Earnings Call: Q1 2011

Dec 22, 2010

Good afternoon. My name is Huey, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to Micron Technologies first quarter 2011 financial release conference Call. All lines have been placed on mute to prevent any background noise. After the call, all lines, excuse me, all for the remarks, there will be a question and answer period Thank you. It is now my pleasure to turn the floor over to our host, Keith Bedard. Sir, you may begin your conference. Thank you very much. Welcome, everybody, to Micron Technology first quarter 2011 financial release conference call. On the call today is Steve Appleton, Chairman and CEO, Mark Durkin, President and Chief Operating Officer. And Mr. Ron Foster, Chief Financial Officer And Vice President of Finance, and also with us today is Mark Allen's Vice President of Worldwide Sales. 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 first quarter 2011 financial 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 706-six forty five 9291 with a confirmation code of 3,235,9725. This replay will run through Wednesday, December 29, 2010, at 5:30 pm Mountain Time. A webcast replay will be available on the company's website until December 2011. We encourage you to monitor our website at micron.com, excuse me, throughout the quarter, for the most current information on the company including information on the various financial conferences that we will be attending. Please note the following Safe Harbor statement. During the course of this meeting, we may make projections or other forward looking statements regarding future events of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to the documents the company files on a consolidated basis from time to time with the Securities And Exchange Commission. Specifically the company's most recent Form 10 k and Form 10 q. These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward looking statements. These certain factors can be found in the Investor Relations section of Micron's website. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results levels of activity, performance, or 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, Kev. I'm going to make some opening comments, and I'll turn it over to Ron for some commentary on the financials, and then we'll open up for Q and A. For any of us here participating in the call today. I'll start out with some of the activity we had in our fiscal Q1. In the operations and technology side, we had a number of achievements worth noting. First of all, our NAND, 25 nanometer transition is actually going quite well. And I think, we would characterize it as being ahead of schedule so that now majority of our NAND bits are now shipping with Micron's 25 nanometer advanced process. In addition to that, Innoterra is now 100% on Micron's stack technology, and they're now just getting back up to starting at full capacity. So we think that we're well on our way to improving both volume and yield there. Clearly, as we noted before, there were some difficulties previously, but they're on a pretty good trajectory right now. So if you listen to what our commentary about and you listen to our about it. I think they feel like they're on a pretty good path moving forward. In addition to that, IMFS started its 1st waivers And that's utilizing our advanced 25 nanometer process as well. So, we're pretty excited about that. I would note though that we don't think there's going to be any significant output, out of the facility until the middle of next year. Obviously, there will be a start and qualification to where it pays before then, but we are pretty excited that we are underway there. Switching over and trying to talk about the markets a little bit. In the DRAM market, In our last earnings call, I noted that we had started to see some softening in the PC space for DRAM and that weakness has continued, even though it's primarily been with the DDR3 product. In fact, I noticed the Hynix CEO comments a few days ago, acknowledging that this environment, I think, is going to have an impact on their current quarter. Clearly, it's having an impact on our current quarter. But I guess what I want to emphasize is I don't think this is the winter of 2007 or 2008. And you might ask why that's the case. First of all, I really do think that what we're experiencing right now is a demand driven weakness as opposed to a supply side stream weakness. What I mean by that is It's such a sharp turn, I guess, starting about a year ago, a year and a half ago. And that was driven by the damage that had been done in the DRAM industry. And as a result, both of us that were still around able to produce were a beneficiary of that As opposed to the environment where there's been a lot of capacity come online, I don't think that's happened. And most of you know that by noting the amount of wafer output come online. And that really we're still in a period of phase, I think, where maybe a little bit unexpectedly, but we're seeing weakness in the more commoditized space particular, the PC space. I also think that, we had some technology transitions pile up as people were trying to get converted over to the next generation of technology. And that added up maybe into a little more a few more bit bits into the market and we thought they would, but it happened all similar time frame. And that also, I would note that keep in mind, this is seasonally a slower time of the year for us as well. So I'm not suggesting we're not going to have some weakness, but we might be in a period of time here where we have a quarter or 2, a 3 to 6 month period where, you know, pricings in this lower range. The counter to that, of course, is I think that CapEx and output for DRAM is going to adjust pretty quickly. You've already seen a couple of come coming out of others in the industry around that. What I find interesting is there's now forecast for the CapEx to be down in 2011 from 2010. And keep in mind that the CapEx in 2010 peaked at about half of what the CapEx was in 2007. So as I said, I think it'll adjust pretty quickly. And then another reference point for everybody is that, as I said, although the mainstream commodity DRAM has had some pricing hit, and it's, you know, kind of in this dollar per gigabit. It seems to have stabilized and it's obviously still well above the $0.50 per gigabit that we hit a couple of years ago a couple of years ago when the costs were a lot higher. So, obviously, it's still down quarter to date. And you know, we have a period of time where we have to deal with it, but, I think it's also positive that the specialty business is relatively flat in pricing pretty stable there. So that's the DRAM front. Switching over to the NAND, I think some of