Earnings Call: Q2 2011

Mar 23, 2011

Good afternoon. My name is Jovan, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Micron Technologies Second Quarter 2011 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. If Bedard, you may begin your conference. Thank you, and welcome to Micron Technologies second quarter 2011 financial release conference call. On the call today is Steve Appleton, Chairman and CEO Ron Foster, Chief Financial Officer and vice president of finance and Mark Adams, Vice President of Worldwide Sales. Excuse me, this conference call, including audio and slides, is also available on Micron's website at micron.com. If you have not had an opportunity to review the second quarter 2011 financial press release, again, it is available on our website at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of this call accessed by dialing 706 645-9291 with a confirmation code of 52960648. This replay will run through Wednesday, March 30th, 2011 at 5:30 pm, Mountain Time. A webcast replay will be available on the company's website until March 2012. We encourage you to monitor our website again at micron.com throughout the quarter for the most current information on the company including information on various financial conferences that we will be attending. During the course 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 a consolidated basis to differ materially from those contained in our projections or forward looking statements. These certain factors can be found in the Investor Relations section of Micron's Web site. 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'd like to turn the call over to Mr. Steve Appleton, Steve. Thanks, Kim. For those of you that were not able to make the call during the last call, I just want to remind everybody that we have a slight format change, and that is that I'm going to make some introductory comments and then Ron Foster will cover some of the financial aspects of the release and we'll open it up for questions. So to start with, I'd like to open on the topic of Japan. On the first comment, we're thankful that none of our employees were injured during these tragic events. And, and, we hope the best for the people in Japan as they start the recovery process. But more specifically, to the impact on Micron, I know people are trying to determine whether it's a positive or negative for Micron. And unfortunately, I can't answer that for you, but I will comment on the things that we are evaluating. First, our wafer fab operates more towards the center of Japan and away from the coast. And we did not sustain any damage nor did we experience any disruption in our production there. We do have a design center that's near Tsukuba just outside of Tokyo and And as you might expect, we have some sales support offices in Tokyo, and they were both shut down for a limited amount of time. I think the greatest challenge there is they're experiencing what I believe most people are in the area, which is, you know, difficult transportation and really blackout which temperature is frustrating to a lot of people. Now, a number of our suppliers are in Japan, and they do range from chemicals to materials to weigh offers many of them supplies from operations, they have outside of Japan, but also as well from operations, they have inside of Japan. And some of them were not impacted in auto some of them were. Now we have a pretty complex matrix analysis on everything, as you might imagine. And for the most part, the companies have been very open, and they've been briefing us really daily, or hourly depending on what the circumstances are. So our our information is obviously only as good as theirs. And I think many of them are still trying to determine themselves what the best path back what is the best path back to full production. Now, also, as you might expect, we're filling gaps on an hourly basis, where we might have holes And as been noted, I think in the media, most of us had inventory for the near term, but really, we still need a couple of weeks to understand what, if any, the gain remaining gaps might exist. So we're working on it pretty diligently. We don't have any other information than that. And we think it's something that we have to pretty stay pretty diligent on and stay on top of, but that's what we're doing. Now, With respect to fiscal Q2, on operations at technology, we had a number of achievements, I think, were noting Probably the one to highlight the most is that IMFS is coming along ahead of schedule, by about 2 months, may be hard to believe, but we're actually shipping now, product from that facility. And I'll probably take this opportunity to mention capital. So in our Q1 capital, the prior quarter was about $570,000,000. We made note that this was going to be our big capital for the quarter. Our big quarter for capital, I think it was about $840,000,000, which is a little bit less than we thought as also happens occasionally sometimes things get pushed into the quarter just in terms of payment. So, Q3, I think, will be similar. But IMFS is going actually so well that, you know, we're going to continue to drive pretty hard on getting the capital in there and getting that facility ramp. So I think We're going to be on the upper end of the range that we've given you. We had previously told you $2,400,000,000 to $2,900,000,000. I think we'll be on the upper end of that range for the year, but we feel pretty good about it. Because, as I said, the operations go up pretty well in particular in the FAS. In fact, I think it's also worth noting that 20 nanometer NAND still looks very good for a ramp in the second half of the year. I also would add that we completed our acquisition of tech Himi, we owned most of it. We completed the acquisition of the rest of it. So we now own 100% of it and it continues to operate pretty well. Switching over to a few comments on the markets and product segments. Let me start out with the DRAM market. I think in our last earnings call, I noted that we did not believe that a winter quarter was going to be similar to the winter of 2007 or 2008. I think that's proven to be the case And we're not suggesting that it was a picnic, as some of our competitors proved with the reporting that they did with some pretty negative earnings, but But I think the downturn bottom this last quarter also we mentioned that we thought it would be at a lower environment for pricing for a quarter or 2, but it wasn't going to get worse. In fact, it didn't get worse. And at least for Micron, it's proven at least to be somewhat mild. Clearly, I think that the new DRAM supply continues to be needed compared to last cycles, who else have made mention of that, and that's proven to be the case. It is true that desktop continues to be somewhat weak. There are a lot of cash now that are pointing to something around 10% growth as opposed to some of the higher forecasts earlier. But I would remind everyone that content is still forecast to grow 40%. And if you do the combination, that's still up 50% or in some forecast I've seen even greater bit demand. So not too bad really for the weaker of the