couple of quarters as demand and supply people consuming the bits and people producing the bits work out that equilibrium. I'd also say that's a that's sort of the process we went through on the NAND But the discussion we just had, as we think about SLC, MLC TLC 20 nanometer, 34 nanometer, what we're doing is we're optimizing gross margin. And whether it's mobile to PC DRAM or, MLC to SLC to 20 nanometer or 34 nanometer or 25 nanometer. We're just optimizing gross margin, based on customer demand. Thank you. Our next question comes from Hans Mosman from Raymond James. Hi, this is Brian Just a quick question on the man side. You indicated that gross margins were up 5 points sequentially, but looking at the operating margins, they were actually down. And I know that consolidated OpEx numbers were in line to a little bit lower than you were expecting. So could you just give some color on the disconnect there? Yeah. I think the difference is that NAND goes into a number of different business units at Micron. So the numbers you're referring to are NSG numbers, but obviously there's, there's, NAND that goes into ESG that in many cases carries a pretty significant premium. There's also NAND going into mobile products and MCPs and sometimes it's tough to even figure out exactly what the gross margin is in those products that can be either higher or lower. So it's a BU effect versus a NAND technology effect. Okay. And just lastly, on the supply side for NAND, I thought that the previous forecast was kind of in the mid-30s and it looks like you're talking about low 40s now. So just to clarify, is that a little bit of an increase in what's driving that there? Actually, we I gave you both years. For 2013, we now think it's a little bit lower than our last call. So we're now in the mid-30s with the rest of the market and it's for 2014. We're looking at low forty And our next question comes from Doug Friedman from RBC Capital Markets. Thanks for taking my question, guys. If you could talk a little bit about you just mentioned you're looking at moving DRAM to NAND And what can we expect that to have an impact on your bit output growth and in which quarter should we expect that? It's all included, Doug, in the guides that we give you. And we if you go back to the last quarter conference call, we did mention we were starting prep the fab. So it would have an impact of lowering our DRAM bit growth in Q3, but it's in our guide as we give it to you. So the transition will be completed by the end of the fourth quarter that you've just guided? No, not at all. Nope. Over probably the next four quarters or so. If with adjustments for market. Okay. I guess what I'm trying to get at is the transition. I imagine it has some sort of a negative impact on your total potential production output. What type of a handicap are you operating under as you migrate DRAM to NAND? Oh, it's it's that piece is pretty transitional And you've seen some of the impact, as Ron alluded to earlier on, had an impact on both Poly DRAM and NAND costs in the quarter, but just finished. That'll probably continue for another quarter. And then we'll be through the overall manufacturing input pack, but the actual transition will occur around 4 quarter periods and whatnot. So the reason there, Doug, is you got to create some space to get the tools in. And then once you reach sort of an equilibrium, you're not suffering any more downside. Okay. In the past, we did get some a filing when you did some of your debt restructuring with some numbers around LPDA. Can you give us an update on their financial performance? Doug, this is Ron. Mark already made a comment in his script about, LP to strength of performance and moving in line with the DRAM business. We don't have information at this time that's available to update beyond what he already said. All right. If I could then, just to follow-up on the inventory. You made a comment that your NAND inventory was up in the SSD segment, but yet your overall inventory as the company was only up $11,000,000. Does that mean that DRAM was actually down to offset the NAND that you built? The comments I made was just around some SSD and the WIP pipeline. And obviously, there's a whole lot of moving parts in the broad mix of our portfolio. So I wouldn't draw that collusion between DRAM and NAND. It's just moving parts in total. We are continuing to manage cycle times in our inventory and try to improve all of those activities quarter by quarter. So some of that effect helps as well. And I guess I'll leave you alone after one last one, if you could. What is, what are you seeing the inventory in the marketplace given the fact that pricing has been rising in both NAND and DRAM, can you give us an update on what you're seeing in the marketplace inventories? Thank you. Yes, sure, Doug, this is Mark Adams. Overall inventory looks pretty tight right now on both NAND and DRAM. We Sometimes when we head into the summer, you see a bit of a lull on the buying behavior of our customers, quite honestly, at this point, in our quarter, we have not seen that. And the demand signal seemed pretty, pretty strong. There's rumors about accumulation and all that stuff, but we have not felt that at this point. Great. Thank you so much. Our next question is from Ryan Goodman from CLSA. Hi, thanks for taking my question. I'm wondering if your peers recently discussed how some of the remaining, empty clean room space was gonna have to end up being used up to enable the 1 wide transitions in NAND. I was curious if you're seeing a similar dynamic to that and how we should be thinking about, like in this in I MFS, how much open clean room space there is? And how much of that you will have to use to hit the 16 nanometers? Yes. Well, 16 nanometers for us is a very easy capital and equipment transition, because that's a planar node to a planar node. And you'll recall that we made the transition to a different kind of planer, but a planer NAND cell when we move to 20 nanometer. So if you look at Micron's 20 nanometer, storage element, it's very different than the other folks. It's a high K dielectric and the cell itself is cleaner. So that technology extends for us and it's a relatively easy transition So don't think in terms of big cleaning requirements for us to move to 16 nanometer. Now what what you what is true for all of us, I think or likely to be true for all of us is moving to 3 d is going to contain is going to consume significant amount of incremental a clean room capacity to maintain the same wafer output. But the productivity of that transition is very, very high. So it makes sense to go ahead and do that. Now relative to that question, for Micron in our fab in Singapore, our wholly owned NAND Fab in Singapore. We have a lot of cleanroom space there and we can get well down a transition to three d NAND without having to add any incremental, the cleanroom space. Okay, great. And then just different area. High mix and Rambus recently came out with a settlement announcement. So I think it's down to just you as the remaining participant in litigation with Rambus, is there any update on there in terms of timing or expectations or anything you can help us with there? There's an appeal that's on file now that I believe is heard again in about a year. And with that, we would like to thank everyone for participating on the call today. If you will please bear with me, I need to repeat the safe harbor protection language During the course of this have been made on For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC, including the company's most recent 10 Q and 10 Ks. Thank you for joining us. Thank you. This concludes today's in Micron Technology Third Quarter 2013 Financial Release Conference Call. You may all disconnect.