you probably already know from a lot of the reports in the industry that It appears that we've already hit bottom and prices recovered mildly. There's some pretty bright spots. You know, SSDs in particular for us have gone well smartphones are holding up pretty well. I think that's a benefit for the DRAM as well. Although, we got to see what happens when we move to the rest of the season. We began shipping volume shipments to Tier 1 OEMs for our SSDs, and we're going to launch our P400 enterprise product coming up here next month. So feel pretty good about that. On the north front, as you might expect, there's some mild pricing pressure, but really, for the most part, it's been pretty stable. A couple of things to remind everybody on the call about. Our CapEx as we've stated, our range hasn't really changed for the year. But remember that this quarter is our big CapEx quarter. And with respect to why that is, the first thing is that it's directly tied to the timing getting IMFs under way. And so, this is the largest period of time we'll start paying for the equipment that's why the CapEx this quarter will be bigger than the end of the quarter we have in the fiscal year. And after this quarter that we're in right now, it'll start to taper off And then in addition to that, Intel is currently not participating with the CapEx in IMSF. But, we actually are pretty comfortable with that. Number 1, we already have that in our financial models the assumption they are going to participate. And secondly, we could really use the output for servicing our customers. So from that perspective, we're in pretty good shape. I will tell you though that, they have the ability to come in and participate in downstream cap expansion. And, and we're happy if they do, and we're also, happy if they don't, so to speak, because we we like both sides of that equation. With respect to the how it impacts our financial model, obviously, the CapEx all being under our umbrella does does require more of our own cash, but the other thing that I want to point out is in terms of there's 2 components to the relationship. 1 is the the output sharing side, which is the joint venture, and then the other is the development side. And on the development side, there's really no change in that, and there won't be any change on that, independent of what we do with respect to sharing of the output. So So I think that their analysis is how much output that they want, which impacts their desire to or the level of sharing with us as we make future investments in additional capacity. But with respect to the development side of it, in other words, the R and D cost sharing we're completely in line with what we were doing and what we will be doing, which is sharing that equally moving forward. All this leads me to my final comment, which is these strong cycles are exactly why we pursued expanding our product portfolio. And it's in times like these, what really starts working to our advantage. In other words, as we've done a lot of the M and A or a lot of the product expansion over time, this is the environment that we prepared ourselves for where we'd get some cycles in one segment or another and yet be able to, have the financials of the company hold up pretty well in particular in comparison to a lot of come is they just have a single product. So with that, I'm going to turn it over to Ron for some commentary on the financials. Thanks, Steve. The company's first quarter of fiscal 20 quarter, we're also providing a schedule of post certain key results for the first quarter, as well as estimated metrics for the second quarter. And we summarize that material in the following couple of slides. In last quarter's call, we mentioned that we would be reporting on the reorganization of our reportable segments, partially in light of our recent acquisition of Mnemonics. That reorganization is still ongoing and we expect to have it completed and in place for reporting of our 2nd quarter results. We still anticipate those segments will focus on markets, which generally aligned around DRAM, embedded NAND and wireless solutions. The results of the first quarter are reported in a manner similar to the past and include the reportable segments of memory and mnemonics. There are several items for the quarter that are worthy of further comment. In recent years, and has demonstrated in our quarter, the company has been working to monetize some of our investments in technology through licensing our intellectual property. Our first quarter results include a gain in other operating income from the $200,000,000 receipt from Samsung There was withholding tax on this payment of $33,000,000, which was recognized as additional income tax expense in Q1. In accordance with the agreement, we anticipate receiving additional payments of $40,000,000 in the 2nd quarter $35,000,000 in the 3rd quarter each recorded in other operating income in the respective quarter. Income tax provision in the second and third quarters will also reflect the applicable withholding taxes on these pay To balance the timing of maturities of some of the company's debt obligations and to reduce the potential dilution from the convertible notes, During the first quarter, we repurchased a portion of our outstanding convertible notes and exchanged another portion for new convertible notes. The exchange retired $175,000,000 of the 17eight's convertible note and replaced them with similar 1.78s convertible notes to mature in 2027. In the repurchase transactions, a total carrying amount of $232,000,000 was redeemed for $328,000,000 in cash, including fees primarily as a result of the 4.25 percent notes being substantially in the money, we recognized a non operating loss on the exchange and repurchases. $111,000,000 in the first quarter. This series of transactions also removed the effect of at least 43,000,000 shares from potential dilution in the future. 