Earnings Call: Q1 2013

Dec 20, 2012

Good afternoon. My name is Sean, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Micron Technologies First 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, Kip Bedar. Sir, you may begin your conference. Thank you very much, and welcome everyone to Micron Technologies first quarter 2013 financial release conference call. On the call today, of course, 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 first quarter 2013 financial press release, It is also available again on our website at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of the call You may access that by dialing 4045373406 with a confirmation code of 79 770-three 23. This replay will run through Thursday, December 27, 2010, at 5:30 pm Mountain Time. A webcast replay will be available on the company's website until December 2013. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will be attending. During the course of this 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. Can be found in the Investor Relations section of Micron's website. Although we believe that the expectations reflected in the forward looking statements are reasonable, We cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward looking statements after the date of the presentation to conform these statements to actual results. And now I'll turn the call over to Mr. Mark Turke and Mark. Thanks, Kim. Like to start today with an overview of the key developments during discussing key developments in our business unit and operations as well as an update on market conditions. Our 1st fiscal quarter was somewhat a tumultuous one as we dealt with shifting market demand and internal operations disruptions. Mark will discuss some of the market shifts in more detail later, but at a high level, we continue to see significant growth and opportunity in the supporting mobile platforms and embedded applications, including, of course, SSDs in a more muted environment in personal systems. Our sales volume for both NAND and DRAM was below our initial forecast for the quarter as we experienced the manufacturing and supply chain challenges. We are confident these issues have been addressed and will not negatively impact fiscal Q2. Revenue for the quarter was down about 7% as a result of a 9% decline in DRAM sales and a 4% decline in NAND. Despite generally declining ASPs, Gross margins were up slightly quarter over quarter with improvements in NAND and NOR partially offset by reductions in DRAM. NAND mark sorry, NAND market prices were up early in the period and trended downwards towards the end of the quarter, although recently prices seemed to have stabilized. You may recall that our estimated quarter to date ASP, including the forecasted mix for the quarter, was down mid teens as a result of our last earnings call as of our last earnings call. Prices did stabilize and in some cases improved later in the quarter, and this trend has continued into the current quarter It will continue to be important to contemplate the effects of Micron's specific product mix as it relates to Micron's ASPs as we move through the year. During the quarter, we continued our efforts to streamline or our ability to deliver leading edge innovative memory solutions. To this end, we have discontinued most activity under our solid state lighting program, and are moving this program toward a technology licensing model. We continue to look at ways to streamline all our manufacturing operations, including our 8 inches front end capacity and our back end operations, particularly as necessary to accommodate any future front end capacity. As we mentioned at our fall Analyst Day, We remain in discussions with our partners in Taiwan regarding changes to our agreements, including those related to inotero supply and our joint development relationship. Although there's no assurance when or if a deal will happen, we don't currently believe the outcome will significantly impact our Q2 guidance for bit growth estimated quarter to date ASP, which includes forecasted mix for the quarter, or R and D spending. Until we finalize terms of any changes to our agreements, I'm not able to add any further details to any potential impact any new agreements may have in the future beyond those statements relative to our fiscal Q2. We are making and we'll continue to make the strategic choices to align our business strategy and operating model to deliver an optimum value and return for our shareholders through efficient manufacturing and value added memory solutions. Relative to the LPDA acquisition, the Tokyo District Court has submitted Micron's proposed reorganization plan to the LPDA creditors and they expect to complete the voting phase by the end of February. In addition, we have entered phase 1 review in China and continue to work towards government approval of all the required countries. We expect to close sometime in the first half of twenty thirteen. In terms of the memory market, we're cautious in the short term, but optimistic about the evolving industry supplydemand balance. The industry DRAM supply outlook continues to be favorable. We don't see any substantial new wafer capacity coming to the market and the latest process process technology transitions are simply going to take longer compared to previous generations. The other key variable on DRAM supply is industry capacity shifting away from PC to higher growth categories, including mobile and server. This shift results in fewer bits produced in aggregate and should eventually result in a more favorable supply demand balance in PCGM as well. The outlook is also encouraging on the NAND front, don't see any significant capacity additions to the market in 2013. And as with DRAM, process technology migrations are getting stretched out which is which has the effect of reducing supply growth compared to prior years, while demand growth remains robust driven by SSDs, smartphones and tablet Our technology development and product portfolio is targeting these key segments as we head into 2013 and we are confident about our position in the market. I'll stop here and turn it over to Ron and Mark before returning for Q And A. Thanks, Mark. While we're rapidly approaching the end of 2012 calendar year, Micron completed the first quarter of fiscal 2013 on November 29th. On our website, we've provided a schedule as usual containing certain key results for the first