Earnings Call: Q3 2010

Jun 28, 2010

Good afternoon. My name is Patty, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Micron Technologies Third Quarter 2010 Financial Release Conference Call. All lines have been placed on mute Thank you. It is now my pleasure to turn the floor over to your host, Chip Bedard. Sir, you may begin your conference. Thank you very much and welcome to Micron Technologies third quarter 2010 financial release conference call. On the call today is Steve Appleton, Chairman and CEO Mark Durkin, President and Chief Operating Officer Ron Foster, Chief Financial Officer and Vice President of Finance and Mark Adams, Vice President of Worldwide Sales. This conference call, including audio and slides is also available on Micron's website at micron.com. You have not had an opportunity to review the third quarter 2010 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 706 645-9291 with a confirmation code of 8196 6928. This replay will run through Monday, July 5 2010 at 5:30 pm. Mountain Time. A webcast replay will be available on the company's website until June 28 2011. We encourage you to monitor our website at micron. Com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will be attending. Please note the following Safe Harbor statement. During the course of or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to the documents the company files on a consolidated basis from time to time with the Securities And Exchange Commission. Specifically the company's most recent Form 10 K and Form 10 Q. These documents contain and identify important factors that could cause the actual results for the company a consolidated 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. I'll now like to turn the call over to Mr. Ron Foster. Ron? Thanks, Kipp. Our press release is available on our website. It has been a busy quarter with the NeuMoDx acquisition and other items. Let me first set the stage with a financial summary for the quarter. Then I'll review with you some of the significant or unusual items in the quarter before diving into the operating details. The company's 3rd quarter of fiscal 2010 ended June 3 2010. The company reported net income of $939,000,000 or $0.92 per diluted share on net sales of $2,300,000,000. Included in net income are gains related to the purchase accounting for the NeuMoDx acquisition aggregating to $488,000,000. Of that gain, $437,000,000 is presented on a separate line on the income statement and $51,000,000 is reflected as a benefit on the income The shares issued in the NeuMoonics acquisition are included only for the period they were outstanding, roughly 4 weeks out of the 13 week quarter. Let's look at some of the The purchase price for Pneumonics is based on 138,000,000 shares issued to the Pneumonics shareholders and consideration for the employee holders of restricted stock units that were assumed by Micron. The total purchase price was $1,100,000,000. The new purchase accounting rules under FAS 141R were effective for Micron with the beginning of our current fiscal year. Under the new rules, the net assets are recognized on the opening balance sheet at their fair values and any excess over the purchase price is recorded as a gain in the period of the acquisition. That gain in the Pneumonics acquisition was $488,000,000, which is included in the results for the 3rd quarter. This purchase price allocation is preliminary. While we are not aware in the purchase accounting and the value of depreciating assets was just slightly lower than their historical cost reflected in the Mnemonic's financial statements before the acquisition. Now let's move on to a couple other noteworthy items occurring in the quarter. During the second quarter, the company accrued $64,000,000 for estimated settlement costs for pending litigation, including the indirect purchasers antitrust case. Settlement of these matters are not final. However, we believe they will be finalized in the 4th quarter. Under existing supply agreements, our Lexar business periodically receives price adjustments from its suppliers of NAND products. During the third quarter, we completed a settlement, resulting in a $41,000,000 benefit to cost of goods sold. We were successful in being awarded a total of $26,000,000 in grants and other incentives during the third quarter $10,000,000 is related to our manufacturing operations and is included as a credit to cost of goods sold. $16,000,000 is related to investments in our entities in China and included in the other operating income. Mnemonics is a party to a joint venture with Hynix that operates a memory wafer fab in China. The arrangement with Hynix also includes a supply agreement. Hynix has certain rights that were triggered upon the change in control of Pneumonics. In May, we received notification that Hynix intends to their call option to purchase all of the mnemonics interest in the joint venture as well as notification of their intent to terminate the supply agreement. The notification from Hynix contemplates closing the purchase and termination of the supply agreement in August. Although the close date may occur later, depending upon receipt of necessary government approvals. Micron and Hynix are currently in discussions regarding extension of the supply agreement. The estimated price to purchase the Pneumonics interest in the joint venture is approximately $4.25 in support of a $250,000,000 bank loan to the Hynix Neuronix joint venture. As a result of Hynix exercise of the call option on the joint venture, we are obligated to substitute for STMicro's guarantee and to deposit $250,000,000 of the proceeds from the sale into a pledged account. We will receive funds out of the pledged account as the joint venture repays the original bank loan through 2016. Let's move on to discuss a few details of our operations over the 10 fiscal year. Prior periods results have been recast to reflect the presentation comparable with the current period. Total