1st quarter revenue from our Memory segment primarily comprised of DRAM and NAND decreased 12% compared to the fourth quarter. DRAM selling prices, as Steve mentioned, came under pressure in the first quarter and decreased 23% compared to the previous quarter. Total idle capacity costs, which are charged directly to cost of goods sold, were $59,000,000 in the 1st quarter compared to $40,000,000 in the 4th quarter. Singapore fab startup costs in the 2nd quarter are expected segment increased slightly in the first quarter compared to the preceding quarter as a result of increases in selling prices, offset by a slight decrease in unit sales volume. Margins on this business over the past quarter have demonstrated good stability and decreased only slightly compared to the 4th quarter, As we look forward to the 2nd quarter, we expect to see revenue from the Mnemonics business in the low $500,000,000 range, which reflects a seasonal decline compared to the 1st quarter. We expect the Pneumonics gross margin in Q2 to be roughly the same as Q1. In addition, recall that the Pneumonics inventories were written sales by approximately 10 percentage points Operating expenses in the first quarter were $325,000,000. The level of SG and expected to be in spending on 50 nanometer and 42 nanometer DRAM products as additional products move out of development and into commercial volume production. R and D expense for the quarter benefited from credits of approximately $50,000,000 from joint development programs, consistent with the fourth quarter. R and D expense is expected to increase labor costs and a higher volume of prequalification wafers processed. The company generated $732,000,000 cash flow from operating activities in the first quarter. While a decrease compared to the prior quarter, it significantly outpaced spending on capital expenditures of $570,000,000 during the quarter. We also used $635,000,000 to repay debt including the $328,000,000 in convertible notes I mentioned earlier and $200,000,000 in repayment of debt that originated with Micron's acquisition of its Innoterra shares. The balance was due to normal debt amortization in the quarter. The cash and equivalent balance at the end of the first quarter was two $700,000,000 including $337,000,000 classified as restricted cash. Now I'll close and turn it back to Kipp. Thanks, Ron. And with that, we'd like to take questions from callers. Just a reminder, if you are using a speaker phone, please pick up the handset when asking questions so we can hear you clearly. With that, we'd like to open it question. Our first questioner in queue comes from Sean Weston with Macquarie. Please go ahead. Yeah. Thank you very much. Can, in terms of the North Flash business, can I reconcile some of the data you provided? You said it was high teens for you in fiscal Q1, but it would fall into the low 500 range. Is the percent that you're quoting there in that in that foil, is that a 100 percent of the memory revenue only, or how should we calibrate that? So I get more like a 500 500,000,000 ish number for q 1. So revenue for mnemonics in Q1 was about $573,000,000. And then in terms of your full year production, the DRAM production sequentially in Q1 looked like it came a little light relative to my estimates, Can you talk about what's happening there? What might have driven the production miss there? And then can you give us your outlook for your full year either in your fiscal year or your calendar year production, expectations for NAND and DRAM? Sure, Sean. This is Kipp. When we give you the production numbers, we generally measure it when it hits finished goods. And just timing wise, we had a bubble sit in WIP, which is where we saw the inventory increase. So what you would expect to hear from us is that the bit growth guidance into Q2 is going to be unusually large, which it is. We'll be in the high teens to low 20s. Sequential bit growth as that width moves on through inventory. And we've, Sean, we've stayed away from a year over year number for now because as we have a lot of moving parts. So for now, we're going to stay with kind of quarter to quarter. And then in terms of the OpEx trends, coming up a little bit in Q2, is there anything lumpy that happens over the course of Q3 Q4 or a period where the OpEx might come down because it gets reclassified? In terms of general OpEx trends, Sean, our view is that we target to be in a range on average and up cycles and down cycles around 15 percent of revenue for total OpEx. And, if you, if you look at that, we're about in that range today. We just, a few months ago, as you know, brought mnemonics in, which actually had an OpEx structure higher than integrating that into the company right now. So what I think you see going on now are some investments to get that integration done. And as we go through the couple of quarters, we'll begin seeing benefits of the full integration of those activities and certainly plan to stay on our 15% OpEx model, over time. Okay. And then maybe if I could squeeze one final one in, in terms of your customers, shipment expectations going into Q1. What's your gauge in terms of will your shipments be better than seasonal, seasonal relative to normal seasonality, there's been a lot of discussion out elsewhere in the PC food chain that there's an expectation for notebook demand, for example, to be better than expected on the component side and just like to hear your perspective on it? Thank you. I think the overall feeling going into our fiscal second quarter is about seasonal pace. We think that PC business channel inventory is actually better than I would expect given the pricing environment. Think people are managing their inventory tighter coming out of a couple of tough years in 2008, 2009. So we think the inventory in the channel is better and thus the potential for recovery in the VC space is there. We haven't quite seen signs of it just yet, but we think it's a much tighter food chain than it was a couple of years back. The wireless environment, mobile phones, smartphones, particularly remains pretty healthy. Going into the holidays and all expectations are that will continue to be pretty good. Steve mentioned in his opening comments that SSDs in general, we're pretty positive for Micron. I think that's a reflection of the maturity of that market, beyond this client and the potential growth 2011 overall for enterprise drives. So, we think overall, the demand drivers are there in place, how it manifests itself in our second quarter due to the seasonality is somewhat hard to predict today, but we're cautiously optimistic. Thank you, sir. Our next questioner in queue is Daniel Barandome with Orango USA. Please go ahead. Yes, hi guys. Thanks for taking my question. On the projected cost reductions, just looking at what appears you're guiding on the NAND side, it seems, you're guiding down mid to high single digits. That seems a little bit light compared what I would have expected for ramping I n slash Singapore for ramping 25 nanometer. Can you talk a little bit about what are the gives and takes there and what we should expect for NAND cost reduction over the course of the next couple of quarters? Yes. Hey, Dan, this is Mark. I think, we were, as Steve alluded to, we're very happy with the way the 25 nanometer ramp is going and we're into that full swing. What we play off against that now is the ramping of a new fab, which, as you know, generally brings costs in advance of bid output. So there's a somewhat of a mitigating effect there as we move through the next couple of