Micron Technology's Q3 2012 earnings call discussed the company's financial results and market conditions. Revenue exceeded expectations due to strong manufacturing and inventory improvements. The DRAM market stabilized in Q3 while NAND softened significantly. Management aims to build a sustainable free cash flow model and discussed opportunities in new memory technologies and systems, as well as potential acquisition of Elpida.

1. SEEKING ALPHA α

2. Micron Technology Management
Discusses Q3 2012 Results - Earnings
Call Transcript
EXECUTIVES
• 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

3. 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

4. Operator
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 Technology's
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.

5. Kipp A. Bedard
Thank you very much. I'd also like to welcome
everyone to Micron Technology's 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
Micron's 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.

6. A webcast replay will be available on the company's
website until June 2013. We encourage you to
monitor our website, again at micron.com throughout
the quarter for the most current information on the
company, including information on 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 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'll 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.

7. 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. I'll now turn the call over to Mark
Durcan. Mark?

8. D. Mark Durcan:
Thanks, Kipp. I'd 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, I'll turn it over to Ron for financial
summary, and we'll 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.

9. 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.

10. 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
we've 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, I'd 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. I've 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.

11. 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. We've 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.

12. In addition, however, being cognizant of and reacting
appropriately to memory industry supply and demand
dynamics is important to achieving this result. There's
currently considerable interest, of course, in whether
Micron will consummate the purchase of Elpida, which
represents 15% to 20% of the DRAM industry capacity. As
most of you are aware, we announced previously that we
were selected to negotiate exclusively to become the
sponsor for Elpida in the bankruptcy process. We are in a
unique strategic and financial position to take a look at this
opportunity and are interested in pursuing it, if it can be
done under the right terms and conditions. In my
mind, these include making sure we do not unnecessarily
dilute our equity nor incur excessive interest-bearing debt
that might overly hamper our flexibility moving forward. A
deal with Elpida in this context should enhance our scale
and operating expense efficiency.

13. Elpida also has a strong product portfolio, leading-edge
technology, strong IP and talented workforce. I think our
track record of successful M&A transactions, which by the
way includes avoiding deals which do not fit financially and
strategically, speaks for itself. . If a deal cannot be done on
terms that are acceptable to us, I want to emphasize that
we're also comfortable with our organic opportunities. Our
customer base is fantastic and almost all are looking to do
more business with Micron. Let me give you a couple of
examples of other things you can expect we'll be doing
outside of the effective ongoing management of the existing
core business. On the product and technology front, 2 key
opportunities include our Hybrid Memory Cube and
enterprise SSD products. These premium products are
pushing Micron further up the value chain with our
customers and will help improve our margin structure
over the long term.

14. Key to success in these and other more system-oriented
memory solutions we are pursuing are the right
partnerships up and down the value chain, including
those with suppliers, customers and service providers.
We will continue to forge close relationships with other
parties to ensure that Micron solutions are the most
widely available, flexibly configured and most value-add
for our customers and the end markets. While we're
building core competencies internally to support these
initiatives, I believe we can best enhance return for our
shareholders by partnering closely with industry leaders
in adjacent spaces to optimally leverage our individual
strengths. We've got a good history of success in this area
and existing partnerships to continue to evolve and new
ones to emerge. Mark Adams will cover a few highlights
on some previously announced system products during
his market discussion later on.

15. On the cost and capital efficiency front, we recently took the
tough but necessary steps to terminate our Transform Solar
joint venture. While we felt like our technology was
strong, the marketplace dynamics did not support ongoing
and potential future capital investments which would have
been required in order to move the business forward. We will
continue to scrutinize all of our businesses to ensure we're
focused on the right opportunities and managing our capital
resources efficiently. While I won't rule out future
diversification in the product -- in the new product areas
where we bring significant core competencies to bear, right
now we have meaningful opportunities to differentiate and
grow in memory and memory systems markets, so you
should expect our investment focus to be there. I'll stop here
and turn it over to Ron and Mark before turning for Q&A.

16. Ronald C. Foster:
Thanks, Mark. The company's third quarter fiscal 2012
ended on May 31. As usual, we provided a schedule
containing certain key results for the quarter as well as
certain guidance for the next quarter. That material is
presented on the few slides that follow, as well as on
our website.The third quarter results posted a net loss
of $320 million or $0.32 per share on net sales of $2.2
billion. The higher revenue in the third quarter came
primarily from higher DRAM sales volume.
Consolidated gross margin was relatively flat compared
to the previous quarter, reflecting improved margins on
sales of DRAM products, offset by lower margins on
NAND. Micron entered into a settlement agreement
with a customer after our second quarter earnings
release, but before the filing of the quarterly report 10-
Q with the SEC.

17. 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
Inotera's results reflects this
improvement, although there's 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.

18. 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

19. 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 Intel's 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

20. to Intel's 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.

21. 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 Intel's
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.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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, I'll turn it over to Mark
Adams for his comments.