Micron Technology Management Discusses Q3 2012 Results - Earnings Call TranscriptEXECUTIVES• Kipp A. Bedard - Vice President of Investor Relations• D. Mark Durcan - Chief Executive Officer and Director• Ronald C. Foster - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance• Mark W. Adams - President
ANALYSTS• James Schneider - Goldman Sachs Group Inc., Research Division• Alex Gauna - JMP Securities LLC, Research Division• Kevin Cassidy - Stifel, Nicolaus & Co., Inc., Research Division• Shawn R. Webster - Macquarie Research• Christopher J. Muse - Barclays Capital, Research Division• Ada Menaker - MKM Partners LLC, Research Division• Uche X. Orji - UBS Investment Bank, Research Division• Brian C. Peterson - Raymond James & Associates, Inc., Research Division• Micron Technology (MU) Q3 2012 Earnings Call June 20, 2012 4:30 PM ET
Operator Good afternoon. My name is Huey, and Ill be your conference facilitator today. At this time, Id like to welcome everyone to Micron Technologys Third Quarter 2012 Financial Release Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Kipp Bedard. Sir, you may begin your conference.
Kipp A. Bedard Thank you very much. Id also like to welcome everyone to Micron Technologys Third Quarter 2012 Financial Release Conference Call. On the call today is Mark Durcan, CEO and Director; Mark Adams, President; and Mr. Ron Foster, Chief Financial Officer and Vice President of Finance. This conference call, including audio and slides, is also available on Microns website at micron.com. If you have not had an opportunity to review the third quarter 2012 financial press release, again it is available on our website at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of this call, accessed by dialing (404) 537-3406 with a confirmation code of 90798592. This replay will run through Wednesday, June 27, 2012 at 5:30 p.m. Mountain Time.
A webcast replay will be available on the companyswebsite until June 2013. We encourage you tomonitor our website, again at micron.com throughoutthe quarter for the most current information on thecompany, including information on the variousfinancial conferences that we will be attending.Please note the following Safe Harbor statement.During the course of this meeting, we may makeprojections or other forward-looking statementsregarding future events or the future financialperformance of the company and the industry. Wewish to caution you that such statements arepredictions and that actual events or results maydiffer materially. Well refer you to the documents thecompany files on a consolidated basis from time totime with the Securities and Exchange Commission,specifically the company’s most recent Form 10-K andForm 10-Q.
These documents contain and identify importantfactors that could cause the actual results for thecompany on a consolidated basis to differmaterially from those contained in our projectionsor forward-looking statements. These certainfactors can be found in the Investor Relationssection of Micron’s website. Although we believethat the expectations reflected in the forward-looking statements are reasonable, we cannotguarantee future results, levels of activity,performance or achievements. We are under noduty to update any of the forward-lookingstatements after the date of the presentation toconform these statements to actual results. Illnow turn the call over to Mark Durcan. Mark?
D. Mark Durcan: Thanks, Kipp. Id like to start today by giving a brief overview of the quarter, including some color on where we performed well and where we need to improve our execution. After some thoughtful discussion on company strategy, Ill turn it over to Ron for financial summary, and well close our preliminary comments with Mark Adams providing an update on the market conditions and key developments in our business units. Revenue in the quarter was -- obviously exceeded expectations as a result of solid manufacturing performance and good work on inventory improvement by our business units and sales force. There is yet room for improvement on inventory management, but it was certainly gratifying to see the results this quarter.
And with the closing of the Intel debut restructuring, we expect benefit from an ongoing structural improvement in our NAND inventory turns. In the quarter, we completed the rollout of a new supply-chain management infrastructure and though there were a few inevitable bumps along the way, the process is complete and we look forward to building from here to new levels of customer service and responsiveness. The 30- nanometer DRAM yield ramp picked up steam during the quarter in all 3 DRAM manufacturing facilities, and is now focused predominantly on higher-density 4-gigabit DRAM products.