quarter as well as certain guidance for the second quarter. That material is also presented on a few slides that follow. The first quarter resulted with a net loss $75,000,000 or $0.27 per diluted share on net sales of $1,834,000,000. These results compared to the fourth quarter of the previous year of a net loss of $243,000,000 or $0.24 per diluted share on net sales of $1,963,000,000 Total sales in the first quarter were 7% lower than the previous quarter, driven primarily by declines in DRAM and NAND. You will recall that we entered into a series of currency options to mitigate the exposure to changes in the end denominated purchase price of LPIDA prior to the close of that acquisition. The weaker yen at the end of the first quarter relative to when we signed the sponsor agreement would have decreased the U. S. Dollar equivalent purchase price if we'd closed the transaction at quarter end. The weaker yen also reduced the fair value of the options we entered into $2,000,000 loss in the first quarter. Approximately $9,000,000 of this loss was the reversal of a gain recognized in the previous quarter With the termination of transformed solar's operations, the fab facility previously leased to transform reverted back to Micron, A $25,000,000 gain was recognized in other operating income associated with the release from that lease obligation. The $54,000,000 net interest expense from imputed interest on the bifurcated convertible notes Trade NAND bit sales in the first quarter decreased compared to the prior 4th quarter. As Mark indicated, We experienced some manufacturing challenges percent comparing the first quarter of the previous quarter as we continue to sell more NAND into premium segments with higher ASPs, such as SSD and MCPs. Estimated trade NAND selling prices are down high single digits quarter to date, including the forecasted product mix for the quarter. Trade NAND cost per bit is expected to be down high single digits in the second quarter while trade NAND bit production is planned to be up low teens in the second quarter as our 20 nanometer wafer output doubles compared to Q1. DRAM of an 11% decrease in DRAM average selling prices, stemming primarily from weaker PC segment demand relative to the 4th quarter. Quarter to date selling prices, including projected mix impact for the quarter, are down double digits compared to the Q1 average. DRAM cost per bit declined approximately 5 percent quarter to quarter, and we are forecasting bit costs for DRAM in the 2nd quarter to be down low double digits approximately 1 third of the DRAM bit sales in the first quarter. Bit production in the second quarter is expected to be up double digits compared to the first quarter. Nor sales were relatively flat in the 1st quarter compared to the 4th quarter and remained at approximately 12% of total revenue. NOR revenue in the 2nd quarter is expected to decrease seasonally approximately 10% compared to the 1st quarter. We anticipate lower cost reductions to offset selling price reductions in the 2nd quarter. SG and A expense in the first quarter was below our guided range as a result of lower costs associated with pending legal matters, and lower personnel costs from our variable pay plans. During the first quarter, certain variable pay plans were suspended resulting in cost reductions across our global operations. We expect SG and A expense in the 2nd quarter to be between 100 and 35 $1,000,000. R and D expense was $224,000,000 in the first quarter and is expected to be between $220,000,000 $230,000,000 in the second quarter. The company generated $236,000,000 in cash flow from operating activities in the first quarter. 1st quarter ended with cash and investments, including non current investments of just over $2,800,000,000. Expenditures for property, plant and equipment in the first quarter were $538,000,000, and we still expect total expenditures for the fiscal year to be between $1,600,000,000 $1,900,000,000, slightly weighted towards the earlier part of the fiscal year. Now I'll turn it over to Mark Adams for his comments. Mark Thanks Ron. Our NAND Solutions Group revenue declined slightly from the 4th quarter. The slight improvement in operating margin for NSG was primarily due to reduced costs in the first quarter associated with the ramp up products on our 20 nanometer process and improved product mix. In addition, our trade NAND pricing was up 8% for the quarter. As NAND has historically been somewhat seasonal, we will be watching hoteliday demand signals closely. We continue to be pleased with our solid state dry business as Bitch shipments were up about 20% quarter on quarter. In Q1, FSDs represented 17% of our trade NAND business. If you include NAND component sales to SSD providers, about 35% of our trade NAND bids go into Solisade drives. Our development of enterprise class FSDs is progressing well. We completed the qualification with a leading enterprise networking customer in the first quarter of the calendar year 2013. We're also nearing qualification of our next generation enterprise SATA drive with major server and storage OEM customers and look for shipments in calendar 2013 as well. Our SLC based PCIe 320 H enterprise high performance stores drive continued to receive positive reviews from both the press and our top customers. On the NAND technology front, we are making steady technical advancements with both our Planner and 3 d NAND technologies. We began sampling our 20 nanometer TLC NAND flash, which is selected controller companies and will begin production in calendar Q1. We saw a slowdown in our 20 nanometer ramp related to the manufacturing issues described earlier, but we still expect production crossover in 3 to 6 months. MLC represented about 80% to 85% of our wafer production in Q1 with SLC and TLC essentially splitting the remainder. Sales for our DRAM solutions group in the first quarter reflects slight growth in bit sales volumes, eclipsed by declines in selling prices, particularly in the personal systems segment. Despite the lower revenue in the quarter, our operating income line was roughly flat due to lower R and D costs for product qualifications as certain product reach production status in the fourth quarter and are now ramping. While we look for demand drivers such as Ultrafin and Light Notebook and Windows 8 to stimulate demand in the desktop notebook segment. We continue our focus on specialty markets such as server, networking, graphics and consumer devices. The networking segment represents about 25% of our DST revenue. We had another strong quarter and made progress to expand beyond the traditional large OEM businesses to smaller customers and distributors in the sale of our networking portfolio A growing portion of the market is shifting and we also continue to see early traction for RL DRAM3 and hybrid memory cube. We continue to see very strong demand signals from our server customers. 