sales in the 3rd quarter increased 17% over the 2nd quarter. Compared to the third quarter of last year, total sales increased 107% reflective of continued improvements in market conditions in our It is important to note that in the Pneumonics purchase accounting, the work in process and finished goods inventories are written up to the estimated selling until the products on hand as to recognize deferred revenue for products that are in the distribution channel when accounted for on a sell through basis, which is the model for both mnemonics and Micron. Until the products in the distribution channel are sold through, the only revenue reported by the Nemonics operations will be those from direct sales. Because of these items and the fact that only 3 weeks of NeuMoDx activities are included in the fiscal third quarter results, NeuMoDx added $80,000,000 to consolidated net sales at a nominal gross margin. Focusing on the memory segment that excludes any mnemonics activities DRAM revenue increased 10% compared to the second quarter. This increase resulted primarily from a 9% increase in average selling prices. Revenue from the sales of NAND Flash products in the 3rd quarter increased 16% compared to the previous quarter due to a 21% increase in bit sales partially offset by a small decrease in the average selling price. Memory sales in the 3rd quarter include royalty and technology fees of $21,000,000, which compares to $34,000,000 in the previous quarter. The decrease is a result of the transition in the Nanya Technology arrangements that has shifted from a transfer fee recognized as revenue to an R and D cost sharing arrangement that is reflected as a reduction in R and D expense. Revenue from our foundry like model with Aptina was $92,000,000, reflecting a 15% increase compared to the 2nd quarter. Average selling prices for percent increase in DRAM per gigabit average selling prices compared to the 2nd quarter and increased 54% compared to the third quarter of last year. Sales of specialty DRAM products grew at a quicker pace in the third quarter compared to core DRAM, resulting in a slight shift of mix towards specialty DRAM products from core. This is a reversal of the trend we have seen in the past several quarters as a result of core DRAM growth from Innovara production volumes. Output from our Innoterra operation decreased slightly compared to the second quarter as Innoterra continues its conversion to Micron's stack process. Sales of DDR3 DRAM products crossed over DDR2 in third quarter to become a larger portion of the company's sales both in bits and dollars. DRAM production costs increased slightly in the third quarter compared to the 2nd quarter primarily due to an increase in the Innoterra continues on track though with our long term conversion targets. DRAM cost reductions in fiscal Q4 are expected to be down low Micron produced product will again show cost per bit declines, while in Oterra cost is expected to be relatively flat compared to Q3. As InnoTera continues to incur costs related to the STACK process conversion. NAND selling prices in the 3rd quarter decreased slightly compared to the prior quarter. Total NAND bit shift in the third quarter increased 21% compared to the second quarter as we have initiated the ramp of our 25 nanometer technology and transition to higher density products. NAND production cost per bit in the 3rd quarter decreased 9% compared to the previous quarter. Including the effect of the NAND cost reductions in the fiscal 4th quarter expected to be down a couple of percent and bit production is forecast to be flat. The company is balancing the mix of products to optimize margin and to achieve cost reduction and bit growth with our ramping 25 nanometer technology. SG and A expenses in the third quarter were $190,000,000. SG and A expense in the 3rd quarter includes expense for litigation accruals of $64,000,000 NUemonics SG and A costs for the period following the acquisition R and D expense in the 3rd quarter decreased compared to the 2nd quarter as the 25 nanometer NAND process development was completed and transferred into production on our accelerated schedule. NeuMoDx accounted for an additional $15,000,000 of R and D expense in the third quarter. And for the first time this quarter, R and D expense includes a credit of $24,000,000 for the cost sharing arrangement with non GAAP. We anticipate SG and A expense in the fourth quarter of fiscal 2010 to be between $140,000,000 $150,000,000 while R and D expense in the 4th quarter is expected to be between $165,000,000 $175,000,000. Both of these forecasts include NeuMoDx spending in Q4. Now to the balance sheet. The third quarter generated over $700,000,000 in free cash flow to end the period with $2,300,000,000 of cash on the balance sheet. During the third quarter, the company generated $889,000,000 in cash from operating activities and repaid $378,000,000 of outstanding debt. Including $218,000,000 to the Singapore EDB, which was repaid before its maturity and $70,000,000 for the Lexar convertible notes, which matured on April 1st. Expenditures for property, plant and equipment in the third quarter were $177,000,000. Initial capital expenditures for our I'm Flash Singapore fab are expected to begin in fiscal Q4 and increased to a significant level beginning in fiscal 2011 as we move forward with tool installations and startup activities. With the inclusion of Pneumonics Capital in Q4, we anticipate total fiscal year 20 10 CapEx to be at the high end of our 8.50 to 9 $50,000,000 $75,000,000 $500,000,000 with gross margin in the single digits as we continue to sell inventories that were written up in purchase accounting and rebuild inventories in the distribution channel. $72,000,000 in the 3rd quarter, which consisted of distributions from I'm Flash to Intel. Intel contributed $24,000,000 to the I'm Flash Venture in Singapore, which matched the company's contributions. With that, I'll close here and turn the