Good morning. My name is Allie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Micron Technology Announces Agreement to Acquire Elpida conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the floor over to your host, Micron Investor Relations Director, Ivan Donaldson. Sir, you may begin your conference.
Thanks, Allie. Welcome to Micron Technology's conference call to discuss the announced agreement to acquire Elpida. On the call today, CEO and Director, Mark Durcan, President, Mark Adams, and Chief Financial Officer and Vice President of Finance, Ron Foster. This conference call, including audio and slides, is also available on micron.com. If you have not had an opportunity to review today's press release, it is also available on our website at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of this call accessed by dialing 404-537-3406 with a confirmation code of 96034829. This replay will be run through Monday, July 9th, 2012, at 5:30 P.M. Mountain Time. The webcast replay will be available on the company's website until July 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 we'll be attending. Please note the following safe harbor statement. This presentation contains forward-looking statements regarding future events that involve numerous risks and uncertainties. Various factors could cause actual events or results to differ materially from those anticipated by the forward-looking statements. These factors include the factors that are disclosed in our most recent Form 10-K and 10-Q, including in the Risk Factors section under the heading, "Debt obligations could adversely affect our financial condition," and, "We may make future acquisitions and/or alliances which involve numerous risks." Although we believe 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 Mark Durcan.
Thanks, Ivan, and thank you to everyone for joining us on the call and webcast today. Ron Foster and I are joining the call from Tokyo and are very excited to announce that we've entered into a sponsor agreement for Micron to acquire 100% of the equity of Elpida. We've also agreed to purchase 24% of Rexchip's outstanding shares from Powerchip. As you may know, Elpida owns 65% of Rexchip, so together with the Rexchip shares acquired from Powerchip, Micron will now own 89% of Rexchip at the close of these transactions. We're truly excited about this opportunity to create the industry-leading pure-play memory company. Our customers, employees, investors will all benefit from the added scale and cost synergies, improved product portfolio, and manufacturing flexibility, as well as our enhanced technology development capabilities.
Before I go any further, I'd like to acknowledge the great effort of the Elpida trustees and management team, along with the Tokyo District Court. Their combined efforts enabled us to forge this alliance at the conclusion of an intense process that was conducted over the last few months. We believe Micron's sponsorship agreement offers the most attractive alternative for Elpida's creditors, employees, and other stakeholders in Japan. Moving to key terms. The agreement called for us to pay, in yen, approximately $750 million in cash at the close. In addition, approximately $1.75 billion of investment installment payments will be paid beginning in December 2014 and ending in December 2019 from the cash flow generated at the Elpida level as a subsidiary of Micron. This total amount of approximately $2.5 billion will be used to satisfy all the pre-petition debt of Elpida.
The installment payments will be interest-free and will have no financial covenants. In addition, we have agreed to support Elpida's third-party financing of CapEx to cover a predefined technology path. The financing will only be utilized by Elpida if their operating cash flow does not cover the required CapEx. The Elpida trustees plan to submit a plan for reorganization in mid-August. This should be followed by court and creditor approval in calendar Q4 of this year. We expect the transaction to close in the first half of 2013, depending on timing of required government approvals in various countries. Next slide, please. We have great respect for the employees and leadership of Elpida. They've worked hard to build a strong technology platform, leading-edge product portfolio, international manufacturing network, and impressive customer base around the world. We're excited about joining the teams together to create the world's leading pure-play memory company.
Moving to the strategic rationale for the deal. The memory business is perhaps the most competitive and rapidly evolving in the world. It requires significant ongoing technology, product development, and market development investments, and the resources and larger served market of the combined companies will bring cost synergies as well as scale advantages. These synergies, significant synergies, in the following areas: manufacturing scale, capital equipment optimization, back-end and test alignment, product mix, and R&D scale and optimization. The way we have structured this transaction, we will have the flexibility needed to operate the company in a way that delivers on these opportunities. This deal will create a significant improvement in Micron's operating model. From a manufacturing integration perspective, we see lots of opportunities for efficiency gains. We plan to move to a combined roadmap for wafer technology development, onto wafer fab manufacturing, and packaging and test.