2013 server bit growth year on year is forecast to grow over 40% and we remain confident we will drive growth in the category. From a product perspective, we added portfolio with non volatile dim targeting mission critical in memory database applications. Overall, we are positioned well for long term success in the server segment. On the DRAM operations front, we project to hit bit crossover on 30 nanometer in Q2. We are conscious that as an industry, there are increasing shrink challenges to ramp 20 nanometer nodes as seen as well by our competitors. We are currently forecasting Micron to 20 nanometer transitions late in calendar year 2013. PC OEM DRAM pricing stabilized during the second half of our Q1 and is up high single to low double digits so far in December. While it is too early to signal a sustainable trend in terms of improved pricing, we will monitor the tightening supply situation as well as the seasonality effect on demand. Channel inventory seemed to have returned to normalized level of 3 to 4 weeks down from where we ended the quarter. Sales by the wireless solutions group improved seasonality in the first quarter. New configurations of NAND DRAM multi chip packages showed strength in the China mobile market, while new DRAM product introductions began to ramp as well. While we continue to be challenged on the bottom line for WSG, we remain bullish about our long term opportunities in wireless. Mobile DRAM shipments increased significantly as we are leveraging the ramp of our 30 nanometer base 4 gigabit low power DDR2 device in both the entry level and high end smartphone category. We also had strong growth in NAND shipments, most noticeably in the low end smartphone market, which is seeing a transition from standalone NAND to EMCP based solutions with EMC NAND combined with low power DRAM. Wireless NOR shipments grew double digits and gross margins were up nicely in the quarter as a result of cost improvements. Our broad product portfolio combining DRAM, NAND and NOR puts us in a great position to capture a larger share of the wireless market as we move forward with a focus on growth in DRAM and NAND in particular. The addition of LPTA's mobile DRAM portfolio will only accelerate this effort. Our embedded solutions group had a record quarter in terms of gross profit and operating income driven by the ramp of 45 nanometer parallel Nora and continued strength in the Automotive And Industrial segment. We delivered the first customer samples of 45 nanometer serial NOR and began engineering wafers for 300 millimeter embedded NOR products. One of the particular areas of strength has been the growth of our embedded eMMC product portfolio. We ran volume production of automotive products and expanded densities offerings of industrial lineup. We continue to invest in infrastructure and headcount resources to accelerate our embedded growth. In the past year, we opened up engineering systems labs in Munich, Shanghai for joint development and validation, continuing our focus on providing customer centric solutions in many cases sitting right next to customer design teams. We have advanced our newer technology leadership with our 45 nanometer 300 millimeter production and we'll continue to leverage this position to generate profitable growth. Pricing the embedded space remained stable and we were able to drive our cost leadership position to improving margins. While we continue to face adverse conditions during our first quarter, we are making progress on a number of fronts. As I mentioned at our Analyst Day conference in October, we are exclusively focused on being the leader in the memory market. Our cash position remains strong as it continued to be operating cash flow positive in Q1. Our inventory remains in check down from $2,000,000,000 within the last 9 months and we are focused on improving our cost efficiency. Our premium businesses such as specialty DRAM SSDs and embedded solutions continue to represent growth opportunities for Micron. Our management team continues to work on integration plans as we prepare for the close of our LPDA transaction. We remain optimistic that the reduced capital spending with no new memory fabs on the horizon will lead us to better memory supply and demand dynamics. Our customers have been extremely supportive that the acquisition and Micron's overall strategy. We believe end markets such as mobile, server, networking, enterprise and embedded will continue to drive strong demand for our products. From callers. Our first question comes from Kevin Cassidy with Stifel Nicolaus. Please go ahead with your question. Hi. Yes. Thanks for taking my question. I wonder if you could go into a little more detail of the manufacturing problem and how comfortable you are that the problem is fixed going into the second quarter? Yeah, Kevin, this is Mark. I don't want to get into too much detail, but I think I could characterize it as really nothing, out of the ordinary in terms of the root cause. A combination of different events in front end, back end, manufacturing, some internal, some external, I think in concert with some knock on effects, the disruptions created in our overall supply chain, really just led to an inability to get all the product out. Relative to, are we convinced the problems are behind us. Absolutely relative to those particular issues. I'm not here to promise you we'll never have a manufacturing disruption again, but I think The what we encountered this quarter was really sort of a perfect storm in terms of the timing of a number of different events that cumulatively created the issue. Okay, great. And maybe just to understand too, you said that in the second quarter, you're expecting heavier personal systems on the DRAM side. Is that normal seasonality? It seems like that would normally be a weak quarter and or is servers just that much worse? Kevin, this is Ron. The effect here is basically is, as we