commentary over to Mark Adams. Mark? We continue to see strong demand for our memory products during our third quarter. Although our Q3 has historically been slower from a customer demand perspective, Our NAND bit shipments were up 21% and our DRAM bit shipments were up 2%. Given that our overall DRAM bit shipments increased only slightly this quarter. We consciously directed more of our bits towards higher margin products, including products to our server, networking and storage and automotive customers. Revenue from our personal computing business, which includes desktop computers, notebooks, and net books was up 3% quarter on quarter as AFPs remained strong in our core DRAM business. Revenue from our Sorter business was up 22 percent quarter on quarter. Demand from our major customers continues to look robust through the second half of calendar twenty ten. Our networking and storage business achieved a 25% revenue increase in our 3rd quarter. The growth in our networking and storage segment was driven by a double digit bit in shipment increase as well as a 10% ASP increase quarter over quarter. As the case with our server business, the forecast from our networking and storage customers continues to be strong heading into the back half of calendar year twenty ten. All in all, demand for Micron's DRAM products continue to be remains very favorable as we look to optimize our production plans around these strategic growth markets where we are uniquely positioned with a diversified product portfolio. We continue to see a shift in demand of bit shipments towards DDR3 Memory in Q3. Bit shipments of DDR3 products increased as a percentage of in the mid teens quarter over quarter, representing more than half of our overall core DRAM segment. When one considers our DDR2 capacity, we feel Micron is in a favorable position to take advantage of a potential increase in legacy opportunities around DDR2. From a pricing perspective, the weighted average ASPs for all of our DRAM products continued to increase of 9% quarter on quarter. The ASP increases we realized in Q3 were consistent across the imputing, server and networking and storage segments. Contract pricing for DDR3 has remained flat quarter to date even in a seasonally slow period. DDR2 spot pricing saw a decrease earlier in our current quarter, but has rebounded a bit since. Quarter to date blended DRAM ASPs are down slightly off of flat pricing. Even though the DDR 3 migration is accelerating, we feel a Doctor2 will be tight and supplied to our existing customers within our specialty segment. I was asked about the potential of de specing memory content on our last call and wanted to comment on what we have seen in the marketplace. In fact, we have seen limited examples of low priced consumer PCs offering 1 and 2 gigabytes models but by and large, the OEMs continue to market 4 and 8 gigabyte models. We have seen little evidence of de specking outside of the entry level consumer market. Demand for Micron's flash memory products continues to grow as we experienced 21% quarter on quarter in bit shipment growth. Micron NAND products are used in a broader range of customer applications, including the consumer, mobile, and enterprise markets. We were able to advance our technology leadership in flash memory as we began shipment of our 25 nanometer product through Lexar and other channel customers. We feel the 25 nanometer process technology will further strengthen our cost leadership position in flash memory. On the SSD front, we continue to grow shipments of our award winning C300 real SSDs to our OEM customers and through our crucial channel. There is a substantial overlap on the SSD front with customers who rely on Micron's DRAM solutions, thus demonstrating their overall breadth and strength of our product portfolio. Our retail business had the best operating performance since the acquisition of Lexar in June of 20 The Lexar branded flash memory card and USB products coupled with our crucial branded FSD and DRAM module solutions have continued to gain market share worldwide. In a time of supply constraints, our retail customers value the vertical integration model microon offers through these channels to meet their demands requirements. We continue to see the retail and e commerce markets for DRAM and NAND branded products. As differentiated channels that few of any of our competitors are able to access directly. Trade component pricing for NAND memory was down slightly quarter on quarter. This was compared to the quarter to date reference of flat ASPs we gave on our last call. Although there are signs of 3 bit per cell NAND from our competitors in the marketplace, we are pleased with the pricing for Micron 25 nanometer, 2 per cell higher performance flash memory is available to maintain a price performance benefit over other lower performance options. We feel the market will trend to higher density chips and that big consumption will continue to grow throughout 2010. We remain optimistic that market segments such as mobile, consumer electronic devices such as tablets, and the FSDs will drive demand for higher cycling performance requirements. We are pleased that the pricing has remained fairly strong during a seasonally slow season for consumer products. With trade ASPs down just a couple of percent quarter to date. And we are optimistic that the NAND market will remain strong for the remainder of calendar year 2010. As Ron mentioned, due to purchasing accounting rules, NeuMoDx numbers do not fully show up in our sale figures this quarter. I wanted strategically in supporting their overall memory requirements today and for their future product requirements in NORMCPs and NAND applications. Our broad portfolio puts us in a strong position as a non competitive supplier at our major customers. From a market perspective, nor memory remains in very tight supply conditions and it appears unlikely to change in the second half of calendar year twenty ten. Except for some