This will drive operational synergies, which while not immediate, are very real and will be very significant over time. Additionally, there are numerous manufacturing efficiencies that come simply with scale. Also important will be our ability to tune capacity to meet the evolving needs of our customers. This can take a number of forms. One example would be the enhanced ability to service high-value networking, enterprise, and embedded market segments with the combined business. Additionally, Micron has a broad memory technology offering ranging from NAND, to DRAM, to NOR, to phase-change memory. Memory capacity is fungible over time, and we will now be in a position to better meet our customers' needs. I believe they are quite excited about our enhanced ability to serve them.
While there are opportunities for savings where the existing technology development and product development activities overlap, the joining of the two companies also presents exciting new opportunities. These include the creation of new products based on combining existing products at the MCP or system level, the improvement of existing products through technology sharing, and resources for support of advanced emerging memory technologies and products, as well as for the support of more customer-specific memory development and interaction. By way of example, Micron's world-leading NAND product portfolio can create more value for our customers when coupled with Elpida's leading-edge Mobile DRAM products for use in mobile platforms. Standalone DRAM products at Elpida can benefit from advanced design and manufacturing techniques and use at Micron. Redundant DRAM development teams can be freed up to work on exciting new Hybrid Memory Cube and 2.5D logic and memory integration.
Time to market on new products can be enhanced with advanced manufacturing capacity to drive introduction and yield ramps. As a management team, we've approached this opportunity with a focus on aligning the deal within the framework of our long-term strategic objectives. The Elpida team, manufacturing assets, and technology will bring us impressive new capabilities. The new capacity at acquisition cost of less than a third of what it would take to put in place on a greenfield basis will improve our cost competitiveness within the first year and for years to come. In short, this transaction, at the attractive terms I laid out earlier, will strengthen Micron's financial position, in particular, its long-term free cash flow and ROI to the benefit of Micron shareholders. Moving to the industry landscape.
Over recent years, we've seen an evolution in the industry's competitive landscape where single-technology suppliers, in particular, those lacking scale, have faced an uphill battle to be competitive over the long term. We believe that those memory competitors with the scale and technology breadth to enable both cost efficiency and flexibility to address the most profitable market segments are emerging as the winners in this evolution. The purchase of Elpida strengthens our capability in these key areas and positions us to succeed in a memory market which has seen accelerating levels of consolidation over recent years. Next slide. Following the close of this transaction, we will solidify our place as the number 2 memory supplier in the world and enhance our ability to deliver memory and system-level solutions for a growing list of customers and end markets. Looking at customers, Elpida brings an attractive set of customers.
Through hard work and great service and quality, we expect to become the memory supplier of choice for this growing strategic list of customers. Next slide. Micron has an expansive global presence in both manufacturing and research and development and has significant experience integrating and managing operations in both Japan and Taiwan. Elpida's Hiroshima fab will bring about 120,000 wafers per month, and Rexchip's fab in Taiwan, about 85,000 additional wafers per month. In combination with Micron's front and back-end technology and operational know-how, the cost efficiency of these operations will be improved. It's worth noting that our total cost for this new capacity versus greenfield replacement is only $0.30 on the dollar. Looking at Micron's market exposure on the next slide.
Over the years, Micron has successfully diversified our exposure across segments including mobile, consumer, personal systems, networking and storage, servers, SSDs, and auto, industrial, and medical segments. The addition of Elpida would initially increase our exposure to personal systems and mobile. Following the close, we would expect to begin taking steps to rebalance our product portfolio to optimize profitability. A few market trends we're particularly focused on include the growth of cloud, big data, and mobility. Our combined product portfolio of high-performance specialty DRAM and NAND, as well as emerging memory and system-level solutions including solid-state drives and Hybrid Memory Cube, will position us to capitalize on these markets. Next slide. Following the close of the deal, we will utilize our increased manufacturing flexibility to manage our product mix based on where we see the most attractive opportunities.
Over time, we expect a generally balanced revenue mix from DRAM and NAND, with NOR continuing as a smaller but stable revenue contributor. Turning to R&D. From an R&D and technology perspective, Elpida and Micron have unique areas of focus and success, which in combination will improve our innovation capabilities. Some examples include Micron's industry-leading NAND design and process technology, and our next-generation product development, as well as strong positioning in alternative memory segments. Elpida brings formidable capabilities as well, including Mobile DRAM technology focused on reduced power consumption and enhanced data throughput to fuel enhanced performance in next-generation smartphones and tablets. We have plans in place to start converging our technology roadmaps immediately after close and expect to see significant benefits in a relatively short period of time thereafter.