quarters ramp in IMS. But generally speaking, pretty comfortable with the NAND trajectory and the 20 nanometer that'll come into play in the summer as well. So then how long did it take to ramp the fab until we start to see, sort of higher cost reduction higher than the mid to high single digits, the cost reduction that you're talking about for next quarter? Yes, I think we've got a couple of quarters, Dan, if we load the fab and then when you get about three quarters off and you start seeing the benefits of that operation. So I look at a couple of quarters of relatively muted cost reduction on the man side and then seeing the benefits as we get in the middle. Second half of the calendar year. Okay. And then just shifting over to royalty revenue, what was royalty revenue quarter? And how should we obviously with the exception of the large Samsung payment, what was ongoing royalty revenue and how should we expect that to play out over the next couple of quarters? Dan, this is Ron. Royalty revenue was about $9,000,000 in the quarter. Recall the conversation on the last earnings call, we've converted predominantly to a, an R and D cost sharing model. So we have a significant amount of our payments going in as credits to R&D, which is about $50,000,000 in the quarter. There's about $9,000,000 in the on the revenue line. Going forward in Q2, I would expect that that to move up some, even on the revenue line as a result of Tera ramping and the STACK technology being put into place and, we'll continue the R and D credits as we go through the quarters. Okay, thanks. And then, and Ron, just one other question on taxes. It looks like you guided $20,000,000 to $30,000,000 taxes. Is that do you have a higher or do you think about in terms of a tax rate or is this just sort of a flat dollar value you're going to have to pay to certain jurisdictions? And how should we think about that moving forward over the next couple of years? Well, it's the latter for now, the 20 $30,000,000 range is the mid to higher end here for the next couple of quarters because of the Samsung effect, getting those payments from Samsung, where we get a withholding tax on those payments from Samsung in the next couple of quarters. The tax structure of the company right now since we are in a net operating loss use position in the United States is that we are paying a foreign jurisdiction tax which are going to normalize to probably a $20,000,000 kind of range post the Samsung payments be a way to think about it. And that will be in place until we get a NOLs used up. Okay. And then how much more sense in paying quarter and is it done next quarter? $40,000,000 in Q2 is our assumption in $35,000,000 in Q3. Our next questioner in queue is Glenn Young with Citi. Please go ahead. Thanks a lot. Apologies for this, but I just didn't catch the number. Did you give the amount the Samsung payment was in the in the November quarter? Yes, it was $200,000,000 gross payment in this Q1 fiscal quarter. We just were reporting And there was a $33,000,000 withholding tax that's in our income tax line, which is the reason our income taxes are higher. Okay, thanks. Just wanted to clarify that. And then Keith, maybe for you, you mentioned that in the commodity DRAM space, you feel that it's more of a demand driven scenario today. If we're thinking about the course of of calendar 2010 when prices were high at the beginning of the year, at least not enough, it suggests bid per box that fall into a lower number. Is your sense that that number can rise, bits per box can rise as we move into the Sandy Bridge environment Or is there no need for the customers to do that? Yes. Well, 1st of all, I think it was obviously climbing in the 1st part of the year. And And the effect that it had was those initiatives apply from, as I mentioned already, the lack of expansion going on in the industry combined with higher demand scenario. And then that led to much higher pricing. And as you already noted, there's some defecting that goes on as they try to adjust their models. And I actually think that that'll probably start to reverse itself, very soon. If it's not already, it's hard tell, of course, on a granular basis from week to week. But, if you look at the most of the information that's out there and if we look at the feedback we've had from our customer, base that that content per box is circling back up. And the St. D. Bridge can add, or is it just a function of repricing? Is irrespective of where we are in the process of work? I didn't hear it. Can you say that last part again? I didn't hear the question. Sorry. The Sandy Bridge contribute to that at all or it just it doesn't matter. We'll just guidance so low, it's time to start taking it back up. Oh, no. I think that helps as well. Okay. The other question I had, if you look at your CapEx, run rate right now. I think if we add back equipment, you're just under $600,000,000 for the year. And you say this is short, sorry, for the quarter. And you say this is your big quarter relative to other quarters in the year, it would seem that you're running towards the low end if you're projected and your CapEx budget. Is that a fair assessment? No. I, what I meant was, the quarter that we're currently in. So the quarter that we're currently in, not the one that you were referencing, which is one we just reported. So the quarter that we're currently in is going to be our biggest CapEx quarter for the year. Got it. And the restructuring is still in the range. Yes, so I think we're still in the range. Okay, fair enough. And then I I guess the last question I have is when you look out into the February quarter and I understand it's hard for you a feel for where, where do you think pricing is going? But what's your sense about your ability to stay cash flow positive given so many of these things are happening. Right? You won't have the benefit of a big Samsung payment. You will have, higher CapEx spend, in pricing, at least in, you know, it's likely to be down further on an average basis. Do you feel like you're sort of on the cusp of that, or can you get a sense of one way or the other, whether it'll be negative or positive free cash flow? Well, 1st of all, operating cash flow were obviously going to be positive. In fact, I mean, we remain positive even the worst of times in the last downturn. In terms of free cash flow, clearly, that's a combination of operating cash flow with CapEx and debt retirement. And as Ron noted earlier in the call, we had significant debt retirement this quarter as well, which is why the cash balance is what it is. And And we just haven't made any decisions yet as to what we do on that front, as to what we did last quarter around debt return and more of the subsidies we go