cases where we are holding inventory to serve some strategic customer opportunities, our finished goods inventory remains relatively low in aggregate, and seasonally very low. The channel appears to be low as well. We have been asked about the impact of Europe's economic issues on our overall business. Openly, the size of the business and some of the impacted companies is relatively small as a percentage of the overall demand, and we have not noticed any material impact to date. As we turn to the end of our fiscal 2010, we are encouraged by the strong demand signals across our channel segments. Our customers continue to seek expanded supply partnerships with us as we continue to lead from a technology and portfolio scale perspective. We see the demand supply equilibrium in the memory business continuing to work in our favor as we look for continued strong operating performance going forward. With that, I'll hand it back over to Chip. Thanks, Mark. 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 questions. We can hear you clearly. With that, let's please take questions. Thank you. Our first question comes from Tim Luke of Barclays Capital. Thank you so much. I was wondering if you could just clarify with respect to the fiscal fourth quarter for August, what we should be thinking in terms of bit growth going forward in DRAM and in NAND? And if you could provide any framework for how we should think about beginning to model the revenue ranges for mnemonics for the coming period. And just to confirm, it sounded like you were saying that as of now, if the pricing was stable in DRAM from now, it would be down slightly. Could perhaps you give the same, guidance with respect to the NAND environment? And then lastly, if I may, the inventory was up some what was mnemonics in terms of the inventory change? Thank you. Thanks, Tim. I think we got all those. I'll take the first one. The production bit growth guidance for DRAM was flat to up slightly. Anne Fernandez was roughly flat in our fiscal Q4 over Q3. I'll hand the ball off to Ron for the new Monnex guidance. Yes, Tim. NeuMoDx revenue, I modeled that for you. So you had a baseline to start from. And going forward, we don't anticipate that we'll be able to provide visibility of mnemonic separately as we get it integrated into our business unit planning and the structure of our company. But for Q4, we're anticipating $475,000,000 to $500,000,000 of revenue in the fourth quarter related to new NeuMoonics products. And, with regard to the, your inventory question, which I think was your 4th question, the mnemonics inventory, this was our 1st quarter, including it, and we included a full fair value assessment. So It has no embedded margin in it, as I mentioned. And, so the increase in the revenue base will be at full fair value. And as we flush through inventory at cost, then it will, it will come down to a cost basis as we go through the 4th quarter. But I also anticipate that in the 4th quarter, we'll have a very small margins on the NeuMoDx product because it will be mainly flowing through at fair market value. How should we think about mnemonics margin going forward after the fourth quarter, if you could give some color there? And then my last thing and I'll pass it on is just have you concluded your, arrangement with your partner for Singapore sounds like you have an initial matching of CapEx, but how do you see that going forward? Thank you. So Tim, the NeuMoDx margin, as I mentioned, 4th quarter is going to be only slightly positive as we're flushing through fair value inventory. But beyond that time, as we get to full normal cost production. I guess one thing I refer you back to is that, in recent reported history, they've run-in the mid-20s kind of gross margin ranges. Let me jump in on IMFS if the question was relative to capital funding there. We still don't have complete clarity as to the level of participation of our partner in that ramp. We've indicated previously that that fab is roughly 100,000 wafer per month fab. I think as a placeholder, you should anticipate that as we move through calendar 2011, we'll ramp that to roughly 60% level, but we we want to maintain flexibility to move that around based on market conditions. So we don't have a firm roadmap for you yet on that. And, the Intel participation, again, well, too early to say. Thank you so much guys. Our next question comes from Daniel Baronbaum of Origa USA. Hi guys. Thanks for taking my question. Can we just go back to the inventory? I'm just trying to get straight in my head. There was like $700,000,000 increase in the quarter. How much of that was mnemonics inventory? How much of that was you marking up mark to market for DRAM. And then maybe just go back and relate that again to clarification on your gross margin was nor gross margin as you recorded on the P and L negative in this quarter? And then when would you expect it to get to that mid-twenty percent normalized number? Daniel, this is Ron. So in terms of the inventory effect in Q3, it was all driven by essentially mnemonics. And so, that was the adjustment. And the inventory that we put on the balance sheet for mnemonics was at fair market value less cost to complete so that when it goes out, it'll be effectively going out in a 0 gross margin. So, that effect will flow through the Q3 effect we were essentially a 0 gross margin in Q3 and will be near 0 gross margin in Q4 as that continues to flow through. So I'm sorry, so it's sort of the right way to think about it that you have $700,000,000 in nor revenue that has to flow through at 0% gross margin before you move some more normal gross margin? That's a reasonable way to think about it. Yes. Okay. In addition, we had just to reiterate, we had inventory in the distributor channel, that was, there at the time we executed the close. And as I mentioned in my comments, as part of purchase accounting, that distributor inventory that was deferred on our books, is wrapped up in