were looking at the quarter, we had an opportunity to pick some, up some additional wafers from, in Oterra. And, our conclusion was that that would marginally improve our gross margin dollars, our gross profit dollars, if you will, And so we decided to take that increment, and that is incrementing our PC bits and affected our guidance in terms of what we gave you. Okay. So it's not the end markets that are shifting at all. It's just a lot of No. It was a mix of just the opportunities we saw in front of us and ability to pick some wafers that added a few more dollars to cash balance. Okay. Thank you. And I'd like to make one too on the guidance sheet that for those of you who are looking at it, you may have an error in the R and D column that lists R and D for the quarter was $1,800,000,000. The actual numbers as Ron was reported was 2 24. So you will get a corrected version of that sent out within the minutes here, but the corrected R and D number for fiscal Q1 was $224,000,000. So with that, we'd like to go back to questions. Our next question comes from Monica Garg of Pacific Crest. Please go ahead with your question. Hi, thanks for taking my question. First question on the DRAM side. So Mark Adam talked about PC OEM DRAM pricing stabilizing during the second half and actually up low double digit in December. But you are guiding DRAM pricing down quarter to date, low double digits. Just trying to reconcile with you. Basically, the effect you're seeing has to do with just the overall mix and where the bits are going. So, the PC bits which tend to be on the and thus the overall mix effect will drag that pricing downward. Okay. Thank you. And you know, decent we have been seeing the news in the media that NALIA may not be buying PCD Ram chess point in in Oterra, and you're also guiding that you are mind some of that capacity. So given that, you know, Tara is a JV between Micron and Nania, could this lead to increased expenses to an in your talaz operation for Micron? I think we said all we can say relative to any potential or hypothetical deal we might reach. We told you that we are having discussions with our partners, and we've, again, we've told you how that has, what we can relative to how that impacts our Q2 guidance. And, I think the bottom line is that the the bits we are currently forecasting are what we believe will happen in Q2. And, obviously, we'll do a deal if we think it makes sense for Micron. Just the last one on the NAND side. Could you talk about NAND bit supply growth for both Micron? And where do you think NAND industry bit supply growth could be for current at 2013? I could start with, the industry part, and then we'll let Mark jump in with, the Micron part. But we're looking at a, calendar 2013 based on public information of probably somewhere between 35% 45%. Our next question comes from Betsy Vanhees with Wedbush Securities. Please go ahead with your question. Was wondering if we could go back to the production issues that you had. So you said you had front end and back end, but how were yields, with 20 nanometer, there were no issues there, are things still tracking in line with your expectations? Well, relative to 30 nanometer, generally speaking, we made fantastic progress on yields as we move through the quarter and anticipate a continued trend as we move into into as we move through fiscal Q2 relative to 20 nanometer, that's actually insignificant piece of our total of our output today. Okay. Then can you walk us as we look at 30 nanometer to 20 nanometer transmission transition, how that's going to look? Yeah. It'll be, the transition is really starting late in calendar, 13th. And you could expect that transition then to continue through calendar of 2014. It's generally on track with with what we would forecast and timing in line with what we believe the rest of the industry will achieve. And then you guys mentioned that you, on the Water Solutions group, you're challenged on the operating profit there. And I was wondering if you could help us understand how things are going to get better in that marketplace when we're seeing sort of a shift, to more NAND solutions versus sense? Betsy, this is Mark Adams. Yeah, the, 1st of all, first of all, correct me on my yes, sorry, the prior comments that Mark mentioned, I think we're relative to DRAM. I think we're relative to DRAM. Is that what you were asking Betsy around the DRAM? 20 nanometer? Well, yeah, and then I was also asking about the wireless solutions group. Okay. Okay. Good. So just on the wireless solution side, there's a couple of factors that are playing into the 24th. 1 is the as I mentioned in my earlier comments, our 30 nanometer LP DDR 3, 4 gigabit part, has put us in a very competitive position, today. And that is ramping and in volume, so we can go out and expand our offering there. Secondly, the maturity of our E MMC product portfolio is opening doors for new sockets as well there. So between the combination of those too, not only do we get back in the game from a cost perspective, but we have a broader product portfolio to bring to market and actually deliver on And then, Ron, my last question, I apologize if you mentioned this, but when we're looking at the estimates for SG and A, I see it's going up to $135,000,000 to $145,000,000. And is that just FICA and things like that that's causing your SG and A to go up? A couple of things. One is that we had a, we're getting back to normal trend line. If you look at our history, in terms of SG and A, we had a lower legal expenses in the first quarter. And also, we've got some integration costs as we're looking forward the acquisition that we're that we've got in that estimate as well. Our next question comes from Steven Chen of UBS. A couple of questions on on the inventory front. So I heard some comments on DRAM challenge, looking looking better. But with the with the anticipated sales of or increased sales of PCE RAM for fiscal 2Q. Do you think that the challenge will increase again in the current quarter or do you think there's enough sell through of this that will stay under control? I think we do think those. Those are bits that would normally go to the PC market indirectly or directly. So we think it's net neutral. Okay. And on the the NAND side, just given that, last about time last year, I think your salt day dry business also saw some, some inventory buildup. What kind of trends are you seeing