The technology team made solid progress on a number of new technology nodes including NAND, DRAM, NOR, PCM and some emerging memory part types. The DRAM market found its footing during the quarter and while NAND market softened significantly, since quarter end weve seen its improved stability here also. Mark Adams and Ron Foster will comment more on all these areas. Given the current memory industry climate and changes here over the last 4 months, Id like to spend a few minutes sharing some thoughts on the opportunities currently presenting themselves to Micron and our path forward. Two weeks ago, I marked my 25th anniversary at Micron. When I started, we had one 5-inch wafer fabs and goats grazing out the front. Ive clearly seen many changes in the company, as well as in the competitive landscape of our industry. One constant has been Micron emerging from tumultuous times as not only a survivor, but a stronger company.
While the memory markets are obviously somewhat soft currently, we believe they are bottoming and we will have the wind more to our backs moving into the second half of the year. Weve taken steps over the years to broaden our product portfolio, improve our cost competitiveness, strengthen our technology position and capitalize on the right strategic opportunities when they arise. It is my intent to continue to move in this direction. My focus is on building an operating and financial model that can deliver sustainable free cash flow and dependable ROI. There are many levers to pull in order to achieve these goals. As always technology, capital efficiency, product differentiation, close customer engagement, effective sales channels, timely and low-cost investment and manufacturing efficiency and effectiveness are key to optimizing our results.
In addition, however, being cognizant of and reactingappropriately to memory industry supply and demanddynamics is important to achieving this result. Therescurrently considerable interest, of course, in whetherMicron will consummate the purchase of Elpida, whichrepresents 15% to 20% of the DRAM industry capacity. Asmost of you are aware, we announced previously that wewere selected to negotiate exclusively to become thesponsor for Elpida in the bankruptcy process. We are in aunique strategic and financial position to take a look at thisopportunity and are interested in pursuing it, if it can bedone under the right terms and conditions. In my mind,these include making sure we do not unnecessarily diluteour equity nor incur excessive interest-bearing debt thatmight overly hamper our flexibility moving forward. A dealwith Elpida in this context should enhance our scale andoperating expense efficiency.
Elpida also has a strong product portfolio, leading-edgetechnology, strong IP and talented workforce. I think ourtrack record of successful M&A transactions, which by theway includes avoiding deals which do not fit financially andstrategically, speaks for itself. . If a deal cannot be done onterms that are acceptable to us, I want to emphasize thatwere also comfortable with our organic opportunities. Ourcustomer base is fantastic and almost all are looking to domore business with Micron. Let me give you a couple ofexamples of other things you can expect well be doingoutside of the effective ongoing management of the existingcore business. On the product and technology front, 2 keyopportunities include our Hybrid Memory Cube andenterprise SSD products. These premium products arepushing Micron further up the value chain with ourcustomers and will help improve our margin structureover the long term.
Key to success in these and other more system-orientedmemory solutions we are pursuing are the rightpartnerships up and down the value chain, includingthose with suppliers, customers and service providers.We will continue to forge close relationships with otherparties to ensure that Micron solutions are the mostwidely available, flexibly configured and most value-addfor our customers and the end markets. While werebuilding core competencies internally to support theseinitiatives, I believe we can best enhance return for ourshareholders by partnering closely with industry leadersin adjacent spaces to optimally leverage our individualstrengths. Weve got a good history of success in this areaand existing partnerships to continue to evolve and newones to emerge. Mark Adams will cover a few highlightson some previously announced system products duringhis market discussion later on.
On the cost and capital efficiency front, we recently took thetough but necessary steps to terminate our Transform Solarjoint venture. While we felt like our technology was strong,the marketplace dynamics did not support ongoing andpotential future capital investments which would have beenrequired in order to move the business forward. We willcontinue to scrutinize all of our businesses to ensure werefocused on the right opportunities and managing our capitalresources efficiently. While I wont rule out futurediversification in the product -- in the new product areaswhere we bring significant core competencies to bear, rightnow we have meaningful opportunities to differentiate andgrow in memory and memory systems markets, so youshould expect our investment focus to be there. Ill stop hereand turn it over to Ron and Mark before turning for Q&A.