through the 3rd time. But, so operating cash flow, I don't think that any any of any question for us remaining positive. Free cash flow will just depend on what we do for a combination of those things in the quarter. Thank you. Our next questioner in queue is Doug Freeman with Gladstone Company. Please go ahead. Great, thanks guys for taking my question. Can you give us some clarity on what you're doing as far as how much of your product is going into the is being sold under contract versus spot presently and what you think that outlook looks next next quarter. So in the quarter, we just reported that ratio of contract to spot was lower than normal given the product transitions and some of the qualification process that we were going through both on the DRAM and NAND side of our business. On a going forward basis, we obviously feel that will improve even in Q2. And so we feel that our OEM contract business as a percentage of overall Google backed up to normal levels. Historically, those levels are somewhere in the 70%, 75% contract and 20% to 25% spot. And then you've got our retail business, which consumes, that type of product as well. Okay. Can you also comment on, the north side of the business? Some of your competitors commented that ASPs were down, pretty materially heading into the 4th Crown or quarter. Did you see the same thing? And is that having any impact on you. Are you able to keep up cost reductions on that side of the business as well? Well, I think there's two things that work in our favor. I think in terms of the overall product breath in Nora. We saw some of that towards the low density segment of the business, but in the higher density, nor, as well as some of the specialty applications embedded nor, pricing remain pretty favorable. And you also have to remember our technology we've got a pretty solid roadmap on the 65 nanometer node, both in some of the legacy applications and some new technology will be shipping in Q101011. That keeps us in a pretty good position, healthy position cost wise. So, I think what you're suggesting is true on the low end low density nor there has been some, healthy competition and eroding some price, but I think we're in a pretty good position vis a vis competition there. And if I could, Steve, one question for you. If you look at the marketplace and the conditions that you're seeing, you commented that you don't think you're heading into the nuclear winter, I think, is some of the terms you used that you saw a couple of years back. What conditions would have to occur for you to trigger, some change in your CapEx budget? Well, I'm not sure if you're what you're trying to reference. I think the most significant condition for us, of course, is a lack of cash flow. Although, as I said, I think operating cash flow wise we're in pretty good shape. There's very little, well, there's nothing we're going to do to change it in the quarter we're in right now. Mean, we essentially are already committed to the rail that's happening, etcetera. What you're really referencing is, what would we do towards the latter, the second half of the year or the latter part of calendar 2011 to change our thought process around CapEx. We haven't we really kept our commitment to IMS, to this kind of 16, 17 K if you will, run rate per week. And so I think the real question that surfaces what condition has to happen for us to go beyond that, because we're committed to running. We know that's the efficient level it needs to be And by the way, that's the vast majority of our CapEx. We have some in the DRAM arena, but not that much. And so, it's really what has to happen first beyond that. And obviously for us to go beyond that, we have to have a fairly healthy market. We already have in our financial models, the assumption that, we're going to contribute that capital ourselves and and Frank will really see a whole lot of need to go out and do something different than our current path in order to be able to do that. Obviously, we'll do some normal equipment financing that we would do over time that we've done in the past, but we're on the current plans to do anything else, and we think we're in pretty good shape. Now maybe to expand a little bit on your question around what has to happen for the industry to, I think, changed course from what's happened in the last few months, again, it's worth pointing out that the that the majority of our competition is not in very good shape, financially with their balance sheets. And so you've already seen some announcements where Some are trying to push out their debt repayment structures. You've seen some announced that they're trying to cut their CapEx. Some announced they're going to try to cut production, etcetera. I think that's all reflective of the fact that other than ourselves and maybe one other, you can argue maybe second to other that we're the only ones that are really pretty good financial shape and have a good balance sheet because as good as the DRAM market was in the last 12 months, it was just okay for a lot of them. And it certainly didn't give him any kind of ability to withstand any great downturn in the market again. So that's why I think this that what we're experiencing right now is relatively temporary that there's pretty quick reactions going on. And again, I pointed this out when I did the identity NASDAQ conference in London a few weeks ago. If you look at where all the CapEx dollars have gone, they've all gone into upgrading the technology. There's just so few dollars that have gone into new silicon and the DRAM arena. That it's all gone to upgrading technology. And I think frankly, a lot of those plans probably got to get delayed, given where the market is right now, because they're just not generating the kind of cash. From our perspective, we have a course set. We're in great shape financially to pursue that course And so that's why I mentioned earlier on that the real question for us is what has to happen for us to change that course. And clearly, we're going to have to have a better market environment. Where we're at today, I think we're pretty set. Great. I'm going to flip one more in how much of your capacity of DRAM is fungible and can move over and start producing NAND and is it possible to do that. I believe some of your factories were set up in such a manner. I don't know where you stand today. We do have a fab currently running both MAND and DRAM. And that's sort of the primary prerequisite, I guess, to be able to do that Having said that though, the flexibility we have to move that back and forth is relatively limited and wouldn't anticipate seeing any significant moves in terms of moving large amounts of capacity one way or the other. Yes, I think the other thing