there right now in terms of think if you go back a year ago, if we go back a year ago, we were coming out of an artificially higher demand curve due to the hard drive situation in Thailand prior to the holidays. I think that affects gone, and we we're pretty bullish. We're trying to grow our SSD business and the demand signals from our customers are in parallel aligned with that. So we were pretty bullish going into our 2nd quarter on SSDs. Got it. And then just last question is in terms of the manufacturing issues in Q1 and how that may have impacted your ability to ship product. Was there any business out of the front table in Q1 that you'll be able to make up in Q2? There's a very small amount of growth in bit inventory that was offset cost of good reductions. So when you look at inventory numbers, they're relatively flat. So some of that will come through, but it's it's not a significant relative to the overall quarter. Great. Thanks. Our next question comes from James Schneider of Goldman Sachs. Please go ahead with your question. Good afternoon. Thanks for taking my question. I was wondering if you comment a little bit more on the move in DRAM spot pricing we've seen. In your view, is that purely due to some of your competitors taking PC DRAM supply offline? And then what kind of impact have you seen in your specialty DRAM businesses on the server mobile side is some of that capacity moving over to those places, which is causing the pricing pressure or have you seen stabilization there? Overall, supply picture in the overall industry when you look at the market. So I think that the supply side, and we referenced kind of what's out in the public on production and investment and capacity and technology transitions we think that it's been relatively conservative in terms of overall supply growth. So the PC number think is just kind of a natural evolution of the last 12 to 18 months of that behavior. I think your follow on comment is to some of those bits make it into our specialty businesses. And, while we can't predict that won't happen in the future. We haven't seen it as much because it's not as a matter of just redirecting that capacity. There are technical specifications that go along with it, along whether it be performance or temperature requirements and those types of things that that capacity doesn't automatically become perishable or transferable if you will to other segments. So we haven't seen tremendous pressure Now having said that, I'll make one qualification to that. We have seen kind of a newer segment in the servers come up that it's a little bit more of a commoditized server for the data center application, the cloud data center application, where it's been more of a higher unit but more of a kind of an industry standard architecture that doesn't have those specifications. We view that as net net positive because those bits are better than the PC bits and they're additive to our core server business. Thanks. That's helpful. And then maybe as a follow on, any update for us on how you see the DRAM industry dip supply, in calendar 2013? You bet right now it shapes up to be somewhere, Jim, between 20% 30%. Got it. That's helpful. And then finally for me, on the the wireless group operating profit. Can you comment on maybe the difference between the reported operating profit and the actual cash flow out of that group and maybe highlight any actions you might take to kind of improve that profitability level going forward? James, this is Ron. The the when you look at cash flow, the wireless group versus the reported result, the main difference depreciation and amortization, which affects all of our main business units, if that's the question you're asking. So it's contributor to the operating cash flow based upon the depreciation component that's COGS. I'm not sure if that's the question you're asking, though. Pete, I was just wondering if there's any acquisition related one timers that would kind of be above and beyond the pure equipment depreciation effect? Not material. Okay. Thanks very much. Our next question comes from David Wong of Wells Fargo. Thank you. Could you remind us if the LPD deal closes on the terms you expect and the time frame you expect, what your cash requirements might be to support this transaction. And given, you know, the current revenue and income statement dynamics, Will you need to raise any extra cash or do you have what you need on the balance sheet at the moment? In terms of the actual purchase price at close with about $750,000,000 in cash that we have to come up with. And, You can see the cash balance on our financial statement. We're obviously opportunistically looking at financing situations, the market is pretty good right now. But as we've said before, we tend to look at ones that are covenant free and focus more on capital leases, which is a normal course of business kind of activity as our primary focus. But we'll continue to look at opportunities also to spread our debt exposure over time, our repayment schedule as well, but it's opportunistic based upon market availability. Okay, great. And my other question is, you were saying that you expect your DRAM mix to be somewhat heavier towards personal systems. So are you seeing a pickup in demand on personal systems? I assume you mean PCs by that or Or is there some other dynamic that pushes down your demand for your specialty DRAM? Yeah, the the comment was in terms of additional DRAM bits related to the fact that we actually have more availability of bit supply. And so we have more to move into the market. It's not a demand driven factor. It's a basically supply we have available. Our next question comes from Ryan Goodman of CLSA. Please go ahead with your question. Hey, thanks for taking my questions. A bit of a follow-up to that last one on the decision to take some of those additional waivers out of LPDA and go into the PC market. How do you balance the risk of potential impact to pricing versus the opportunities there? I mean like maybe you could talk about some of the opportunities you see by geography or by segment within the market that help lead to that decision? This is Ron. I'll take the part, maybe Mark or Mark wants to comment on sort of market opportunities. This is a short term kind of thing that happens periodically happen to be a little bit larger this quarter where there are available wafers from in Oterra. And we have an