markets that we participate in and auto handle market actually look better. So on the pricing front, we don't think it's going to go crazy. In other words, it's not going to go crazy up. I will tell you that we do see a continued improving pricing environment through the rest of our fiscal year. And I think most of you have seen in the media, some of that's actually materializing now. From the NAND front, also mentioned in December that we felt we had hit a level where the NAND pricing would be pretty stable. Of course, it's fluctuated a little bit. It's gone up and let's gone down a little bit. For the most part, I think it's worthwhile saying that it has pretty much behaved as we would have expected it to, obviously notwithstanding the recent spike due to the Japan effect. So, wireless, particularly the smartphones, in terms of really consumption, continues to look very good. I want to also mention that our SSD shipments were up significantly quarter 2 over quarter 1, and we see that trend continuing, with quarter 3, it's going to be over too. And obviously a lot of the news around tablets and military devices are actually pretty positive for us in the NAND drilling. And so all those things added up look like all the demand signals going forward look pretty good for both the NAND and the DRAM environment. On the non front, the embedded markets, we have the business groups now, which Ron will just mention in a second, but the embedded markets for lower DRAM and NAND all look good. And I think as you would expect, as we've tried to communicate earlier, for the most part, we're pretty stable in pricing and demand. I will say specifically to NOR, we believe we maintained our market share, in other words, our market share leadership in NOR, Obviously, we saw some modest seasonal decline in fiscal Q2, but that's pretty typical. And then another highlight is that we sampled our 45 nanometer node products for wireless and embedded and actually beginning our 45 nanometer NAND production ramp. So all of that's on a good note. So all of this leads me to my final comments, which, in our execution, our product portfolio strategy is working. With Acorn in pretty good shape. In fact, with Acorn as good a shape as we've ever been coming out of a negative period. The demand signals from the majority of our customer are strengthening from Q2 to Q3. And I think we're pretty well positioned so that even with stable moderately improved pricing, we should now start to build margin back into the financials. So all in all, we feel pretty good about what we said. And with that, I'll turn it over to Ron. Thanks, Steve. The company's second quarter of fiscal 2011 ended on March 3rd. As usual, we provide a schedule containing certain key results for the quarter as well as estimated metrics for the next quarter. That material is presented on a few slides that follow as well as on our website. The results for the 2nd quarter include a $40,000,000 gain in other operating income associated with the Samsung patent cross license we discussed last quarter. A portion of this gain is reflected in the operating results for each of our reportable segments, as you will see later in the presentation. Recall that the final installment of $35,000,000 under this settlement agreement is expected in the 3rd quarter. The provision for income taxes in the 2nd quarter is higher than what would normally be expected, primarily as a result of a tax rate change outside of the United States. This change caused a $16,000,000 one time write down of deferred tax assets and accordingly is not expected to have significant impact on the tax provision going forward. In addition, the tax provision includes the withholding tax of $7,000,000 related to the Samsung payment under the Patent Cross license. Total idle capacity costs which are charged directly to cost of goods sold were $36,000,000 in the 2nd quarter compared to $59,000,000 in the 1st quarter. These costs are primarily attributable to the Singapore fab startup. In addition, preproduction costs at IMFS of $15,000,000 were charged to cost of goods sold. We anticipate that IMFS will begin to inventory production costs in the third quarter as the initial products NAND trade production cost per bit declined faster than NAND trade selling prices, while selling price reductions for DRAM products outpaced the cost reductions. The result was a compression of the overall company gross margin from 23% in the first quarter to 19% in the second quarter. As you recall from our winter Analyst Day, we estimated DRAM production bid growth to average low teens over the next three to four quarters. The 2nd quarter actually came in above this range of 23%. The higher bit growth in the 2nd quarter along with a plan to shift for the product mix to higher margin specialty DRAM products drives our estimate of low to mid single digit bit production growth in the third quarter. We also projected came in above this range as well at 20%. We are shifting NAND mix to lower density and higher margin products, including SLC and NAND based multi chip packages in the 3rd quarter, leading to bit growth in the mid to high single digit range. Correspondingly, the NAND trade cost per bit decline in the third quarter is moderated in the low to mid single digit range as we shift to these higher margin products in our mix. Bit production includes bits purchased from third party suppliers which may impact reported volumes and margins. To give you an idea of the general composition of our product portfolio, have developed this high level summary. As a percentage of consolidated net sales DRAM comprised in the low 40% range NAND in the mid 30s and nor in the mid to high teens as a percent of revenue. This quarter, we began reporting financial results for each of our 4 business unit segments. The 2nd quarter results for DRAM Solutions Group track closely with the DRAM product average selling price cost per bit and bit volumes I mentioned earlier. This resulted in revenue and operating income somewhat lower than prior periods. The DSG segment includes virtually all of the production volume from Inno Terra, which was relatively higher NAND solutions group trade sales tracked closely to the NAND trends presented earlier with revenue up quarter to quarter. NSG sales to Intel from our I'm Flash joint venture were just over $200,000,000 in the 2nd quarter, roughly flat compared to the first quarter. Recall these sales are at long term negotiated prices approximating costs. Wireless Solutions Group Sales of products by Architecture in the 2nd quarter were NOR, NAND, and DRAM, and increasing decreasing order of revenue. That's NOR, the NAND, then DRAM, and decreasing order of revenue. A portion of NAND sold in WESG is supplied from Hynix at market prices. This supply is transitioning to Micron factories in the coming quarters which we expect to improve The Embedded Solutions Group sales of products by architecture in the second quarter were in rank order NOR, DRAM, and NAND and decreasing order of revenue. Most of the inventory that was mark to market in the Nemonix acquisition has now flowed through. In