In summary, on the last slide, we are very excited about this opportunity and believe it further positions Micron as a leader in the memory market. Our customers, employees, and investors will all benefit from the added scale and cost synergies, improved product portfolio and manufacturing flexibility, as well as enhanced technology development capabilities. We expect the deal to be EPS and cash flow accretive within the first 12 months of closing and expect significant improvement of our long-term revenue, gross margin, and free cash flow profile. Thank you for your time today. I'll turn it back over to Ivan for questions.
Thanks, Mark. We will now take questions from callers. Just a reminder, if you are using a speakerphone, please pick up the handset when asking a question so that we can hear you clearly. Allie, let's go ahead and take the first question.
Our first question comes from Doug Freedman of RBC. Please go ahead.
Great. Thanks for taking my question, guys, and congratulations on getting terms of the deal squared away. If you could, I think the biggest question investors are facing when looking at the combined deal of Elpida and Micron is the fact that this is an industry that has faced bankruptcy risk in the past. Can you address what actions in this deal allow you to avoid the future risk of that?
Hey, Doug, this is Ron. If you look at the terms of the deal that Mark summarized, I'll just quickly recap. It's a set of very attractive terms from Micron perspective. First of all, the cash consideration up front is about $750 million, and the installment payments that are spread out over about seven years, $1.75 billion, are interest free. If you look at what Micron gets out of the deal, we get significantly inexpensive or less costly assets in terms of PP&E that we can bring into our infrastructure. As Mark mentioned, we can also make a lot of moves in terms of realigning that infrastructure and merging with ours. If you look at the other parts of the transaction, we're going to be able to retain all the current assets that come with the Elpida acquisition, and that includes any remaining cash and other current assets.
As is typically the case in a bankruptcy situation, all the pre-petition obligations are fully discharged, and all the pre-petition payables are part of the bankruptcy proceeding and so wouldn't be carried over. If you look at Elpida's last reported current assets, they were, in December, about $1.4 billion, just as a reference point. That would all be retained as part of the transaction. In summary, as Mark mentioned, if you look at the acquisition cost of the PP&E, just in terms of manufacturing infrastructure, it's about a third the cost of greenfield capacity. You combine that with the cost to convert, it's a very economic solution for us vis-a-vis normal organic growth alternatives that Micron might have. Along with that, we get other things with the transaction, such as IP. As I mentioned, we get all the current assets that come along with the transaction.
Net-net, that's a very good deal, and specifically to your question, the capital structure is obviously significantly easier to handle than what Elpida was dealing with at $1.75 billion spread over seven years.
All right. If I could, for my follow-up, what that initial question was really aimed at is financial flexibility going forward. If you could offer any more insights into that. Then my follow-up is really, we've got a pretty long window here, at least six months before this deal is going to close. Can you discuss how Elpida is going to operate and what type of CapEx Elpida is going to have during that, I don't know what to call this window, this period in time at which, what obligations do you have towards deals that Elpida has done? How is the entity going to be operated in this window?
I'm going to let Ron reply to the financial flexibility question. I'll come back and address operation of the company.
If you look at the financial flexibility, obviously, we've got, as I mentioned, spread-out payment terms that make it much easier for the company to handle over a significant period of time. Part of your question, I think, is addressing the stability of Elpida. Obviously, they haven't reported results since December. If you look at the performance of the company more recently, they've significantly improved. Let me back up one step. They have had a challenge in the more recent periods with volumes that were down, reduced activity in the mobile segment, and also challenges in terms of just the flow of business when you look at their revenue trajectories. The current trajectories of Elpida right now are improving. They are improving their capacity output.
They are moving from 42 nm to 30 nm as part of their operating plan, which is helping them significantly in their cost structure, and they've acquired, as they've communicated in some cases publicly, additional mobile business and opportunities, which is significantly helping them. The trajectory of Elpida going forward is improving. To your CapEx question, the CapEx is important to our business as you know. It requires CapEx to keep costs moving down and technology migrating. I just mentioned they're continuing to move from 42 to 30 nm. They're going to continue to access CapEx and fund that through their operating cash flow is certainly the expectation. Micron, as Mark commented, has committed to support that in terms of getting access to capital lease lines if that's needed, and that's typically part of their process and financing structure as it is with Micron.
We expect that will continue as usual, Micron has, through the agreement, agreed to support that in a backstop manner, the CapEx financing that they need to continue the trajectory of their business performance.