election to actually pick them up or not pick them up. And it's a straightforward economic analysis based upon current market conditions and known potential we have with our market pricing and contractual arrangements with our customers. So we make the decision based on a cash evaluation and we made a decision to take some in this case. But in addition to that, if you the comments made in our opening discussion around PC OEM pricing. I think the market and the supply base reflects an adjustment of what CT capacity looks like. And so while the overall PC segment doesn't look like a significant growth category. If it's flat, the supply base to that has already kind of contemplated that. We believe that the supply and demand curve is in better shape as reflected by the OEM contract price increases in December. Okay, great. Thank you. And then just another question, this one on the NAND side of things. Specifically on client SSDs, I know one of your competitors appears to be making a stronger push into 3 bit lately and even as a 3 bit SSD out there. And at the same time, we're another competitor kind of moving the opposite direction and pushing a little more 2 bit and going more into smartphones and 2 bit SSDs. I'm curious. I know in recent conference, you had mentioned the possibility of a 3 bit SSD, but maybe you could just provide some color on the strategy there going forward? Sure. A lot of it depends on the customer and the application you're selling to. We see over time the client SSD business as it continues to scale and and its growth is encouraging. We see kind of a value of different product offerings within client When you're selling to a major OEM customer, a 3 bit solution won't quite do it. If you're selling, to a white box, emerging market segment that might accept lower than that type of performance. You might be able to get there. The other side is the maturity of controller development being able to handle 3 bit will continue to improve. And so do we think in the future that 3 bit per sale SSDs will be viable yes, do we think the market is there today? Probably not. And that's why we continue to focus on performance high performance client SSD drives. Okay, great. Just one quick follow-up too on the manufacturing issues. Did that only affect NAND volume or was that also was there an impact to DRAM volume as well? It hit both sides. Our next question comes from Daniel Amir with Lazard Capital. Please go ahead with your question. Thanks a lot. Couple questions here. First of all, if as we look at the your product mix in both DRAM and NAND, I mean, that's been changing here in the past few quarters. How should we be looking at that, you know, in the next, in this fiscal year 13? I mean, what should we see your SSD bits growing to potentially 50% of your total NAND, or is it kind of mid thirties right now? Is that is that where it should stand? And the same question, you know, relative to specialty DRAM and PC DRAM? I think think it's fair to say we don't think 30% is the ceiling on SSD bids, both part of our portfolio and our SSD pure play customers. So I don't think we're satisfied nor do we think that's the top. We think there's more opportunity. And in fact, that's kind of where we're driving a lot of our go to market and development resources. And then in terms of trying to pin down for you, what percent of our business can be NAND and DRAM, we're going to try and keep that to ourselves for now. Okay. And then in terms of your wireless side, I mean, you focused a lot on, you know, your Analyst Day and since then as well, and focusing on finding ways to penetrate more the handset market. What, you know, what can you give us in terms of update, in terms of your product portfolio, and your traction that you're getting as you turn around this wireless segment in terms of getting more content in the in the smartphone space. Well, I think I'll kind of revert back to my earlier comments. We were out of 2 key portions of the business as far as growth opportunities within wireless. 1 being low power DRAM solutions, which hit us both on the standalone sale of that product as well as the MCP, as well as our EMMC offering. And, both those product development efforts have progressed really well. And we haven't lacked access to the market. I think what we we looked at in one case, a cost position, which we weren't driving too hard to sell that volume in that space and another capability that our AMNC offering wasn't as mature as the all of our customers would have liked it. So we've kind of we can kind of say today that we have confidence that our products are competitive and able to to gain that share of a market that we want. And just final question on your NOR business. I mean, there's been some news lately, that your plans for, you know, the fab in Israel, what, you know, what's, what's, what can you update us on the strategy of your NOR business? I mean, in terms of the roadmap here? Well, I think that, Again, we mentioned a little bit earlier, we continue to invest in NOR from a technology perspective. We are a leader right now with our 45 nanometer 300 millimeter product, which gives us a pretty good cost advantage in that business. It showed up in the embedded space and, some extent, it will help us also enable us in the lower end wireless sockets. You made reference to manufacturing rumors that are in the press and so on and so forth. What I would say to that is that, we are we still remain very, very committed to Nora a good part of our business and enabling technology for us, both embedded and wireless and some other segments as well, including TC Bios applications and consumer applications Okay, thanks a lot. Our next question comes from Glenn Young of Citigroup. Please go ahead with your question. Thank you. Could you guys have a forecast for us what CapEx could be next quarter? This is Ron. As I mentioned, we're still projecting $1,600,000,000 to $1,900,000,000 for the year. We had about 5 $38,000,000 in the first quarter. And we said we're going to be loaded a little bit heavier to the first half. So It's not for us to get too specific, Glenn, because because timing on exact timing on acceptance of tools can move and that can swing that number pretty dramatically quarter to quarter, even though same trend line is in place. Yes, that's right. Fair enough. Just with respect to that, the difference between the 1.6 and the 1.9, if maybe you could just remind us what what would lead you to one end or the other end of that range? Well, it's a number of variables. 