addition, similar to my comments relating to WESG, ESG also acquired a portion of their NAND products from Hynix and are also in the process Now, turning to operating expenses. R and D expense for the quarter benefited from development cost sharing of approximately $56,000,000 from joint development programs. R and D expense as well as the cost sharing was reduced by the reimbursement of certain costs incurred under government programs in the second quarter. R and D expense is expected to increase in the third quarter to the $210,000,000 to $220,000,000 range primarily due to a higher volume of pre qualification wafers processed, notably 42 and 3x nanometer DRAM and 20 nanometer NAND. The company generated $809,000,000 in cash flow from operating activities in the second quarter. As previously reported, to buy out the other shareholders of tech Semiconductor, as Steve mentioned. The accounting for this acquisition resulted in a $67,000,000 increase to additional capital in our equity section. The cash and short term investments balance at the end of the second quarter was $2,200,000,000 In addition we have restricted cash of $338,000,000 separately presented on the balance sheet Now, I'll close and turn it back to Kipp. Thanks, Ron. And with that, we'd now like to take questions from callers. Just a reminder, if you are using a speaker phone, please pick up the handset when asking your questions so we can hear you clearly. With that, please open up the line. Thank Our first question comes from Glenn Young with Citi. Thanks. Steve, in your prepared comments, you said you were seeing demand signals improving. And I wonder if you could just give us a little bit more detail about that. 1, and then 2, let us know if you've contemplated, the impact of hand in in those statements? Well, let me first talk about Japan for a second and then Mark Adams and Sarah Salmott will let him answer the question. The financing was we haven't contemplated in thinking about Japan, whether that helps us or hurts us because, obviously, there's, you know, a competitor or 2 of ours, no doubt, has some supply issues related to that. Because they're in the area where we've impacted. And then of course, you already know the counter to that, which is, you know, if customers can't get some components and they, then there obviously be challenges in meeting other components. So that, that's hard for us to know. You know, I remember, I don't know if you remember, but probably not, the, Sumeetomo Chemical Plan explosion, the mold compound, which was, I don't know, 90% line out of that part of the world. And it's probably worth noting, I think, that, what we saw in that case and probably what we'll see in this case is that Most of the supply chain, most manufacturing operations have the ability to have an accordion effect. So in other words, we can run at near full capacity, but run a lot lower cycle time or you, and so you can expand and contract your production to try to deal with shortages they come through at various times. So I think you'll probably see that through most of the manufacturing world, novell, where they will expand and contract and they'll run faster cycle times or shorter cycle times, you know, with a replenishing or trying to squeeze more products in the line. For the most part, I think if the effects are relatively short term, in other words, a couple of months, you know, a few months then you probably won't see a whole lot of anything, in terms of what happens in the manufacturer operations around the world. And if it affects a longer term, then clearly you're going to have some and those kinds of things, we just don't know. And our information is only as good as probably years on how that might impact our customers. And let me ask Adam to comment on the general demand signals from rest of them. Joe, in my comments will be obviously pre Japan, just as Steve addressed Japan. What we saw coming out of Christmas, which again normally is our, weakest demand quarter. We saw pretty stable demand throughout the quarter. And in fact, post Chinese New Year's, we saw kind of an uptick across, a number of our key volume segments. The PC business in general was better than expected and we're also seeing, density inside the box increased back to even above where we were back in the, the de specking phase of 2010 in the spring and summer of that are density per units back up. And so demand in the PC commodity space is pretty strong for us. The server market as well from Micron, was very healthy. As a matter of fact, as a percentage of overall, specialty bits against commodity, it was, it was up significantly this quarter for Micron. So pretty strong demand there. And I would also point out that those server growth overall is not in the 6% to 7% range year over year in terms of unit growth. The density per server is dramatically up around 50% to 60% per box. So, so good growth there and good demand, from our customers in that area. Obviously, the NeuMoDx acquisition has opened additional, customer opportunities around the wireless, segment for us. And they're certainly manifesting themselves both across NOR applications and then DRAMMCP solutions with NORN and NAND solutions. So, I see some pretty good demand through the quarter, which enabled us to, to perform pretty well at the top line. That's great. And maybe just a quick follow-up, because Steve wanted to clarify something you said earlier. With respect to your ability to manage your production in light of an issue. I think you said maybe a couple of months you could handle it. I just want to be clear on on some precision there. Is it is it something like about 8 weeks where you feel like, alright, I can manage the fabs, you know, at this point for about 8 weeks, and I gotta start thinking a little more carefully after that. About shortages or is it, or do you have a number like that in mind? Well, let me first comment that precision in this environment is just unachieved. Number 1. Number 2, what I was referencing was that, well, actually you made a comment that probably would be good to add some additional input on. Number 1, most of the companies, us and others, carry, you know, a couple months of inventory for most of our processes and products and so forth. So we all still have that. So I think the reference point that for a couple of months, it's unlikely most companies see much impact. It's probably true, at least in the semi industry. I can't speak for other industries, but at least in hours, But secondly, even when you hit shortages at some point in time of supplies, you're able to dial your action operations to actually just run faster cycle times, because the way most of the equipment fabs operate, at least in the memory world, and third full capacity because they want maximum utilization of the capital. And the way that we achieve that is we make sure that every piece of equipment has material waiting for it to run. And what happens, when you're either starting to wafer fab, by the way, we're experiencing 9fs, when you start up a wafer fab, it doesn't have that much material in line, or when you when you learn