Ronald C. Foster:Thanks, Mark. The companys third quarter fiscal 2012ended on May 31. As usual, we provided a schedulecontaining certain key results for the quarter as well ascertain guidance for the next quarter. That material ispresented on the few slides that follow, as well as onour website.The third quarter results posted a net lossof $320 million or $0.32 per share on net sales of $2.2billion. The higher revenue in the third quarter cameprimarily from higher DRAM sales volume.Consolidated gross margin was relatively flat comparedto the previous quarter, reflecting improved margins onsales of DRAM products, offset by lower margins onNAND. Micron entered into a settlement agreementwith a customer after our second quarter earningsrelease, but before the filing of the quarterly report 10-Q with the SEC.
As a result, a $58 million accrual was pushed back into the second quarter results as a charge against DRAM and DSG revenue, and was reflected in the Q2 10-Q filing. This accrual is also reflected in the second quarter results presented today. The cash payment to the customer occurred in the third quarter. Inotera continues to improve both production output, as well as yields. Our share of Inoteras results reflects this improvement, although theres still a net loss in the third quarter of $38 million. In the second quarter, we entered into a short-term loan to Inotera for $133 million. In the third quarter, Inotera repaid the loan and Micron made an equity investment of $170 million, increasing our ownership interest from 30% to 40%. This entitles us to an increased share of 30- nanometer node output in the future.
As Mark mentioned during the third quarter, the Board of Directors of Transform, a development stage joint venture in which we have a 50% ownership interest, announced the planned to discontinue operations and liquidate the company. . As a result, Micron recognized a charge of $69 million in the third quarter and the equity method investment balance was reduced to 0. Micron leases certain fabrication and other facilities to Transform, which we expect to be terminated and the facilities reverted back to Micron. Depreciation and amortization decreased in the third quarter to $546 million and certain production equipment, primarily in the Lehigh and Virginia NAND, and 200-millimeter NOR operations have become fully depreciated. We anticipate a further reduction in the fourth quarter depreciation in the $515 million to $520 million range. The income tax benefit in the third quarter reflects a $42 million benefit from the favorable resolution of an uncertain tax position in a non- U.S. jurisdiction
that arose over several previous years. The original amount of accrual came through the Numonyx acquisition, where we had an indemnification for exposure prior to the acquisition date. As I mentioned last quarter, we restructured our IM Flash joint venture with Intel during the third quarter. As a result, Micron acquired Intels 18% ownership interest in the IM Flash operation in Singapore and purchased from the IM Flash entity its production assets in the Micron fab in Virginia and the associate lease of a portion of that facility was terminated. Total consideration for these purchases was approximately $600 million. Micron recognized a $17 million loss in the third quarter associated with the termination of the Virginia lease. Intel made a cash deposit with Micron of $300 million, which will be applied
to Intels future purchases under a new supply agreement. In addition, Intel loaned to Micron $65 million, due in installments over a 2-year term. The existing supplier arrangement through IMFT remains intact, and Intel will continue to purchase their 49% of the output from the Lehigh, Utah operation, while Micron owns 100% of the production output from the NAND operations in Singapore and Virginia. Beginning in the fourth quarter, Micron will take approximately half of the volume of this previously sold to Intel at prices approximating cost. A portion of this volume will be sold from Micron to Intel under a new supply agreement at a markup above cost. Going forward, these sales to Intel under the new supply agreement will be reported as trade NAND sales in our financial results.
As a result of changes in our partnering arrangement, sales to Intel are now recognized upon completion of wafer fabrication rather than after back-end assembly and tests are completed under the previous arrangement. . $97 million of back-end inventories associated with Intels supply chain was sold to Intel in the third quarter, generating a onetime increase in NAND sales revenue and reducing WIP inventories by the same amount. Micron and Intel will continue to participate in the development of NAND Flash memory technologies and will fund these shared costs equally. Joint development of the technology was also expanded to include emerging memory technology. NAND market prices declined across the board in the third quarter. Product mix shifted toward MLC NAND, which drove higher bit sales, as well as significant declines in per bit cost and selling prices.