purchase accounting and we don't ever report that as revenue either in the current period or future. So until that pipeline gets refilled, the distributor inventory pipeline, we have an effect, from that. And I incorporated that in the guidance for the fourth quarter that I gave you for pneumonics. Okay. That makes sense. And then just, on the accrual for litigation What what litigation are we talking about? Is this in addition to is this cost price fixing case and is it in addition to Rambus litigation? Dan, this is Ron again. It doesn't relate to Rambus litigation is the antitrust class action suit related to indirect purchasers effectively representing consumers. And that settlement involves Micron and 4 or 5 other participants in the settlement of that antitrust class action related to the indirect purchasers. Samsung actually previously settled that same suit. And this one involves Micron, NAC, LPDA and Infineon as examples. Okay. Thanks. And then just one last administrative question. Guidance for share count for next quarter when you have the full effect of the Mnemonic issued shares. Should be about 1159. 1159. Thank you. That of course depends upon income levels. Right. Understood. But fully diluted assuming Fully diluted fully diluted, would be at 11.60. Great. Thanks very much. Thanks. Our next question comes from Kate Cutlarski of Goldman Sachs. Hi, thank you for taking my question. Couple of questions. First on the NAND bit shipment guidance for next quarter. Could you maybe clarify a little bit as to why we're only seeing flat production next quarter if there's any difference between what you expect your production to be next quarter versus what you expect your shipments to be? Yes. This is Mark Durkin. Let me jump in on that one. The, the effects are numerous, but primarily revolve around, increased penetration of our 25 nanometer node being offset by lower volume purchases, but primarily a shift in mix to more margin, higher margin NAND products, which tend to be lower densities. Okay. That makes sense. And then any difference in what your production is going to be versus the actual shipments in the quarter? I believe we're roughly flat. No inventory change. Okay. And then my other question is on the cost reduction trajectory. You mentioned that next quarter cost reductions will be fairly minimal. Should we expect them to accelerate, over the next couple of quarters? And if you could quantify that, that would be great. Yes, absolutely. We've got a lot of runway ahead of us here as we move into fiscal 2011. In particular, on the Inanterra front, we have the 50 nanometer transition moving ahead and we'll really start to see the impact of that fiscal Q1 and beyond should be a big story for the entire year. On the NAND front, I mentioned we're into the 25 nanometer transition. That'll be on the order of 25% of the bids the quarter we're in. It'll be closer to 75% of the bids the following quarter and that'll drive significant cost reductions as we move through the year on NAND front as well. So boil all that down. I think on the NAND front, you can look for high teens moving forward quarter over quarter and for DRAM, you can look, be a little bit lumpy, but averaging out something in the mid teens. Okay. And then just finally, the follow-up to my first question on the NAND side, how should we think about the growth after Q4? Sorry, can you say that again, Kate? Yes. So next quarter on the NAND side, bid production is going to be relatively flat. How should we think about that in the following quarters? Oh, yes, bid bid production, probably, flattish again the following quarter and then yeah, we'll have some pretty good growth after that. I'd say, how do we characterize that guys? Yeah, mid teens. Okay. Thank you. Our next question comes Thanks very much. Can you give us a rough idea of what your weeks of inventory are for DRAM and NAND And do I understand correctly if you've got about 1,000,000 of mnemonics revenue and you're saying that the run rate might be up to 1,000,000 accounts to about 20 weeks of inventory for the mnemonic's north staff? I'll take a shot on the inventory question, on our finished goods inventory, we're slightly below our normal inventory holdings about 3 weeks on hand for finished goods, and in certain high volume products or even less than that. Sometimes towards the end of the quarter, we have the choice to make on holding over some inventory to position to serve some higher market margin opportunities in some of the specialty areas we serve. And that sometimes is the case, but on average, we're lower than we are normally seasonally and slightly less than 3 weeks in total. This is Ron. In terms of your NeuMoDx revenue question, I didn't say 700 dollars mnemonics revenue. We had about $700,000,000 $686,000,000 in mnemonics inventory at the end of the quarter. And that was mostly mark to fair market value, as a real, the acquisition, although we did have, obviously, production that went in there in the 3 week intervening period, period after the close. Then that will flow through essentially at market value less cost to complete. It will flow through. And based upon guidance, the vast majority will flow through in the fiscal fourth quarter. But bear in mind, some of that inventory already is probably at cost in that mix also. But doesn't that mean that you've got a quarter or more worth of inventory on your balance sheet for the NOR? That is correct. Yeah, that's right. Our next question comes from Alex Gouna. I'm sorry if I mispronounced your name from JMP Securities. Yes, thanks very much. I was wondering, and I apologize, because I think you've touched on this, but with your flat bit or flattish to slightly up bit growth in DRAM, Can you reconcile what I would think would be stronger seasonality on that front with that sort of guidance? Keep in mind that's not a shipment's guidance. That's only a production guidance. Okay. And so But again, in such a tight environment, when