to add on top of that is, that's most relevant in an environment where you are static in terms of your big growth because then your trading off one for the other. But in our case, we have a scenario where we have an Otero ramping on Micron's technology and we have a scenario where we have a new facility coming up on NAND. And so the need or the you could, you could, if you really wanted to make adjustments there, you would just dial 1 or 2 of those efforts. You wouldn't really switch a whole lot into the current fabs. In terms of making adjustments there. The reality is it also doesn't take a whole lot of adjustment to effect where you want your bids to go because any of us that have that flexibility typically only do it within one facility. Because on the margin, you need most of your product for whatever your customer base, is that exists. Great. Thanks for all the color. Thank you, sir. Our next question in our queue is Buchi Juj with UBS. Please go ahead. Can you hear me? Sure. Sure. Let me just ask you a couple of questions. On the inventory, you made some comments about inventory on the PC DRAM side being actually, okay, any way we can quantify that in terms of Wix, in terms of DRAM and then On general inventory, it will notice an increase in the quarter. How much of this was from Inoterra DRAM And should we model inventory to grow, especially as, IMFS test papers, volumes that's a group through the next couple of quarters? I'll take the first part. As it relates to the PC DRAM push and we have seen some increase in inventory, but it's been relatively mild, as I said earlier, given the pricing activity we've seen over the last quarter. What I mean by that is we're seeing inventory in 3 to 5 week range in the PC space, up from what's normally in the 2 to 3 week range. So Given the pricing activity, you might suggest that there'd be deeper inventory concerns, and we're just not seeing that. What we're seeing is a channel that's probably I've got a good memory from the last few years during the downturn and they're managing their inventories tighter. And we thus see that, enjoys are okay. They're not bad right now given the market conditions. I'll hand it over to Ron to answer the second question. Yes, Ute. In terms of inventory, as was mentioned, in the first quarter, we had a buildup in WIP inventory largely related to technology transitions and customer calls. And we expect that that will, flow out as we go through forward the next quarter. So I wouldn't read anything significant into the inventory levels in Q1 and and the transition into Q2, in terms of the overall volumes, we just see this as normal movement of our technology transitions. Let me just ask you another question on COGS. I'm not sure maybe I missed it when you said it, but can you just help me understand the IMFS startup costs impacting, on COGS in the first quarter and also what impact will be beyond the 2nd quarter? This is Ron again. In terms of IMFS startup costs about, I think about $44,000,000 of startup costs in the first quarter related to IMFS. And, in general, it's going to be about the same level in the second quarter. We are not we're just starting up as Steve mentioned wafer starts. We don't have any product called at this point. So don't see a big ramp in the costs, but they will continue in the startup or idle category, if you will, and we're, we're segmenting those out for a purpose of your understanding. And that will go on probably till about the 3rd quarter when we begin to get some volume into quo status and can move some of that over to production. So that's the sort of the time frame I'd consider. Sure. Okay. That's helpful. And just my last question. In terms of asset you talked about demand being a cokem in any sense as to, how you expect the demand drivers for NAND to kind of play out through the rest of this year. Of course, we don't know what's happening with tablets, but in all the SSD front, any color will be helpful. And also, Intel not participating at this stage. I'm a little if I'm going to do side to participate? I mean, how I thought maybe it's a question to ask Intel, not you, but I'm just trying to understand how that arrangement is left at the moment. I mean, what that's one of the things that how should we in any way across the model at this point of studios model everything from my MFS onto Micron and when Intel basis with types of range of the models, how we should think about it? So on the SSC question, as you mentioned, tablets is, have taken on a pretty healthy projected output on the NAND side. And that number somewhere in the 10% of overall NAND capacity industry will go to tablet in 2011 is in that range. On the SSP side, you've got basically 2 dynamics playing out here, one in terms of overall, client SSDs, which have lower densities than you have the, really the launch of the enterprise segment, even though it's had its start in 2010, it's really the volume shipment in the enterprise segment will occur in 2011. And we see that being still around that same range as tablets. We think the tablet phenomena has been pretty amazing in terms of the acceleration. I think SSDs would be fair to be somewhere in that same 10% range of the overall industry capacity And we still think, I think, that the client side will dominate that in terms of overall consumption. And at the enterprise will continue to be in more of an early stage adopter model. And then 2012 will be where the enterprise will accelerate in terms of overall growth. On the IMFS, I'm a key question around the joint venture with Intel. First of all, I don't want to presumed to speak for Intel. But let me make a couple of comments from my perspective around it. Number 1, is that both of us are very happy with the operating entity, known as evidenced by, you know, we're gaining the industry and production on advanced technology. And so forth. So it's not an issue around, the execution of the entity. I think that it's a if I could probably characterize it in simplistic terms, Intel is very interested in some markets that involve NAND. Micron is interested in all markets that involve NAND and therein lies a different perspective on how much NAND we want from the operating entity. I think that they still view it as very strategic just like we do, but they are interested in certain parts of the application of NAND. And we're interested in base with all the applications. And so it's not one of it's not an issue of do we want to participate in output coming from the joint venture. It's really an issue of how much volume do you want from the joint venture and how much is strategic to us in the markets that we're interested in and therein lies the difference. And so again, you mentioned it earlier, which