1 of the speed timing as Mark mentioned at year end, right, as as as how things play through, but it's it's it's hard for us to call it much closer net. As we go on the 1st part of a year. And of course, we're always adjusting our proposed product mix and our spend associated with that as we see mark Understood. I think in the NAND commentary, it was mentioned that you're watching holiday demand signals to sort of give a sense as to how anything NAND will progress from here. I know it's a little early for that, but maybe just your initial thoughts on how you see demand trends at the moment from the NAND perspective. Well, I mean, I think quarter to date, we feel things are pretty stable, but, you know, it's not unusual for some softness and just out of the holiday period, especially given some of the consumer product driven platforms that NAND consumes or is consuming NAND. So It was only a hedge that we'd like to just kind of follow that and track it to make sure that NAND keeps at the current pace. Sorry, Glenn, I'd go a little bit on that. I'd say that generally, we're relatively optimistic about the future demand for NAND. We see a lot of growth in end applications that are consuming the end, including the SSDs have been alluded to a couple of times already here today. We don't know about is what's the macroeconomic environment going to look like. So we're kind of like everyone else here waiting to find out how that played out. Just last one. I understand why more PC DRAM, it's more of a supply issue on your part. But just to be clear about what your visibility is on demand from server, just exactly as it's looking as you expected to look any better, any worse? Yeah, I think we're pretty happy with servers and we have we have line of sight is that it looks pretty stable in growth oriented on the bid side for sure and the units tracking pretty well. So overall, very favorable. All right. Thanks a lot. Our next question comes from Stephen Fox of Cross Research. Please go ahead with your question. Thanks. Good afternoon. First, just a question on the SSD market. Your own sales of SSDs and cash, if you want to throw that in. You obviously have a lot of momentum there exiting the quarter. On the client and enterprise side, are you looking for some seasonality in Q1 ahead, especially on enterprise ahead of some of your new qualifications. And then within that, over the next couple of quarters, are there any competitive dynamics we should keep in mind relative to, especially the enterprise side that may be helping or hurting you guys. And then I had a quick follow-up. You know, I think I mentioned some of our qualification success in my comments and as an indication that we think the Our enterprise business will grow. Your reference to seasonality, I wasn't quite clear what you're asking, but we don't given the earlier stage of enterprise versus the overall SSD business, we think that that says growth oriented and we think our business will continue to And well, I guess I was referring to, like, client, demand for SSDs in the first quarter, the 1st calendar quarter. We even that category, we think is still pretty high demand that we don't we think it's up into the right right now given the the lower penetration of client SSDs even in Q1. And competitively, do you feel like there's anything going on where you're taking more of an advantage, whether it's channel near term or product category that we should be thinking of? Well, I think I'll break it down pieces. On the client side, there certainly have been some client, players who've had some financial challenges, that might impact our ability to actually go out and capture more share. But overall, so the client we like our position in client. We think it's very strong. On the enterprise side, it's a little bit more of a design win engagement model. So when you pick up something, tends to be pretty large volumes as they roll that out as your customer rolls it out. But we'd the only thing I would say is that we're pretty pleased. Our NAND team is pretty pleased with the PCIe products that we've come to market with and that seems to be a high growth category, even within enterprise. So, we're pretty bullish on both segments. One's more of a competitive ability to go out and deliver volume on the client side and some of the differentiated products in our enterprise solution. Thanks. And, just really quickly, I apologize if I missed this, but in terms of the pricing you're talking about on NAMS side, there were no there were no mix issues that are affecting either the outlook or what we saw in the quarter. I might not be unclear on that one. No, we would guide you to think that there are always mix issues going on. For example, as Mark just described, we think SST probably grows for us next quarter. So that's an uplift, for example, over some markets. So every quarter we're dealing with mix related product movements, both in DRAM and then. Okay. And if you look at the the guidance we gave you in terms of forward NAND pricing for the second quarter, I would say a significant chunk of that, as we're looking at mix mainly at higher density products going into the channel, for example, and more of our 20 nanometer business related to that higher density. So significantly mix effect. Great. That's very helpful. Thanks again. And note the cost per bit is going down correspondingly. Yes. Thanks. Our next question comes from Alex Grana with JMP Securities. Please go ahead with your question. Good afternoon, everybody. Thanks for taking my question. I was wondering, you've talked a lot about the server market here. I understand how your bid growth might be strong. Given some of the moves in servers, but there's been a lot of mixed indications in terms of infrastructure, data center demand. Can you maybe help us parse what's happening for you in terms of bit density growth and maybe what you think the underlying growth rate of that market is right now, now that trends in Q1? Hours, I think that the bid growth, we've been pretty confident. We still think that's a pretty good growth platform for us in servers. When you look at overall server unit growth, it's still mid to high single digits, But when you look at the bit growth, I think we're somewhere around 45% or 50% bit