Mark, I turn it over to you for the operations.
Relative to operations between signing and close, Doug, obviously, we are not involved in the running of the company in any way, shape, or form. Beyond the close, we believe we're going to have a lot of say in appointing, well, we will appoint, at close, a Micron business trustee. We believe we've structured the terms of this agreement such that we will have significant flexibility in running the company in order to drive the synergies we need to make this a successful company moving forward. I would note that the trustees in this case, and the court in this case, have a significant interest in the long-term success of the company, as well as just the return on the installment payments, which I would just add, are very manageable under the current financial structure of this combined company.
We do have, I guess I should mention additionally, we do have an interim business plan that we've agreed to as we entered into this transaction. It lays out the terms and conditions under which Elpida will plan to run the company between signing and close, and the operation of the company under that business plan will drive their decisions around which products they continue to develop and which CapEx they fund associated with those products. When we do get to close, we will have a plan that syncs with their ongoing operation of the company.
Our next question comes from David Wong of Wells Fargo. Please go ahead.
Thank you very much. Can you give us some idea of the schedule of moving Elpida's facilities to Micron's process flow? Will that take several years, or is it a matter of quarters? What will the output of Elpida be as you're doing this transition?
The process, David, will begin at close in terms of the transition. We expect that to go relatively quickly. While we can't predict exactly when close is, we think we can get to a merged product portfolio relatively quickly post-close. One of the interesting things is while there are differences, obviously, in the memory technologies of Micron and Elpida, they're actually more similar than those of some of the other competitors in the space. We have that working for us. In the short term, after close, we expect to see some significant synergies in the back end of the combined company by virtue of technology that we think we can deploy relatively quickly across the combined company.
Okay, great. Excuse me if you already said this earlier in the call, but will you be, in the first instance, using Elpida for DRAM solely, or will you plan to port in other types of memory into those facilities?
I think I alluded in my discussion here to open the call to significant flexibility and fungibility among memory technologies or product types with the CapEx. We are not wanting at this point, for obvious reasons, to disclose exactly what our strategy will be relative to directing that capacity. Additionally, I think that strategy will continue to evolve as the market evolves. We do have a plan, and we're going to keep that to ourselves for now.
Great. Thanks very much.
Our next question comes from Nick Gaudois of UBS. Please go ahead.
Yes. Hi there. Thanks for taking my question. Just a follow-up on the conversion question on the DRAM side. Should we expect this therefore to kick in at the 2x nm node for you? To what extent can you actually incorporate anything out of Elpida's process technology in that timeframe, if at all? If not, how should we think about how what they've been doing, basically, on the low-power side could effectively benefit further technology migration and product roadmap for you in post 2x timeframe? Thank you.
I'm not sure I caught the second part of the question, relative to the first part of the question, let me start with Elpida has existing 30 and 25 nm technology, as does Micron. We would expect to converge the two companies at the next node, which would be a 20 nm converged node. I believe the second part of the question is, are there things at Elpida that will be useful in a merged technology? The answer to that is, that's absolutely true and the case. While, as I said, the technologies are similar, there are some significant differences, and there are pieces of what they do that we find value in.
In particular, I would highlight again their success in the mobile low-power area and some of the things they've done from a process technology and design perspective to help enable that piece of the market. Did I get the second part of the question properly?
Absolutely. If just in terms of timeframe, we're talking basically post 20 nm essentially to bring all that together, I suspect, on the process side and therefore design side in terms of products.
No, I think at the 20 nm node, we will be converged. Not post 20 nm. At the 20 nm node.
Got you. Just now a follow-up on other parts of David's question, actually. On the NAND flash side, did we understand you correctly that actually what you intend to do is convert everything to one DRAM process flow first, then subsequently, probably 2014, 2015 onward, you may make use of more flexibility to convert some of your joint DRAM capacity to NAND flash if required. Essentially, in first stage, you will be converting everything on the Elpida and Rexchip side to a joint process flow for DRAM. Right? Therefore, whole capacity.
No, actually, I didn't say that. I'm going to be silent on the topic.
Okay. All right.
Sorry.
Thank you.
Our next question comes from Vijay Rakesh of Sterne Agee. Please go ahead.
Yeah, hi, guys. I know this is a little early now, but wondering how you're looking at capacity of the combined Micron-Elpida over the next 12-18 months. Also, if you could take a stab at CapEx also. Thanks.