is you ought to ask Intel their thoughts on this. I'm just giving you my perspective. I'm not presume to speak on their behalf, but I think that's where each company is continually trying to, determine what they want from the operating entity. The great thing about the way the joint venture is structured is that we have the flexibility for both of us to achieve what we want if they like their level of output then they can keep that level of output as the technology advances, of course, increase it somewhat from the advancement technology. But neither one of us is driven to have to put additional capacity in place for output that we may not have strategic use of. And so we can move forward with them and creating additional output for our strategic use that they may don't want to participate in. And that's okay because, the model is flexible enough to allow us to do either one. So don't think you should read more into it. Then it's really an issue of each company. Just trying to determine what our strategic level of putters that we want from joint operating entity, and that's the process that we're going through. Soon, Brian. Thank you, sir. Our next questioner in queue is Tim Lu with Barclays Capital. Please go ahead. Thanks so much. I was wondering if you could give some color on what is pressuring in your view, the lower market, why has that been weak and particularly at the low end? Thanks. I think some of that low end nor is tied to the PC sector in general. And I think some of it has to do with some additional capacity has come online from competitors, more from the low end players in the market. As I said, it is the low density segment of the market. So it's tied to more of the commodity type of the business. But quite frankly, as I said earlier, I think we're pretty well positioned on the higher density components and as well as some of the specialty applications that we've developed the business upon and Mnemonics has established themselves in in the past. Secondly, Steve, could you give us your sense of what's going to happen over the next several months in terms of capacity, announcement so that your expectations of current conditions are going to precipitate, the curtailing of capacity by some of the less strong players? Or did you not think that we should expect particularly meaningful announcement? I actually think we're already seeing some of it. You've seen some companies already announced delay of capacity expansions, or by the way, a delay of some technology transitions because they just don't have a capital to do it. So, as I said, I think this will adjust pretty quickly. And I can't predict nor would I try any, you know, any macroeconomic challenges that the world might experience in the next quarter or 2 But short of something negative, I think that the industry will being balanced pretty quickly in this, in this sector. Remember, a large part of the memory business, including a large part of the DRAM business, is actually still fine today. It was pretty good and pretty stable. When you say that quickly, what do you mean? When do you expect balance to be achieved after what you plan now? Well, I think we have to get through a seasonally slow period, which is probably in the next 30 to 60 days. And then we'll know a lot more. Again, we don't try to predict what's going to happen in supply or demand. And I'm just giving you a perspective that says, between what Mark Adams has already described. And then with what you already know around some of the markets and some of the destocking that occurred. And then combine that with a seasonally slow period anyways. I mean, everybody knows that in the next 15 to 30 days, people don't buy a whole lot. For a whole for a variety of reasons, that we have to get through this period of time. And the other thing to note is to remember that a micron's total revenue business, about a quarter of it goes into that segment and the rest of it is going somewhere else. Maybe just lastly, could you just remind us perhaps of the order of the profitability of the core unit Is it fairly similar to what it was last quarter? Yes, we have it on our we put it out on our therapy to see on the website. We posted it. But as you might expect, especially the DRAM was number 1. And then came NAND and, fallen number 3 by NOR. But remember, the NOR has some accounting going on within the margin that it makes it artificial. Because of the way we had to book it within the Mnemonic transaction. And then you get to the what you would characterize as kind of the mainstream core DRAM predominantly DDR3, a lot of which of course goes going into the PC market today. Yes, thank you. Thank you. Our next questioner in queue is Kate Maloski with Goldman Sachs. Please go ahead. Hi. Thank you so so much for taking the question. You know, this might be a difficult one to answer, but I was hoping, you know, given what the business mix is today, if you could give us some color as to what your revenue breakeven is today maybe and what it might look like as we exit next year, sort of assuming that there's not a meaningful change in mix from a unit perspective? Kate, this is Kipp. I think we're going to stay away from trying to predict the profitability levels of different products a year from now. Could you tell us what the breakeven point is today? No, we're not really interested in providing that because that would, that would give you a good look at exactly where the gross margins are. On by product basis, so we don't report that way. Okay. And then maybe just one other question, on the NAND side. You know, obviously NAND is faring quite a bit better today versus DRAM. And, you know, I think if, you know, we do really see a meaningful growth in tablets that a lot of people are expecting year, we could be in a situation where Amanda's pretty tight. Do you think it's possible? And I know, you know, Apple has done that workly that they use their balance sheet and try to secure, or prepay some of the vendors, to secure incremental NAND supply maybe in the first half of next year? Well, if you look at the historical practice, you'll know from what the companies have reported had done that essentially to look at the 5 NAND Producers and the 5 NAND producer, by the way, that Samsung Micron Intel Toshiba and Hynix. And now you've clearly got Sandisk as part of Toshiba and Micron Intel together, so you can take that for what it's worth. 