to a situation where maybe you have some kind of shortage on something that you're expecting to get but you actually dispute the cycle signs up in those sense. And so the output isn't quite optimized, but it's not like you take the same percentage hit as a shortage of material. And that can last for some period of time. And then it's only after that that you then have to start dealing with true shortages. And, and of course, we have no idea whether that's going to exist or not. Okay. So that's very helpful. I appreciate that. Thanks. Our next question comes from Doug Freeman with Great. Thanks guys for taking my question. Ron, would it be possible for us to get the rank of gross margins you know, DRAM NAND. What was the highest? And then if I could focus in a little bit on it, sounds like you're changing strategy there. On NAND, looking to go to some higher value product. Can you give us the gross margin effects that that should have? Yeah, rough, I'll give you a rough ordering specialty DRAM, always tends to be the head of our list trade NAND is, is doing quite well for us and probably next in rank, nor clearly in the, the vast majority of our NOR products. And then, core DRAM and sort of that rank order. Just elaborate a little bit though on on your line of questioning We are seeing market opportunities, as Mark, mentioned in his comments to shift to, higher margin product and the specialty end of things, both on the DRAM side and on our NAND, product side in the third quarter And we're opportunistically shifting some of our mix, which is, affecting our bit growth and cost per bit cost mutations that we typically give you, but I just wanted to make sure you understood that we're doing this strategically, to help improve margin. And it's the right thing given the the balance of, mix we need for our customers. All right. And could you help walk us through a little bit of, you mentioned pretty quickly there in your, prepared remarks about the accounting treatment for the startup of Singapore and your startup costs. Can you walk us through in a little bit more detail and offer some color on on how we should think about those startup costs accounting playing out over the next couple of quarters? Sure. There's a couple of pieces, this quarter. There's true idle costs, which were about $36,000,000 in the quarter for the company, the vast majority of that was IMFS. And then there's another, $15,000,000, which we characterize as preproduction startup costs. And that's resulting from the fact that we're now actually starting wafers, as Steve mentioned, and beginning to move up the production curve. So, both those pieces are expensed directly to cost of sales. And so you can compare them to the prior quarter's title costs that were about $59,000,000. But bear in mind that those that $15,000,000 of cost relates to variable materials, etcetera, that are used to start our production ramp in IMFS. So what's going to happen here beginning in third quarter is as we qualify production which we expect to do, as I mentioned in the third quarter or beginning of third quarter, we will start inventorying some of those costs. And they will go into our our inventory on our balance sheet and they will move out, when we ship the qualified products. So we will not be directly expensing all of the costs as we begin to qualify a product, which I would do is beginning to happen in the third quarter and then, significantly in our fiscal fourth quarter. But just so that I understand correctly, so then when that inventory cost flows out of the operating model, it will be at a lower than corporate average gross margin or normal gross margin? Well, you've asked gross margin presumes an average selling price so I need to just address it on the cost side. We will be in the, we use a moving average cost system, if you will. So we'll be, and we're already beginning to ramp costs. So, we'll be moving it into our inventory at, at an average cost, trended over time if you and that will be, that will be in our inventory cost structure. We do not tend to inventory, the full cost when you have a significantly higher ramp cost we inventory that is somewhat lower level. So as that goes out, it'll depend upon the average selling price, but it's, we would expect them to have a typical relationship to, to our normal flow business. Great. Thank you. Our next question comes from Sean Webster with Macquarie. I guess, 1st of all, on in demand going into Q3, can can you give us a a little color on what you're hearing from your OEMs in terms of what your expecting for calendar q 2, bit demand for DRAM and maybe even which end markets you're seeing the most strength in going into fiscal q 3? From a demand standpoint, I think, what we're seeing quarter over quarter is in the mid teens more or less. And, we see no reason for Steve's earlier comments that there'll be a lot of variability around that number. In general. And then the NAND market continues to look pretty strong, around, obviously, smartphone, market to tablet, segment as well as SSDs. So mid teens, DRAM bit demand growth. Is there any particular end markets, whether it's networking server or PC that's the strongest for you? Well, I think for us, again, this is all kind of on a, a proportion basis. The server and networking markets showed significant strength over the end of our Q2 and have continued to show strength, going into Q3. So we're, we're continuing to be very bullish on those markets. And as I mentioned earlier, despite the fact that the DC numbers are down off of maybe last year's 2011 projection, the density for boxes making up for that loss and we, you know, so PC business is still fairly robust for us as well. Okay. Great. And then, do you have a can you share with us your expectations for cost per bit reduction in Q3 for NAND and DRAM? Yeah, we're looking at, Sean, we're looking at down, excuse me, high single digits on DRAM and down low to mid single digits on NAND. Okay. And then one final one. On terms of the production, so you had a really strong quarter in Q2 on your production, your expecting that to slow down in Q3. Can you flush out what you think the next couple of quarters are directionally, you know, excluding Japan impact on what you're expecting, for sequential bid production? Not much impact from our Japanese production facilities. And we'd be back to that, guidance that Mark said at the analyst meeting, which is kind of low double digits in, over the next 3 to 4 quarters. On the DRAM side? That's correct. It's about mid teens on demand. Great. Thank you. Our next question comes from Kate Kiblarski with Goldman Sachs. Hi, thank you for taking my question. I wanted to ask a question on content per box. I think Mark talked about content per box starting to increase nicely. And I wanted to get your thoughts on how you're thinking about content growth for the remainder of the year given that pricing is now stabilizing and potentially moving up. Do you think that might actually have an adverse impact on content growth? Thank you. Uptick in price that we saw back in 2009 going to 2010. Remember something as our cost in DRAM