Sorry, I don't think I understand the intent of the first part, how we're looking at capacity.
You're talking about capacity increase, Vijay?
Yeah. You have a capacity increase, but are you going to keep all the capacity running, or do you expect to consolidate some of the capacity and move stuff around?
Well, again, as I said, we think some of the capacity is potentially fungible, but we're not discussing what our plans are there. I actually believe that we can wring some increased output out of the existing facilities and tooling, and we plan to work on that as we bring the companies together.
Got it. Any thoughts on CapEx?
Oh, I'll let Ron address CapEx.
Your question was what's the requirements for CapEx?
Yeah. How you see the overall CapEx for Micron-Elpida combined over the next 12 to 18 months or 12 to 24 months?
Well, if you're talking pre-close, as we discussed a little bit earlier, we're operating as two separate companies. We'd anticipate that Elpida would be funding their own CapEx through their operating cash flow. Micron has supported that in terms of the interim operating plan that Mark referred to and can provide backstop support as required. There'll be independent activities. As he commented, we've got support up to $500 million of CapEx till June 2013, and then $300 in the timeframe beyond that.
Let me add one comment on that, Vijay, which is, we had previously told you that the CapEx forecast for Micron for fiscal year 2013 was $1.6 billion-$1.9 billion. I think, with the announcement of this deal, what you should expect is that we are continuing to scrub our CapEx spending internal to Micron to make sure that the CapEx we do allocate over the next fiscal year will be directed at the highest opportunities from an ROI perspective for the converged company. You might expect us, as we update that guidance in the future for that internal Micron CapEx number, to move down or crunch down a little bit.
Got it. Great. Thanks a lot. That's it. Really appreciate the color.
John Pitzer of Credit Suisse, please go ahead.
Yeah. Good morning, guys, and congratulations. Mark, just given the inherent volatility of the business and the timing on the close here, can you just talk a little bit on this interim business plan, what the broad metrics are that you guys have agreed to? Is it Elpida running for optimized cash flow, optimized profitability? Can you help me just understand some of the details in this interim business plan?
Well, first of all, the elements, John, would be around their operating expenditures, their capital expenditures, and the product roadmap, and making sure that those all fit together in a way that we think makes sense over the timeframe between now and close. I think the essence of your question is what can you expect in that the priorities are within that plan. Really, the priorities were set out with an eye to making sure that in what would be a reasonably expected close time, they have the right products and the right equipment on the floor to facilitate a rapid convergence to the most efficient technologies that we can imagine the two companies putting together. As I mentioned, there's some short-term things we can do from a test and assembly perspective that actually amounts to significant dollars.
There are some longer-term things that involve bringing the two companies together. I think what Elpida has done here is put together a plan that makes a lot of sense to us and that we were willing to sign up for and buy off on as one that'll put us in a good position when we get to close.
Great. As my follow-up, maybe a couple of accounting questions for Ron. Ron, as I think about building a single model for both companies, on the PP&E side for Elpida, do I just take a net present value for the price of the deal and use that over an amortized period? Secondly, how do I think about book value as you guys combine the two entities? Is there anything on the accounting side that might dramatically change book?
Sure. John, as you may or may not know about accounting for acquisitions today, what will happen first is we'll do a fair value assessment of all the assets acquired in the transaction. As you may recall happened in our Numonyx acquisition, the situation was when we did the fair value assessment, the fair values actually ended up being greater than the purchase price, and we had a gain that was recorded at time of close. If the fair value assessment here with Elpida of all the assets ended up being greater than our consideration, which is certainly possible, but we've got to go through that process, then there could be a gain at time of close.
Of course, the cash consideration we put in for all those assets are, as I described, the total consideration, $2.5 billion, and the ROI on that is quite high on a cash basis. What you end up with from an accounting standpoint may be a little bit different in determining how you value the fair value assessment and what goes in for PP&E assessment. The important thing, though, is the real economic cost of that PP&E is quite favorable, and even after the invested conversion cost, our estimate is that the economics will be quite favorable relative to organic alternatives that Micron would have. We'll get a high ROI on that overall result. Did that address your question?
Yeah, it did, Ron. Just on book value, how do I think about that from an accounting perspective as we try to combine the two companies?