4 of the 5 announced that they had done essentially contracts with Apple for NAND supply, and that's all and out there are known. And today, those contracts, I think, in various states. So hard to know exactly what they will and we'll try to do. But, I think that it's just worthwhile noting that It's not just the I think that the NAND supply next year will be impacted by not just the tablets, but I would not underestimate the demand profile coming from the enterprise space in SSDs. And of course, whatever traction we get in the client space as well. So I can't speak for Apple, they're probably the best ones to ask about what they're up trying to do. But I do think that the, as you noted, that the NAND environment could be, could be fairly tight next year depending on how these other applications come online. Thank you. Our next questioner in queue is John Pitzer with Credit Suisse. Please go ahead. Yes, guys. Thanks for taking my question. I guess the first question I have is with issues at Innoterra mostly in the rearview mirror now, can you help me understand how the cost curve there trended in the November quarter and what we should sort of think about for cost downs in the February quarter? John, this is Ron. Make sure I understood your question. You wanted to understand how the esoteric costs flow through in the current quarter. We're reporting that. Just how cost is coming down now that they're up and running on your process and kind of re ramping to full utilization. Do we think about getting cost of debt from that point of the equation? Yes. Obviously, there's a significant impact with the ramping production on our new stack technology and the volume is expected to come up significantly from Q1 to Q2. And that will drive costs down along with the yield improvements that we're expecting to see, as we go forward in the second, third quarter, etcetera. So, that will definitely help us on the cost side. As we mentioned before, there's also a profit sharing model, which partly is a function of the pricings ASPs in the marketplace and the margin generated between the participants and in Oterra, which can move that around some, but the cost driver, which is a significant portion, will be significantly reducing our costs as we go forward quarter by quarter. Just say, John, I might add, it is on your, your guidance sheet there and we're staying, down mid-20s in total. That might help you gauge a little bit, Alan Alterra is doing. And then guys, correct me if I'm wrong, but my understanding was the cemetery ramp on your process, there was the opportunity of mixing up some sort of commodity PC into more of the server market. Kind of curious if you can just tell me if that's what you think is going to happen. I guess just in general, how would satisfy kind of a server do you want to market right now? Yes, I think that's right. Essentially, as they come up on our technology, there's qualification periods that are required for the entire customer base. The shorter qualification periods are what you expect them to be, which are kind of more commoditized markets and a lot of qualification periods are associated with more differentiated markets. Initially, the product is primarily directed at the more commoditized markets, but clearly as we get the qualifications completed, a higher percentage of product will move to the more differentiated markets, some of which you already referenced server and so forth. It just takes time for that to happen. Just when you look back on November quarter, was there a significant difference in server pricing declines versus commodity TC? The server pricing stayed pretty stable for us in our Q1 that we just reported and the business remains pretty healthy, going into our Q2 and, versus our commodity desktop, we expect that to pretty favorable going forward. And guys, just my last question real quick. Steve, you alluded to the February quarter being a big CapEx quarter kind of curious to give us a ballpark figure as you kind of build out our cash flow models? It's, it's really tough to predict the exact timing of the capital payments to the vendors as those tools go in based on, insulation, factory acceptance, etcetera. So it can We have a big ramp like that. The number can swing pretty dramatically at the quarter boundary, so probably better not take a step out of that exactly. Perfect guys. Thank you. Thank you. Our next questioner in queue is Atif Nalik with Morgan Stanley. Please go ahead. Hi, thanks for taking my question. Can you comment on your market share in the specialty DRAM market? I assume Samsung 50% of the market, but how about your market share in that market? We, we normally guide to about 25% to 30% share in the specialty DRAM business. A lot of that has to do with some of the innovation we do around solutions in that sector. And we've been a longtime player in the specialty market. So we anticipate that will remain pretty solid for us going forward. Okay. And then on the NAND side, is is the target for the the Singapore ramp still a 60,000 wafer starts per month for calendar year end for next year? That's correct. Okay. And assuming Intel does not move forward from here, out of that, you know, for middle of next year, assuming you have, you know, 1015 gigahertz per month, how much of that will be Micron? Well, first of all, let me recharacterize just slightly what you said. Intel will not be moving forward with in the next year. That is specific to IMFS. IMFT, we both continue to, invest as they generate cash and, advance technology, etcetera. And so, yeah, specifically with what the reference running, don't participate in the environment test. They have participated already in the past. So it's not 100%. It's again, it depends on what they do moving forward, where we are, because we have a continuum of capital calls. But I think that, you know, reasonably what you should expect is that assuming they decide not to move forward where they are today or they just partially move forward from where they are today, but it's probably going to be in the eightytwenty range, eighty fivefifteen range. Thanks. And that's what I meant, IMFS, your contribution from IMFS could be 80, 85% by next ye/ar end. Assuming Intel does not quite state an IMFS? That's correct. Okay. Thanks. And with that, it looks like we're out of time. I'm sorry to for everybody we didn't get to on the call, but I would like to thank everyone for, for participating today. If you will please bear with me. I need to repeat the safe harbor protection language During the course of this call, we may have made forward looking statements regarding the company and the industry. These particular forward looking statements and all other statements that may have been made on this call that are not historical facts are subject to a number of risks and uncertainties that 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 Ks. And with that, thank you very much for joining us. Thank you, sir. Again, ladies and gentlemen, this does conclude today's Micron Technologies first quarter 2011