goes down, you know, even as we think pricing will be more favorable in DRAM over the next coming quarters, we don't think the impact on the bill of materials anywhere significant as it was back when, it was $2.50 per gigabit at the OEM. So we don't anticipate any downward trend in density per unit going throughout the rest of our fiscal year. And then maybe just one other question on IMSF. You know, you talk about the ramp progressing faster than you had expected. Are you guys still targeting that 60,000, 65,000 wafer starts per month by the end of the year or has that number now gone Well, no, we're still targeting that. Actually, even if we decided to go beyond that, unlikely we could have it before the end of the year because just the ordering cycle time and the equipment. So that's a good target to use for now. And as as we've noted before, we're just going to lost the markets as we go through time. But, you know, we're trying to get to that 60 k at the first benchmark. And then just a final question, can you remind us when the first quarter is when your output share of IMSS is aligned with your ownership share? They know there's a 12 month lag there. Kate is running. Depends on upon the timing of capital injections, which happened every several months. So, and there's a, a 12, approximately 12 month lag effect per the agreement in terms of the share changing here this summer, we'll have the effect of the first, capital calls where our partner didn't fully participate and it will sequence from there. But right now, we're at about, 78% ownership and our, and our output share is about, 53% and that will ratchet up, in significant steps here starting in the summer. Great. Thank you. That's it for me. Okay. Our next question comes from Daniel Brown from arrear USA. Yes, hi guys. Thanks for taking the question. Can you talk a little bit about maybe guidance in the wireless and embedded segments? And I'm just sort of parsing through the data sheet here. And can you then talk about, you know, the wireless profitability, obviously seems fairly low. Can you talk about how that business trends both in terms of revenue and profitability over the course of maybe the next year, year and a half or so relative to the embedded group. Andy, we're going to stay away from any guidance at the BU level. Now, if you'd like, Mark Adams to talk a little bit about the wireless segment in general, we're happy to do that. We're going to stay away from any, any projections and guidance on the BU level. I might just add that a couple of things I mentioned in my, comments and that is that we are still flowing through, higher cost purchase accounting inventory, which is significantly hitting WSE. And I mentioned that's, significantly, significantly through, as of this quarter end and now it's going to tend to be a longer, trend line and not have as big an effect on our financials. So, there was an impact on both the WSE ESG businesses in terms of the purchase accounting effects. I also mentioned that there's Hynix material volume that is being purchased at market price and we're in the process of transitioning over some of that NAND volume. And as that happens in the coming quarters, it will improve the margin, everything else being equal. So those are two things to keep in mind that are currently impacting that will change here in the next, coming quarters. Okay. And then maybe just to follow-up in the other segment, is that basically all imaging or is there other component is there another component to the other segment? That's things that aren't of significant enough size to warrant a segment treatment by the normal tests, but it does include the Aptina imaging display solar, activities, that sort of thing. Our next question comes from the line of John Pitzer with Credit Suisse. Steve, getting back to the issue of Japan, Is there a concern that that memory doesn't become sort of the bottleneck component in the system? It's something else And in that situation, do we have to worry about inventory being built in memory in the calendar second quarter, which will have an adverse impact on pricing? How should we think about that? I I didn't hear the first part of your can you repeat the first part of the question? What would have an adverse impact? Yeah. Let's assume that memory isn't negating fact for getting systems shipped out the door. It's another component. Is there a risk that we see an increase in memory inventory for the industry? How do we think about that dynamic Well, it's it's, that's a, that's a tough one to gauge because, clearly, there's going to be some impact on supply of memory. I mean, I think if you look at where some of the large fabs are, despite the fact that someone didn't go down hard, you know, those of us in the memory business know that all you have to do is have a couple hours of a problem and it takes you several weeks to recover. So, so there's going to be an impact on the supply side. And to the to the extent that there's something that happens that impacts another demand which I noted in my opening comments, that's just impossible for us to predict. We, we just don't know how that sorts out and the pluses and minuses on it. And actually, I don't think it's, as I mentioned earlier, it's probably not a phenomenon in the 30, 60 days is something after that, if in fact, the reason isn't, isn't it? Thanks. And then I guess, Ron, on the operating margin side by business unit, where does the Samsung settlement kind of get accounted for in those buckets? Yeah, it's actually spread because it's a broad based license among all the businesses. And then guys, my last question just on on DRAM mix. Can you help me understand PC server and mobile in the quarter just reported? And I guess when do you expect to be able to ship server ready DRAM from in Oterra and help me understand how that might impact the mix if service starts to grow. You bet, John. We're looking to qualify the Innovator output sometime in the second half of the year. In terms of a breakout of sales, we're running around 25% to 30 percent of our bps in, in, in PC, around 25%, maybe even a little bit lower last quarter, should ramp up a little bit this quarter, but in that mid-twenty percent server, we generally run about twice our market share. So, if we're running 15% to 18% worldwide market share, we're generally running in the 30s in terms of server market share worldwide. And networking, we do about the same thing. We also outrun our market share in those markets also. And get anything meaningful in mobile DRAM yet? Coming out of in Ontario? Out of out of Micron itself? Is it a big enough percentage of the DRAM business to start breaking out? Just they just began running mobile wafer starts this month in Ontario. Perfect. Thanks guys. Our next question comes from Vijay Rakesh with Starn AG. Yeah. I guess just trying to figure out, you know, when you look at Japan, going back to that, how much of the wafer supply on your DRAM NAND or not comes out of Japan? We have pretty minimal exposure to wafer supply specifically out of Japan. We carry about 5 different suppliers. Different competitors