In terms of our book entry, as I mentioned, we will do a fair value assessment. It'll go in at that fair value, and we may take a gain, and if we do, that would go into the equity section as additional value. The book value is going to generally relate to the consideration, it should be pretty favorable in terms of the overall economics.
Great. Thank you.
On a book value level. Yeah.
Thanks, Ron.
Our next question comes from Daniel Berenbaum of MKM Partners. Please go ahead.
Hi, guys. This is Ada calling in for Dan. One question for you. It seems like Elpida is going to be treated as a wholly owned subsidiary, but Micron's going to pay Elpida foundry services. Can you get a little bit more into those details? There's going to be some type of cost-plus arrangement to keep the subsidiary break even?
Ada, this is Ron. Yeah, the construct that we have as a company is that we have a Singapore principal structure where Singapore is the global manufacturing entity and the risk taker for manufacturing around the globe, and all of our subsidiaries then tie into that construct on a cost-plus basis. We'd anticipate that Elpida would come in with the same kind of construct into that overall structure. The risk taker for manufacturing would be Singapore as it is today in that construct. Does that address your question?
Yeah. The payment of the additional $1.75 billion, is that going to add to the cost, or is that part of the cost there?
We anticipate that under the current assessment, that all of the Payments would be paid out of the funds generated at Elpida and paid by the Elpida entity as part of this construct.
Is there going to be a similar arrangement like that with Rexchip, or is that going to be something different?
No, Rexchip, as Mark mentioned, we own 89% of Rexchip. We would, upon close, be consolidating Rexchip, but there's, today, a different economic relationship in terms of a transfer pricing construct, similar in concept to what we have within Inotera today.
Okay.
Obviously, that would, for now at least, remain intact at time of close, and that transfer pricing mechanism that goes to Elpida today would transfer over to Micron.
Okay, great. Thank you.
In terms of funding the cost of wafers.
Okay, thanks.
Sure.
Our next question comes from James Schneider of Goldman Sachs. Please go ahead.
Good morning, and congratulations on the transaction. Mark, I was wondering, at a very high level, post the close, you'll have less than 30% of your revenue exposure in NAND flash. Do you think that's the right business mix for you going forward, or would you look to increase the NAND flash percentage over time?
No. I think over time, we would anticipate it would be more evenly balanced than that. I'm not sure that your numbers actually, in the question as posed, are accurate. No, you're right. It'd be about 30%. No, we would look to rebalance over time, sure. We have a lot of flexibility around the various fabs around the globe today.
Great. Fair enough. Just a detailed question. Regarding the CapEx support of $800 million you outlined, can you tell us through what technology node that'll take you on both the Hiroshima and Rexchip fabs?
Well, it'll depend on exactly how quickly we deploy nodes below 20 nanometers. The line that is in place is carved into two pieces through June of 2013, and then on beyond that to June of 2014. We believe that will be well into the 20-nanometer node conversion, but not a complete conversion of all those wafers. Again, we're not wanting to telegraph exactly what our strategy is relative to which nodes we would be running in which fab. I would think of it as more of adequate capacity to assure Elpida's ability to continue to operate the company to the interim business plan over an extended period of time, and not necessarily reflective of what the longer-term plans are for that capacity.
Understood. Thanks very much.
Our next question comes from Hadi Orabi of UBS. Please go ahead.
Sure. Thank you very much. Can I just start off by asking about the statement here about maintaining Elpida's operational employees and how that factors into OpEx synergies over time? What is your flexibility regarding headcount reduction? If I look at Micron's own headcount of 27,000 employees against Elpida's 5,008, whereas your revenue is just a factor of twice theirs, it starts to look like there's more scope to cut costs employee-wise on the Micron side. Are there any comments you can make at this stage about OpEx synergies coming from this deal? What areas you've identified where headcount can be reduced might just be helpful for us to understand the value this deal brings.
On the synergy front, as I mentioned, we believe that there's a lot of rebalancing that can be done within the existing Elpida operation. Although we wouldn't expect to see any significant overall headcount reductions on that side of the company, at least over a reasonable period of time. We do see, as you pointed out, a lot of opportunity to rebalance, not only in the R&D area, but also in the sales and marketing areas, in a way that will produce greater value. Not looking for significant headcount reduction until we get into 2014 timeframe, and at that point, we'll have to see how the company is growing.