we'd be looking to grow it, I mean, is there is it entirely accounted for by the transitions going on with Inoterra and DDR3 conversion? Yes, our bit growth is right now. No wafers coming on board for us in the immediate future. So it's all transitions. So it is a combination of Innovara's transition and Micron's internal or wholly owned transition. Okay. And then if I could ask the same question that you just answered on NAND, if we look beyond this current quarter, what might we see on the DRAM bit growth side a little bit later in the year? Yes. After Q4, you should start looking for some double digit bid increases on the production side. All right. Thanks very much. Our next question comes from Glenn Young of Citi. Hi. You mentioned that there was some difficulties with the conversion to stack at Innovara and the long term targets remain the same. Has there been any changes? Can you talk about some of the changes to the more near term targets? Yes. This is Mark Durkin. I wouldn't say that there's anything really unexpected going on with Antero. We just continue to move through equipment installations and deploying the technology on what's been the tool set at Micron as well as some repurposed tools there. In the short term, we'll see a slight reduction in the wafer start rate as we just work through those equipment repurposing activities, but we still anticipate being on the original schedule as we move, late into the calendar year and that's driving some pretty it's going to be a bit growth for us throughout 2011. Okay. And are you planning specialty DRAM mix to remain at this higher level for the rest of the second half of calendar twenty ten? Yes, this is Mark Adams. Was something I alluded to in my opening comments that given the profile we're looking at, we had we were able to do this quarter shift towards some specialty and higher margin segments for ourselves. And we do see some upsides there as we're in some cases sole sourced in some of these applications. And certainly tied to some of the growth opportunities in these markets. And the next question please. Thank you. Our next question comes from Daniel Amir of Lazard Capital Markets. Thanks a lot. A lot of my questions have been answered, but can you give maybe some commentary on kind of what you're seeing a bit in terms of, customers in the PC space, and how we, where we're standing in terms of, back to school orders right now? Yeah. Thanks, Dan. It's Mark again. So what we saw is kind of, I guess, analysts and press talking about a softer April. But openly, since kind of the May timeframe, we started to see some pretty healthy indications on a back to school in the second half of the year. Notably, the server business has been very strong. The desktop business is very strong. And the June ODM numbers around notebooks is very strong. So despite some concerns or questions early on in our quarter back in April, it's still been fairly strong. We feel pretty good about it. And in terms of the specialty DRAM market? Likewise, I said, we had the opportunity to take a look at our allocation models given some of the limited production upside we had this quarter and we shipped as much as we could those markets because there's a lot of appetite for our products. I would also mention there's a number of questions on the mnemonic side on today's call. And It's not just pertaining to DRAM and Flash memory. The Nora specialty market is a high growth opportunity for us as There's tremendous appetite for pneumonics parts in that channel as well. Okay. Thanks a lot. Our next question comes from Gary Hu of Oppenheimer And Company. Great. Thanks for taking my question. Just a few more follow-up questions to some of the questions that have already been asked. But I'm just curious here in terms of your ability to basically change production bits from commodity to specialty. Was that more of a reaction to what you're seeing in the marketplace? Particularly vis a vis a little bit of incremental weakness here on the commodity side with the PC market? And second question, just a similar vein, you talked about decontenting, you came out and said, basically, you didn't see any evidence of that. I was wondering how much visibility do you have on particular specs for PCs for the back to school selling season? In other words, are you seeing any kind of visibility, or do you have any visibility on DRAM content per box in Q3 and Q4? And I have a few more follow ups. Yes. So, I think the first question is, did we I think let me restate this. Did we move some capacity? Did we move it to more profitable products? Because we foresee weakness in the less profitable segments, not as much. We were just trying to optimize profit. On the second question around going forward configurations, We're not as tied to the choices that our OEMs make on individual configurations. I'll tell you that part of my responsibilities around the retail business and I've got pretty good interactions with the retailers and e tailers. So far, the consumers haven't voted on on going down to lower configurations. And you've got to remember the emotional part of buying here. And the most part of buying is when you're used to going out and evaluating and purchasing 4 gigabytes, equity bytes platforms, behaviorally, it doesn't just seem right to go down in 1 to 2 gigabyte products. And that's just a consumer sentiment. Secondly, that these specks never hit the corporate PC side. So it's such a small piece today and it hasn't proven to be successful, that I'd be surprised if it may have an impact in the back half of the year. Okay, great. And just a follow-up in terms of manufacturing. You guided single bit production, on DRAM, particularly. I thought that, and correct me if I'm wrong, that crossover in terms of a wafer production at Inoterra for STACK had occurred, or is expected occur, at the end of Q2. Just wondering, is there any kind of, step back in terms of, the ramp here going on at Innoterra