we have, do have a much larger, as Steve mentioned, in his opening comments, exposure to Japanese facilities. Even the supply that we have from, one of the larger Japanese guys actually comes from the U. S. Player. Got it. Okay. And and on the NAND side, Aditi said you talked about the Singapore fab. How far is it how much does it facilitate now? And, the second part is you you mentioned 65,000 refers, you know, a additive incremental for the second half. If it is SLC, that should obviously be much lighter on the total bit growth that you team, right? I couldn't break it up a little bit. We're not going to give you the exact number of outs today, but it to say we're about 2 months ahead of what we thought the ramp schedule would be. And if you'd like to repeat the second half of that, we'll cover it. I'm just wondering if if you, if we assume 65,000 wafer starts incremental from the Singapore fab. If it's a lot of it is SLC, the bit growth probably is not as strong, overall, right? Are you asking the relation between SLC and MLC? SLC and and your and your paper starts. If it's all MLC 65,000 wafer starts, there'll be a lot of growth, but if it's SLC, probably not as much bit growth. That's that's correct. You you have the right ratio. LLC would certainly increase that as would TLC. Great. I'm just trying to figure out how how the supply on the NAND side would look in the second half. So It'll be increasing. Thanks. Next along, we have H. A. Orgy with UBS. Sure. Let me just start off by asking you about SSD. I think in your prepared remarks, you talked about SSD growing really fast. I mean, from a consumer standpoint, I'm not quite sure I know sort of Apple, I don't see many SSD based books in the marketplace, but can you just talk about what's been driving the demand there and how sustainable that is? I mean, we had all expected that non price prices need to go down significantly to drive us as the demand, but that seems to be happening. So any comments as to what's driving that given how resilient non flashpoints have been, just be helpful. Thank you. So, I think one underlying piece of the asset D solution was the underlying controller development that had begun over the last couple of years to get that market going. So, we talk a lot about price per gigabyte and the the value proposition to the consumer. In fact, the notebook segment is still driving that growth by and large, although enterprise is starting to play out pretty nicely, as I said, because of the technology development around intelligent and, television controllers and firmware development around making these things more reliable from an enterprise requirement standpoint. So The markets are pretty strong. The OEM segments are good. I would also suggest that the the aftermarket integrator environment has proved to be very successful for us so far, through the Lexar and crucial channels So, it's a combination of some OEM desktop, prefigured, pre configured machines as well as some aftermarket that have combined for some pretty impressive growth at least from what we see internally as well as the upside forecast for the back half of the year. I think enterprise is now becoming more real in terms of the opportunity for us to, as an industry to put these devices in the back end of major companies and have the reliability and performance, benefits that we've we've carried all along. Okay. That's helpful. And and from what you're seeing, obviously, that seems to be a trend that will continue through the, the rest of the year. Is that one will read to all these trends you just mentioned? Yes, I think, we're very optimistic about the market potential that we've seen so far. Both in the OEM segment and the channel. So, yeah, we don't see any reading that would stop. Actually, again, I think the reason we're bullish in the enterprise, I think the enterprise game is just starting because the technology around the Flash itself, which Mike Grant invested in over the last couple of years, is mature enough to bring to the enterprise Sure. Sure. Now when you were making out the comments about NAND in your prepared remarks, you seemed very, positive in terms of how you expect pricing to develop through the rest of the year. I mean, embedded in that obviously is that you have thoughts on supply from the rest of the industry. So any comments you can make us to what you think to supply demand dynamics for NAND flash through the rest of this year. And also within that, you talked about tablets a lot. I mean, there are concerns about the non Apple Ipad tablet not selling through, if that were to be really the case, does that affect your, expectation for NAND price, development to the rest of this year? Well, I think how we look at the demand market is that you've really got 3 pretty significant application drivers lining up at once. And that's why I think in general, the market's been bullish on demand going into 20 11. We haven't changed our position because in fact, when you break it down, the smartphone market is still driving significant demand The SSD market is, really playing out pretty nicely this year. And we feel bullish as it does to my earlier comments. And then the tablet market really has been a very, sudden surprise from a NAND perspective year over year when you think about where it was just 12 months ago. So when you line that up, given the NAND supply picture for 2011, we're still bullish on NAND in general. I think you asked about The last part if I understood correctly was with regards to if tablets don't manifest themselves to be as strong as they look right now. Of course, that potentially could impact demand, but, we think, we think NAND in a pretty good place. It would have to be pretty dramatic. And remember of the 3 categories, the tablets would be the lower of the consuming categories. Sure. And just lastly, if prices were to host it from where they are now, what will be the change to ASPs for NAND, DRAM and NOR by the end of this quarter? We have a flat DRAM quarter to date and we have NAND up a couple of percent. Our next question comes from Kevin Cassidy with Stifel Nicola. On your strategy for moving to more specialty DRAM and also to a higher margin NAND flash how quickly can that reverse? Can is this a permanent change? Or I guess maybe it's along the lines of questions that you always had about converting from NAND to DRAM. Can you do the same with a specialty going back to core DRAM? So, yeah, hi, this is Mark again. I, you know, Steve in prior calls, as mentioned that the demand business like the DRAM business from, early generations of DRAM and the market behavior. And in fact, I think we're seeing that. I think, if you look at what I would call generation 1 of NAND. It was primarily photography USB with a little MP3. And now when you think about it, NAND is the effective storage platform for smartphones for tablets and moving into notebooks and, and even enterprise storage. So the the the maturity of NAND and the role of playing in storage will allow us to treat that in terms of more specialty value add that Micron can bring in addition to the Silicon itself. And so I