growth year on year in servers. And so I think the, the dynamic I was alluding to earlier is you've got, kind of your traditional server players in those type of enterprise applications, and then you've got this cloud data center model where there are people who are actually building out these networks that are actually rolling their own servers are going through ODM models. And so product requirements because of the way the networks are structured and the requirements of the server aren't the same. There's this subsegment of server growth that is a little bit more commoditized. Okay. That's very helpful. Thank you. I was wondering if I could ask a similar question with regard to PCs right now with all the transitions towards convertibles and tablet. You give us a sense of maybe what average density per PC is doing right now and then your assumptions on how some of these moves to more Adam based systems or tablet systems might affect DRAM growth in the PC segment going forward in 2013. Sure, I'll take the first part of that and maybe Mark and Mark can jump on on impacts of architecture. But basically in 2012 over 2011, we're going to see PC notebook growth rates around 20% and flat to down units depending on which third party you're looking at. Next year, 3rd party data suggest units up probably 1%, 2%, 3%, 4% with bid growth somewhere in the 10% to maybe 12% to 14% range. Obviously, some of that dependent on ASP. And if Mark or Mark, would you guys like to talk a little bit about how architectures might change, content growth? Well, I think that, in one sense, depending on the architecture and the operating system efficiency, That can certainly have a swing factor at one way or the other, meaning that the density could go down or up depending on the application focus and the usage model. But the other side of that is when you get to these type of designs, they tend to be more customized and less commoditized. And so they end up being kind of customer and customer design wins, which can protect us from a little bit of the commodity nature. Okay. One last one if I could. Your CapEx guidance for next year, I'm assuming that does not include LP to demand you maybe found what you might need to put on top of that in order to, keep LP to current and then how those assets might even help you going forward? Terms of maybe bringing down CapEx spend? Alex, we have not released those numbers yet. We will update you when we can. Our next question comes from Sean Webster of Macquarie. Please go ahead your question. Yeah. Thanks a lot. Going back to the supply chain disruption, maybe kind of the explanation was a little bit vague. Is there are you able to parse it out between, like, was it a supplier of components or other materials or was there a problem in your own factories or something further down the food chain? Yeah, you know, I don't want to get too specific, Sean, but it was a it was a there were a number of separate events, which accumulated to give us the net effect we had somewhere internal somewhere at subcons in the back end. Okay. And then on the pricing guidance, for the current quarter. If if we exclude mix or assume stable mix, is pricing still down? You can probably well, first of all, Sean, you're going to have to be more specific about what designs. But if you look at the spot market, I think Mark covered this in his comments, Pricing generally from the end of our quarter to today is up on a line item by line item basis. Okay. And then on on the non year restructuring, that's still under negotiations. And I understand you're you don't want to talk a lot about the details yet, but can you tell us what their contribution to your R and D has been, the last couple of quarters It's roughly $20,000,000 to $25,000,000. Okay. And then I guess, finally, are you getting any feedback from your PC OEM customers in terms of overall demand outlook for PCs, either in Q1 or Q2 or what catalyst could be if service pack 1 will be a catalyst and maybe what their overall views on PC growth is next year? I think their PC growth projections in line with what Chip alluded to earlier. I think they in the traditional desktop notebook segment, I think they view the PC growth to be flat plus or minus 1% or 2%. But again, I think they think the market's adjusted that. That's already in the market, both on the PC OEMs inventory side as well as the supply side. Okay. Thank you very much. I think we have time for one more question. Our question comes from Harlan Sur of JP Morgan. Please go ahead with your question. Great. Thanks for taking my question. On the manufacturing issues impacting your NEM business in Q1, I know you can't go into a whole lot of detail, but my question is, Did these disruptions result in wafer scrapage, or was it just a slowdown in output relative to your prior expectations? It's a combination of those. Okay. And then it also seems like you may have answered this question, but it also seems like you pushed out bid production crossover for your 30 nanometer DRAM DRAM ramp by about a quarter. I guess were you also seeing the same manufacturing challenges as you ramped process? Or were these a different set of issues relative to your NAND technology? Any color there would be great. Yes. So we had impacts on DRAM and NAND. I would say that our 30 nanometer, technology trajectory and, and, ramp has actually seen dramatic improvements as we move through the quarter. So while it was impact on the DRAM side relative to 30 nanometer output, It was not related to, overall the technology ramp. We're very pleased with the way that is gone. All right. And I'd like we'd like to thank everyone for participating on the call today. If you will, please bear with me. I need to repeat the safe harbor protection language. During the course of this call, we may have made forward looking statements regarding the company and the industry. These particular forward looking statements and all other statements that may have been made on the call that are not historical facts are such to a number of risks and uncertainties and actual results may differ materially. For information on the important factors that may cause actual results to differ materially, Please refer to our filings with the SEC, including the company's most recent 10 Q 10 K. Thank you. This concludes today's Grand Technology First Quarter 2013 Financial Release Conference Call. You may now disconnect.