Margins on trade NAND products decreased in the third quarter, primarily as a result of substantial market price declines, particularly for MLC products that outpaced the 29% cost per bit decline quarter-to-quarter. Trade NAND selling prices are down mid-teens quarter-to-date, while trade NAND cost per bit is expected to decline a few percent in the fourth quarter. Trade NAND bit growth is projected to increase in the high single-digit range for the fourth quarter following the robust 68% bit sales growth in the third quarter. Turning now to DRAM, DRAM revenue in the third quarter increased 20% compared to the previous quarter as a result of a 12% increase in bit sales volume. . The increase in DRAM average selling prices in the third quarter is primarily due to the effect of the $58 million second quarter charge to revenue from the customer settlement I mentioned earlier.
Normalizing for this Q2 settlement, average selling prices were flat quarter-to-quarter. Selling prices in the PC sector of the DRAM market improved through the third quarter, while prices for specialty DRAM products, which trend with a lag compared to PC memory, only recently began to stabilize. Quarter-to-date, selling prices have remained flat as well. DRAM cost per bit declined 4% quarter-to-quarter, but are projected to increase slightly in the fourth quarter as near term, we execute technology node migrations at all of our DRAM fabs. . A product mix shift to lower-density mobile and specialty products and the timing of new product quals at our leading technology node are also expected to impact fourth quarter cost per bit and push bit growth down in the high single-digit range in the fourth quarter.
NOR revenue in the fourth quarter is expected to be relatively the same as in the third quarter. NOR product margins improved slightly in the third quarter as cost reductions outpaced selling price reductions in the period. The cost profile for our 200-millimeter NOR fabs is improving as production levels are ramping back up. The charge for idle capacity for the quarter was $30 million compared to $40 million in the second quarter through all of our production operations. The NAND Solutions Group swung to a slight loss in the third quarter, as average selling prices dropped faster than cost reductions. Revenue was up despite the price declines with a higher mix of MLC product and a reduction in inventory. Sales of SSDs and NAND component sales to SSD OEMs increased only slightly in the third quarter compared to the previous quarter as we have worked through the demand issues over the past couple quarters.
We are looking forward to additional growth in SSD sales as the market further improves through the remainder of the year. . Improvement in operating income for the DRAM Solutions Group in the third quarter reflects higher revenue and lower cost per bit compared to the second quarter as more volume was moved into personal computing sector at slightly improved average selling prices. The $58 million customer settlement in the second quarter was charged entirely to the DSG business unit. Our Wireless Solutions Group continues to show the weakness of this market segment and our customer group in particular, although margins improved slightly in both NAND and NOR wireless sales. Operating income from the Embedded Solutions Group reflects broad-based growth across all 3 memory technologies and the successful transition of legacy NAND designs to more current architectures.
SG&A expense in the third quarter was within our guided range and is expected to be between $145 million and $155 million in the fourth quarter. . Third quarter expenses for research and development were slightly higher than our guided range due to the volume of development wafers processed and the timing of product qualifications. R&D expense in the fourth quarter is expected to be between $225 million and $235 million. The company generated $686 million in cash flow from operating activities in the third quarter, which includes the $300 million deposit received from Intel. Cash and investments at the end of the quarter was $2.7 billion. This balance includes cash, cash equivalents, short-term investments of $118 million, and noncurrent investment securities of $361 million. The cash and investments balance at the end of the quarter includes $876 million of proceeds from the issuance of convertible debt securities, net of the cost of associated capped call transactions of $103 million and other debt issuance costs.
In addition in the third quarter, we called for redemption of the remaining $139 million on our 2013 convertible notes. $23 million, which was converted into 4.4 million shares in the third quarter and the remaining $116 million of this redeemed convert -- was converted into -- will be converted -- or was converted into 22.9 million shares following the end of the quarter. Inventory levels came down in the third quarter compared to Q2 for NAND, DRAM and NOR. A portion of the decrease in NAND inventory was due to the sale of the back-end inventory to Intel in the third quarter that I mentioned. Expenditures for property plant and equipment were $324 million for the third quarter. PP&E expenditures are expected to be approximately $450 million in the fourth quarter and between $1.6 billion and $1.9 billion in fiscal 2013. With that, Ill turn it over to Mark Adams for his comments.