think that's been a good thing. You can see, we feel pretty confident that our mix will continue to improve over time. We've talked a little bit about why we've stayed so focused on two bit technology in addition to our leadership position around, you know, the 25 nanometer offering and why we stay with 2 bit because of performance and, and all the, specification we're trying to drive with our customer applications, we continue to believe that, regardless of how we transition and we are transitioning 2, 3 bit, the value add is around the NAND, not just the NAND itself. So that will continue for Micron. On the DRAM side of the business, it's 1, it's really one around the opportunity we've cultivated in the past, very strong server share, very strong networking share. And those are two businesses that continue to to grow nicely for us from a density per unit and really just overall units out the door. So, we're positioned well in those segments and, would continue to think those are opportunities for us to grow. Okay. Maybe if I could turn to, in Oterra, Is there a supply chain, very similar to your internal supply chain, or, do they have exposure to Japan also? Well, in, in some ways, I think, for similarities, but they actually, I think, have less exposure to Japan than we do. Just because traditionally we've had real good relationships, with Japanese companies over several decades. And, they, as I said, they actually have less reliance upon Japanese suppliers than McKinney. Okay, great. Thanks. Congratulations. Our next question comes from Manish Goel with Quest Investment. Yeah, hi. I have a question on mobile returns. Can you maybe give some color where you see your internal capacity or your wafer allocation going for mobile DRAM and specifically what densities you're targeting? Manish, we're not going to give any specifics. We, we certainly don't want to give our strategy out to competitors who are certainly most listening to the call. So if you'd like to answer, ask a different question, feel free. Perhaps can you give some color as to how much mobile DRAM do you procure from the open market today? How much what from the open market? I mean, you're referencing the Hynix relationship. Is that the question? Yes. Yeah. Because that's they're trying to match that up traditionally with what the mnemonics business was. I actually don't know right off hand myself. And we buy a little bit of outside DRAM that goes into mobile applications, but that's where transitioning out of that, as I mentioned, along with demand over the next several quarters. There's not a lot. So I'm just trying to understand that over the last several quarters for years, you've talked a lot lot about mobile DRAM, but we've not really seen a whole lot of progress. So where where and when is the inflection point and what really triggers that? Well, I think a couple of things to point out. One is that you know, mobile DRAM in terms of the consumption of it in, is is obviously predominantly been in its occurring in terms of densities in the smartphone here. And if you look at what's happened historically, it hasn't been bad long ago, since they started converting to, you know, a NAND DRAM combination going into MCP, which has been addressing the higher density need in the in the wireless space itself. Previous to that, it would be the relatively low density. And by the way, we are one of the largest pseudo Grand suppliers in the world, which is really just a DRAM with a static rim interface. We were one of the largest suppliers in the world that have been for a long time, and almost all that product was born in the wireless space. So I guess I would characterize it a little bit differently than you did. I think what you're specifically referencing is what they characterize as kind of the low power high density DRAM stuff and it hasn't been in the wireless space in large amounts for all that a long time. Our next question comes from Betsy Vani with Wedbush. Thank you very much for taking my question. And, 1st and foremost, congratulations on the quarter. I think This is kind of a historic moment for you guys. Isn't this the first time that you've ever been profitable during a DRAM downturn? Well, it's, yeah, first of all, thanks. Actually, we were able to basically break even in 1990, 1991. In, in a, in a mile downturn that occurred then, that's the last time that it's happened. And even then, you know, we weren't really profitable at the time of this break and even when we stay positive, and that, that's the first time it's happened. And I think the other thing that's, I guess, worth noting is that clearly, we just came out where, you know, we think we're buying it in a downturn and, you know, we were able to maintain, I guess, in our 6th quarter profitability and, and everything can improve from here, throughout the year. With with the DRAM, I would imagine, with the gross margins around 19% that that was probably the pretty much the significant drag on margins. And as we look at the mix going forward, how can we a look. I know you guys don't like to give any type of, guidance in terms of gross margins, but how can we look at that in terms of getting back to maybe where you were in fiscal Q2 of last year. You know, how is that going to help us? How can you help us in remodeling? Yeah, a couple of things. 1, remember that, along the lines, what Mark said, we said earlier, is that we don't need rising pricing in order to build margin in. We're going to continue to drive down our cost per quarter. So even flat pricing, our margin will expand from where it's at. Secondly, I don't think there's any question that is, Mark, Adam Verde noted that the PC space in terms of the margin as you already noted, and highlight was a drag on us in our margin, and, you know, we're, we're in an improving environment in that space too. So that combined with, I think we haven't, I think we would also acknowledge that we haven't fully optimized the DRAM operations around the world yet. And there's still some progress we made there. I guess the way I'd characterize this is there's some runway left there in addition to our normal cost reduction. So I know when you add all those up, I guess I think that's how you ought to think about it in terms of modeling, it's going forward. And then I want to take another run at the, the mix of MLC versus SLC. If we look at your production today, can you give us this percentage that is SLC and as you exit the calendar year, what do you expect the percent of SLC mix to be? I'll tell you what we are today, but we probably won't give you the exit because we will continue to optimize for the market. We run about 95% MLC today, about 5% SLC. Okay. Thank you very much. And once again, congratulations. Thanks. Our next question comes from Bobby Gujavarti with Deutsche Bank. I was wondering if one reason for your confidence and content for box growth, is it really, enter price clients. Do you guys see that refresh continuing? And I think that's a higher content per box than a consumer box. Could you comment on that? Yes, I think, I think you're spot on. I think we think of the 