Okay. I'm not sure that entirely addresses, but I'm hoping we'll get more clarity on that over time. Let me ask you a different question. On the CapEx front, I know that people have asked you about CapEx in various ways, and I don't know that you have straight answers to give yet on how much over time it will cost to convert Elpida's facilities to Micron. Let me ask you this From a cash flow perspective, at the beginning of the-- During the earnings call, Mark, you said that you will not dilute equity, and you're not looking to raise significant debt. Should we understand the CapEx commitment and spending you'll be making will come from cash flow generated from this deal, and investors should not be worried about future significant dilution of equity or more debt being raised?
First of all, the cost to convert, maybe I can just give you a reference on that. As Mark mentioned, the acquisition cost of the in-place capacity is roughly a third of greenfield capacity. If you add in what are now rough estimation costs for conversion that we've got modeled, we'll still have a very economic total cost in terms of cost per wafer and more economical than other alternatives we'd have through organic choices. I'm trying to convey without being able to give you precise numbers right now that the ROI on this in-place capacity, including the cost of conversion, is very economic. To your question of financing, yes, we believe that as we have done historically, we'll continue to finance a lot of our requirements through capital leases on some of that CapEx.
We also anticipate that Elpida will continue to do that once integrated as a subsidiary, the CapEx line is intended to give them some funding, support, I should say, so they can continue those activities, even though we fully anticipate that they'll be able to continue to support that through their operating cash flows. The CapEx equation in terms of our overall economics relative to our volume of business and output, we don't expect to be materially different, if that's what you're looking for from what we have typically run. That's all very preliminary right now since we haven't built out full models for those activities. If you're looking for the question, is there going to be a CapEx bump on conversion?
Our belief is no, that also, as Mark mentioned, we will be making choices in terms of shifting CapEx priorities around to the optimal applications as we go forward, we have a lot of choices and flexibility to do that.
Sure. All right. Just one last question. In terms of the ownership of Rexchip, just remind me. Sorry, actually, let me just ask a different question from that. Prior to this point, Elpida had reduced capacity, obviously, as they try and get the operations within what their cash flow can handle. Since the deal was announced, DRAM prices have rallied, have improved significantly. Is Elpida's operation now back up to 100% in terms of wedge running today? I don't know what you can disclose to us at this stage or not, but from a cash flow standpoint, is Elpida cash profitable at this stage given where DRAM prices are?
Let me handle the first piece. We're not going to comment on what Elpida is doing with their capacity, but I think Ron probably has a few things to say about the cash flow. Yeah. As I alluded to earlier in brief, we're not in a position to comment extensively on Elpida's capabilities for obvious reasons. To your question, yes, they were underutilizing capacity for the last few months, and they are vectoring in a positive direction in terms of more capacity loading. In addition to that, they're going much heavier to 30 nm and anticipate that in about six months, they'll be at peak 30-nanometer capacity, whereas previously, they were running much heavier to 42 nm.
That along with, as you mentioned, normal market conditions and the access to increased number of mobile customers improving their mobile mix, all is vectoring in a direction that's more similar to prior periods when they were EBITDA positive. In fact, before the downturn of the DRAM pricing market, they were running around $300-plus million a quarter of positive EBITDA.
I don't know if that helps you sort of structurally, that's about all I can comment on in terms of their business trajectory.
That's helpful. Thank you very much.
Our next question comes from Mark Newman of Sanford Bernstein. Please go ahead.
Hi. Thanks a lot. Congratulations. We're getting a step closer here. A question for you on the synergies. You commented that you expect this to be accretive to EPS and cash flow, I think within a year. I just wanted to talk through the synergies we've got here from the scale and capacity side, which you talked through a little bit, and then the process technology, which you talked about quite a bit in terms of the synergies there and the timing of that. Also on the product and customer side. I think there's a lot of potential synergies you could potentially get there from bundling Elpida's Mobile DRAM with what you've got on the NAND flash side, for example. Finally, on the timing for the operating expenses as the fourth synergy.
I wonder if you could talk through the timing of the third and fourth one, which we haven't really talked about. The timing of synergies there on the product side and on the operational expenses.
Mark Adams, why don't you pick that one up?
Well, let me start with the first piece. I think the customer feedback overall has been fantastic and very supportive. Clearly, they've asked Micron to step up in the past to take on more of the capacity given our pure play memory approach. More specifically, in the wireless segment, Elpida's low-power DRAM portfolio is very strong and has been very well received as a combination with our portfolio. It really puts us in a very unique position to be significantly scaled in the wireless segment. I would say, across the board, we've been getting very good feedback for us. When you think about the context of the scale opportunity for us as we continue to add this capacity, we are left as really the lone memory company not competing with its customers in each of the segments.