for STACK particularly in regards to your single digit kind of production guidance for fiscal Q4? And how much more acceleration could we see now in November February quarters? Yes, I think, this is Mark. Relative to in Oterra, I think your assumptions relative to the original plan were off a little bit. We are, as I said, continuing on a pace We're probably, lagging a couple of months at the current point, but we anticipate that as we move through Q4 that'll be right back on track. So we don't see any long term disruption there. Okay. And we could expect basically double digit bit growth beyond Q4 for DRAM? Mid teens, I think. Yeah. Okay, great. Thank you. Our next question comes Thank you very much. Just a couple of questions. One is, any idea how much DTRO3 will constitute up your sub 15 nanometer products, in the second half of twenty ten. Just trying to get a sense of, know you've costed on DDR3, but I would just want to know, how much that kind of constitutes of your, of your self explanatory products? So, let me take a shot of that. This is Mark again. I think the for 50 nanometer in the quarter we're currently in, is probably it's roughly 2 to 1 DDR3 to DDR2. Okay. All right. That's helpful. So let me just ask you. You're saying your inventory is about 3 weeks. Any insight as to what the inventory at the OEMs or at the channel or the module companies is at the moment. Are you getting that sense? Because we should add some of the year ahead of back to school. Some people tend to, you know, with past building ventures. So any commentary as to what the channel event is looking like would be helpful? Yeah. Thanks. This is Mark Adams again. So the inventory, it's actually interesting. It's much tighter than you would expect going into back to school. My suspicion is that I think we all have to remember we're not sitting here in the most robust economy. It serves better than 2009. But people still have kind of the memory of running through the working capital strains of that time period and they're pretty efficient on supply chain and probably a little bit more risk averse than they were a year or 2 years back. So we see pretty tight inventories across the channels and even back into the ODM that you referred to earlier and don't see a lot of buildup at this point. Okay. Let me ask you about the because you talked about networking and storage business, and that's of course your specialty business. How much of In terms of the demand you're seeing there, how much more on weight do you expect for strength and the demand there? And while you're answering that also any commentary can make us to the configuration you're seeing in the several market. And to what extent that reflects on overall strength in enterprise spending? That would be helpful. Thank you. Yes, Mark Paul said in response to that question is we it's hard to see far up behind 6 to 12 months from a demand cycle. But it looks good. It looks really strong. The networking guys obviously are looking to get into computing and vice versa. So you see a lot more technology plays around storage and not just on the DRAM side. They were talking to us about flash applications and certainly newer applications. So, as best we can see that, that's a very healthy segment for us and one where we're pretty well positioned from a product portfolio standpoint. Okay. My last question is regarding Europe. I mean, this has been a topic of everybody in terms of you've had some OEMs talk about raising prices for PC products in Europe. The west way to kind of respond to the currency weakness. In the demand you're seeing out of Europe, has there been a need change at all, be it by order of specifications of people back in terms of pricing on the component level. So any comments on Europe will be helpful. Thank you very much. That's my last question. Sure. We haven't seen it ironically. What led to my comments earlier was we've actually seen some pockets of strength in retail and Europe. Certainly, there's been some questions about Greece and others, smaller markets. But on the margin, it's been okay. And so we haven't seen a dramatic shift. A lot of conversations about it, but we haven't seen a dramatic shift. It's certainly some of the currency implications abound, but The other side of that equation is China retail has been up dramatically. So on a global footprint, whatever noise there might be in some all the regions in Europe is more than offset by some other global success paths around China, India and others. Thank you very much. Our next question comes from Kevin Cassidy of Thomas Weisel Partners. Thanks for taking my questions. Were there any changes in your gross margin rankings of your different product groups? I'll rank it for you if you like. Specialty DRAM, continued to lead. Number 2 was our trade NAND. Number 3 was core DRAM. Number 4 was the segment we now have as imaging another and then of course NeuMoDx was number 5. Okay. Thanks for that. And, for your internal DRAM conversion, is there any change to that schedule or could you remind us what the schedule is? No. Again, I think over the long haul, we get through Q4 and we're looking for a pretty big fiscal 2011 that'll be in the mid teens and accelerate. In the short term, we're maybe lagging a couple of months at Innovero, but that'll play through here relatively quickly. Okay. And one last question on Mnemonics. Of the $80,000,000 that you sold to OEMs, what exposure was that? Split between handsets and, embedded customers? Well, I think, and Ron will correct me if I'm wrong here. The $80,000,000 wasn't an 80 actual revenue. It was the revenue we recognized by virtue of the accounting treatment of the quarter and how that we closed on the date. So that notwithstanding, I think the answer you're looking for is about 65% to 70% wireless and about 30 plus percent around the embedded market. Our next question comes for taking my question. I thought you guys were a little bit constrained on your