2, the enterprise refresh is definitely driving that, that growth in the overall market condition. Great. And just, one thing if you could help me make makes sense of this. I know in your breakout sheet, you had trade NAND ASPs were down 12, but in the press release, they mentioned that NAND ASPs were down for I I assumed your trade NAND always has a better ASP performance than your overall man. Maybe I misunderstood that. Could you could you help explain the discrepancy? Yeah, this is Ron. The trade NAND ASPs are in fact, the movement of our market in the NAND marketplace and the, the total includes our our at cost shipments to Intel, which are moving with our cost down, movements relative to the products that we ship to them. So so when you look at the total, you've got the combination of those two movements going on. That's why we're also focused, going forward on giving you a trade NAND view of what's happening with our trade market and also the the cost per bit related to our trade NAND production. Because there's a significant change, difference, in terms of our mix of products, versus Intel, for example, we mentioned that we have significant, SLC mix we're shifting to in the third quarter. We've got MCP volumes, which also reported in our NAND sales volumes. And so, all that factors into the trade ASP numbers we're giving you for Micron And, the average is is a mix of those 2. It's the cost on intel shipments and the, trade pricing on micron shipments. Okay. Great. Thank you. Our next question comes from Alex Gano with JMP Securities. Yeah. Thanks for taking my question. I believe it already got asked, but it wasn't clear to me. In terms of you moving more to SLC, how large is that addressable market? How how well can it absorb your increased supply? And how is it that we've seen the pricing move with you guys at only about 5 percent of production SLC that you weren't there for it in terms of this past quarters and the run up into it. I think the, the question around SLC for us is in those certain high performing markets that really warrant both the opportunity costs of making the product, around the performance, we're we're we're being asked to hit in terms of specifications from our customers. So, markets like high end enterprise SSD performance, we'll be looking at how SSD that architecture, I mean, sorry, FSC plays in that architecture especially in the combination with an SLC, MLC architecture, those types of things we're evaluating from a technology standpoint. So, it's really basically the opportunity cost to manufacture rate versus what we can garner in the market to justify that production switch. And are you aware of any of your competition making similar moves or should we feel pretty good about the ability for this market to absorb your moves? Yes, we see other players looking at it because again, when you look at the price storage market. This is not a glorified USB. This is something that's very sophisticated, much different than the pure NAND players understand. And so you know, why we haven't been so big on the 3 bit for sale, campaign up until today is because performance and reliability and endurance around the enterprise sector is going to make a winner, from a solution standpoint and we're very focused on not just the NAND, as I said earlier, but all the technology that goes around in making a world class product. And that's going to be more in the FLC type architecture or high performing controllers with the combination thereof. Okay. And do you think just one last one on this topic? Do you think that you can get those SLC gross margins towards what you're experiencing in the specialty DRAM at the top of the stack? Well, especially in enterprise, if you look at Alex, if you, I mean, and you probably know it's better than I do, but if you look at the projections for SSDs in general, while the revenue is very heavily weighted towards the desktop client segment, the overall projected margin profitability by analysts suggest that the enterprise margins can be dramatically higher and almost get to a 50% of the overall category margin Terrific. Thanks very much. Thank you. Ben, I think we have time for one more question. And our next question comes from Wayne Kramer with Avian Securities. Thanks guys for fitting me in. Just one quick question on DRAM production. Can you talk about as a percentage of what is produced at 5x nanometer and 4x nanometer? We're just looking at the data and make sure we're accurate for you. Sure. Thank you. Yeah. Just, this is Ron. Looks like at, 5x nanometer, we're running in the neighborhood of, 85%. Okay. But can you talk about the transition schedule the 4 x and then possibly 3 x as well? Yeah. Well, we're well, obviously, we're in transition to 4x now. It's running in production. I think we would expect, probably the majority of that to cross over towards, you know, end of this year. Sometimes second half of the year will be the majority. And then we all also happen to be currently running the 3x, but, you know, there's association with that with qualification and getting it throughout our wafer fab network. And part of it, that wouldn't occur in terms of large volumes probably until we get into the in the next year. Is that is that end of the fiscal year or calendar year? With respect to what piece? The 4x, you said you'll be there by the end of the year? Yeah, fiscal year. Okay. Thank you. And then my last question for you, you hinted towards the fact that you're making progress with TLC. Is that going to become more of a staple year business or still 2 bit MLC all the way? Well, I think, yes, I think, as I was suggesting earlier, the challenge for man manufacturers in general is, how do you keep the Endurance and the performance at an acceptable level for the application of where the parts are going. Historically, TLC has been pretty low end performance cycling well below 2 bit per cell. And so what has to occur in the industry, and then again, I mentioned again that Micron has invested pretty heavily around controller and firmware development to enable this is that, that has to become more of an intelligent controller for things like air correction that allows us to gain the performance levels needed for things like SSD and things like smartphones and the mobile wireless market in general. So we believe that our roadmap will continue to evolve utilizing TLC as we've grown in this area. But it, we've only believed that we're getting there today. We don't, we didn't think we missed a big market opportunity in the past. Great. Thank you very much. You bet, and we would like to thank everyone for participating on the call today. If you will please bear with me, I need to repeat the safe harbor protection language. During the course of this call, we may have made forward looking statements regarding the company and the industry. These particular forward looking statements and all other statements that may 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 ten Q and 10 K. Thank you. Thank you. This concludes today's Micron Technologies 2nd quarter 2011 financial release conference call. You may now