That's giving us a lot of support as we look at adding value around premium solutions going forward.
Okay. Any guidance in terms of Okay, let me put it another way. You commented about the synergy when you might be EPS accretive, which I think, as I recall, you said within one year. Is that taking into account all of these things? In which case, can you talk through what the timing is to get some benefit on the product side in terms of getting these kind of wireless MCP or products and getting the advantage of Elpida's LP DRAM?
Let me try and help. As you pointed out, Mark, the ways in which the strengths of the Micron portfolio and the strengths of the Elpida portfolio can be combined can be pretty short-term benefit to the company. When you talk about combining a leading-edge NAND portfolio with a leading-edge low-power DRAM portfolio, that's where a lot of the hot products are heading and needing more and more of those types of MCPs and system solutions. We think that's a short-term return. The other thing I'd point out is in your list, and I thank you for pointing out the list, it was a good list of synergies. The one big one that's very short-term that you left off the table was the back-end methodology that I alluded to.
In that vein, I would say, there's some significant short-term returns there post-close, associated with very different models between the two companies, but technology that can be shared very quickly.
Mark, I might just add that to your OpEx question and timing and your question about accretion. The accretion view that we're sharing that within a year will be accretive on EPS and cash flow is not predicated on getting significant OpEx synergies in the short term. We certainly expect to get those, but we are anticipating we can get very positive results, as Mark mentioned, from the products, back-end activity alignment, technology integration, et cetera, in the nearer term.
I see. Great. Just to confirm, the EPS accretion you're talking about, does that include some assumption for DRAM price rebound, or is that true even without a DRAM price rebound?
No, we're not assuming significant changes in the market environment.
Great. Thanks. One further clarification on the short-term back-end methodology improvements. I guess you're talking about benefits to how you're doing testing, packaging, and assembly for the DRAM modules, flash cards, the flash modules, et cetera. Is that correct?
That's correct.
Okay, thanks very much, and good luck.
Thank you. Yep. Yeah, Allie, I think we're going to take just one more question and then wrap up the question and answer session. One more question from the queue, please.
Okay, great. Our final question comes from Hans Mosesmann of Raymond James. Please go ahead.
Hi, this is Brian Peterson in for Hans. Just an additional clarification on the synergies. Does that incorporate the full $2.5 billion payment, or is that just the initial first-year outlay?
I'm not sure I understand the question. The synergies are independent of the purchase price. The $750 is payable at close. The remaining $1.75 billion will be paid over the next seven years. We expect to get some significant benefit in the operating structure of the company relatively quickly and generate accretive
Cash flow and earnings per share within the first year.
I'm just trying to get.
That's also why. Go ahead.
Actually, what it assumes from the capital outlay? If it's based on the whole 2.5, or if it's just the initial payment to get the accretion in the first year.
Brian, one of the reasons that I put the EPS number out there is because if you just level load all the activities, including the fair value assessment I mentioned, we still get accretion within the first year. When you look at the cash flow pieces, obviously that ties the cash flow profile, which I think you're driving at, but I would focus on the EPS accretion, which means even on a net income basis, we're getting significant results early on. That comes from significant synergies, et cetera, and what we can drive through the activities Mark mentioned.
Before I turn it back over to Ivan, let me just finish up here by reiterating. We believe that this is a highly Sorry, we got a little echo on the line. This is a highly attractive deal for Micron. We're going to get a great benefit from the manufacturing scale and R&D synergies. There's significant synergies up and down the business from products, from technology, from R&D, SG&A. At the end of the day the attractive economics here are hard to ignore. The combined company will put us in a stronger position in the memory landscape. We can execute on this deal. We've got the experience, we've got the team. We know how to put these companies together, and we think that this combination gives us a very bright future. Appreciate all your questions today.
I'm going to turn it back over to Ivan to wrap up.
Thanks, Mark. I'm just going to go ahead and read our safe harbor statement again. We'd like, again, to thank everyone participating on the call. Our safe harbor language is as follows. 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 this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC, including the company's most recent 10-Q and 10-K. Thank you again.
Thank you. This concludes today's Micron Technology Announces Agreement to Acquire Elpida conference call.