server shipments because in Oterra transition. So a bit surprised how strong server was. Do you think server can be strong again in the coming quarter despite, despite some flower bit growth than you'd hope from perhaps from Innovair? Yes. This is Mark Adams again. Yes, absolutely. And, I think your comments well found is coming out of last quarter. And as I mentioned on this call and a couple of other calls in the past, sometimes we make the choice to hold on to certain inventory parts that can go into those markets And if it happens to be over a quarter and we hold it for 2 weeks after the closing of the quarter, we do so for the profit and customer service rationale. So We're in pretty good shape right now. And we expect as we go through with the conversions in Oterra, to our STACK technology that will again allow us to penetrate and grow our service share. Great. Thanks. And just a quick follow-up on NAND. You alluded to this a little bit, but Could you can you kind of estimate what kind of price premium you're getting for your 34 nanometer NAND? It seems like it is and your 25 nanometer NAND if you've seen any Were you able to maintain your price premium going to the the new new technology because of your performance advantage? I think that it's a little bit early to tell, but we feel pretty confident on the 25 nanometer ASPs as we're just getting that into some of the OEM design in qualification efforts. On the 34 nanometer, what we really are seeing is kind of a bifurcation between higher performing, higher cycling products, 2 bit per cell MLC, and some of the low performing, 3 bit per cell applications for emerging market consumer products that are acceptable for certain regions and we're seeing kind of 2 different price points. We have been able to hold pricing pretty favorably against that. In our current contract OEM customers. Great. Thank you. Our next question comes from Deepaun Nag of Macquarie Capital. Hey, guys. Thanks for taking my question. I just had a quick question about the DRAM and NAND production mix. For the current quarter. Could you give us an idea what those were? They were up a couple of percent. For both DRAM and N? Oh, sorry, that was for NAND. I think DRAM, for excuse me, that was DRAM. And, for NAND was actually up very nice, a little more than we even guided which as you recall was high teens. High teens. Okay, great. Thanks. And also if pricing orders stayed flat at current levels, do you see ASPs coming out at the end of the quarter or Q4? So if pricing were to day level of rain in the quarter? How do we see them? DRAM, DRAM relatively stable, relatively flat the remainder of the quarter. And NAND is interesting because we're going into a stronger period of NAND historically. And so it's coming out of the the June, July seasonally slow period and heading into back to school, but it's a state relatively flat, down slightly a point or 2. Okay, great. Thanks a lot guys. Our next question comes from Bill Dezellem of Tieton Capital Management. Thank you. A couple of questions for you. First of all, relative to the termination of the JV with Hynix, does that imply that the $250,000,000 or so that you said was an escrow through, what was it, 2016 or so that would then come out of that account feedback on your balance sheet or I guess they're there either way, but available to you? Bill, it's Ron. The JV agreement and the, the call option would specify that we put $250,000,000 essentially a pledge escrow account, if you will. And it would be paid down by the joint venture, between now and 2016 as, as, over that time schedule. So the flow of the, cash back to us would be over that period between now 2016. Okay. Thank you. And then the supply agreement that you're looking to renegotiate with Hynix or that Mnemonix is looking to renegotiate with Hynix, would you please discuss the implications, positive and negative that could develop around that? Negotiation? We're in the midst of discussions, Bill, and it's not appropriate to talk at this time, but suffice it to say that micron is, is intent on continuing to supply to our customers and we'll, we'll certainly supply it and we'll be working with our JV partner to affect that transition and supporting our customers over time. Thank you. And then my final question is, that during the course of this call, there was a reference to mnemonics and growth opportunities you're seeing within various mnemonics markets. And given that there's been a fair amount of discussion about the mnemonics markets being mature or even declining, would you please discuss in more detail the growth opportunities that you are seeing and what those of us on the outside that have been, thinking about maturity declining or missing. Yes, I think you could characterize the overall NOR growth fairly. I would suggest that maybe the industry structure and the dynamics that have played out over the last 12 to 18 months come into play when you think about other competitive issues around loss share and reliability of a Micron now enabled with NeuMoDx as a strong balance sheet, well financed product diverse company if you look at the embedded market as an example, the forecast growth in that market alone allows us to go in and get more share a place there at NeuMoDx has historically been very strong. And so, certainly in a macro level, you could I get the understanding of what you're suggesting on Nore from a growth perspective that's modest. But the competitive landscape as well as the embedded market by itself represents a tremendous growth opportunity and then historically has been margin segment for Pneumonics. So when you net those 2 together, how would you view the overall Pneumonics market space? But I view it for Micron very positively. Thank you both. Thanks, Bill. I apologize for those that are left in the queue, but we've run out of time today. So, I'd like to thank everyone for participating on the call. 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