Highlights From MU's Q1 Conference Call: Sales Relatively Flat with NAND Growth Offset by Deline in Wireless NOR Sales

Last night, Micron Technology (NASDAQ: MU) reported Q1 EPS of ($0.19), $0.12 worse than the analyst estimate of ($0.07). Revenue for the quarter came in at $2.1 billion versus the consensus estimate of $2.14 billion. Shares are trading up 17.5% today to $6.50.

Highlights From MU's Q1 Conference Call:

• (Steven R. Appleton) We were able to introduce the world's first 128-gigabit monolithic NAND device, which uses Micron's 20-nanometer NAND process.
  
• We also started production on our first 45-nanometer NOR products for the embedded applications.
  
• On the operations side, IMFS continues to ramp and perform well. As we had mentioned the last quarter, I think within a month we should be at full wafer starts.
  
• One other item worth noting is on the 30-nanometer DRAM, we had spoke about that before. It's in the early ramp. It's going well at both Virginia and Inotera. And related to that on the CapEx front, I just wanted to highlight that we came in at about $750 million for the quarter.
  
• If you'll recall, it's a little bit lighter than we probably thought but I do want to confirm that we intend on holding the target at around $2 billion for the fiscal year, and our plans line up pretty well with that.
  
• I will highlight that the hard drive supply issues that everyone's aware of, we think it's dropped the DRAM demand somewhere 10% to 15%. Obviously that's temporary, but it definitely had an impact.
  
• But, on the bright side our specialty DRAM, particularly our growth in the server market, looks good. Our bits shipped into this space were up over 30% quarter-over-quarter.
  
• In the Wireless segment, you can see from our business unit financial summary that this group continues to be under a lot of pressure. Really there's no improvement in the quarter we're in. I think it's obvious from what's going on in the marketplace that a couple of our customers continue to have challenges there.
  
• On the embedded front, however, it's been pretty good. Again, it's pretty stable as we would expect. Revenues were up about 8% and that was primarily led by automotive applications, where we happen to believe that Micron is really a supplier of choice now so we think we're in good shape there.
  
• We started shipping our 45-nanometer NOR into a number of Japanese gaming applications, so that's also going well.
  
• On the NAND front, the NAND Solutions Group, on the NSG front, they had a pretty strong quarter.
  
• (Ronald C. Foster): Total sales for the first quarter were relatively flat compared to the prior quarter, with NAND growth being offset by a decline in wireless NOR sales.
  
• Similar to the prior quarter, the first quarter resulted in a net loss, primarily as a result of weakness in the DRAM markets, particularly for PC DRAM products.
  
• Although average selling prices declined for both DRAM and NAND, we continue to leverage our broad product portfolio to achieve selling prices at a premium to the industry average.
  
• In the first quarter, NAND revenue increased 6% and continued to outgrow DRAM sales, which were flat compared to the prior quarter.
  
• On the P&L, the equity and income loss from equity method investees primarily reflects our share of Inotera's net loss for the period. To help facilitate Inotera's investments required to transition to our 30-nanometer process technology, subsequent to the first quarter, we lent Inotera $133 million in a short-term 90-day note.
  
• Our Singapore IM Flash fab continues to make outstanding progress on its production ramp, which is several months ahead of the original schedule. In fact at the end of the quarter, wafer output from the Singapore fab reached the target level for its original ramp.
  
• While Micron's ownership of the Singapore operation is at 82%, during the first quarter we took about 65% of the capacity in accordance with the agreements. We expect to take approximately 78% of the capacity from IM Flash Singapore in the second quarter. The output from the IM Flash U.S. operations remains consistent at the initial 51/49 ownership split.
  
• Trade NAND bit sales to Micron customers grew 21% in the first quarter, as IM Flash Singapore ramped production at the same time our output share increased.
  
• However, the higher Singapore production volume and lower cost of MLC products in the first quarter combined to yield 16% lower bit production costs in trade NAND, which outpaced market price declines and the effect of the SLC to MLC mix shift. We expect similar output and cost improvements as the ramp continues over the next couple of quarters. Quarter-to-date average selling prices for trade NAND, adjusted for the higher MLC mix, are running down high teens compared to the average for the first quarter.
  
• Cost reductions will keep pace in the high single- to low double-digit range. Quarter-to-date, average selling prices adjusted for mix are down in the low 20% range compared to the first quarter average.
  
• IM Flash sales to Intel (Nasdaq: INTC) were $261 million in the first quarter and are expected to be relatively flat in the second quarter.
  
• Our Wireless Solutions Group was impacted by weakness in the wireless NOR market. In response to this weakness and to better manage the level of inventories, we reduced production in our 200-milliliter NOR fabs. Total idle capacity charges in the first quarter were $44 million, which was largely comprised of charges from the NOR fabs that impacted both WSG and ESG operating results.
  
• SG&A expense in the first quarter was down slightly compared to the previous quarter, and is expected to be roughly flat for the fiscal year 2012 year-over-year. R&D expense for the first quarter of $230 million was higher than the previous quarter due to higher volumes of development wafers processed and the timing of production qualifications. R&D expense is expected to be in the same range in the second quarter, and then trend down for the remainder of the fiscal year.
  
• The company generated $404 million in cash flow from operating activities in the first quarter and ended the quarter with a cash balance of $1.9 billion. Expenditures for PP&E were $746 million for the first quarter, and we reiterate the estimated expenditures for the fiscal year at $2 billion, as Steve commented. The largest category pertaining to equipment acquisitions for IMFS. During the first quarter, we executed lease financing arrangements that sourced $110 million in cash, more than offsetting the $48 million in payments for normal debt amortization in the quarter.
  
• (Q&A) Thanks for taking my question. First of all, on the DRAM side, I was wondering if you'd give us any kind of sense at all, ballpark, what would DRAM prices have to do from here for the DRAM Solutions Group to turn profitable on an operating basis? (A) James, I think we're going to defer from answering that kind of a question. It gets too close to gross margins, and I don't know any DRAM company that gives those out.
  
• James E. Schneider>: Okay, fair enough. Could you maybe give us an update then on what you expect your bit growth in both DRAM and NAND to in 2012? (A) Well, as we look sort of quarter to quarter, I think you can expect DRAM bit growth will be - oh, averaging - yeah, mid to high teens in the short term, and then down from there later in the year.
  
• Kipp, do you still expect to be able to basically be above 40% for 2012, on a year-over-year basis? (A) Yeah, I think that's a good number.
  
• And in the DRAM business, can you talk a little bit about how whether or not you've been successful moving mix towards server DRAM, specifically in Inotera? Maybe help us understand what percent of the DRAM business now is going to servers, and where that might go? (A) Today if you look at our specialty business defined as server, networking and storage, that number's roughly 30% of those DRAM bits are going to those segments. And to your point, I think the growth there is - we have continued upside for us going forward.
  
• And then, guys, my last question, Steve, I think a lot of investors I talk to are wondering whether or not there's some consolidation events coming down the pipeline. I wonder if you could just speak a little bit to sort of your view on consolidation, kind of what looks sort of attractive as you think longer term? And I guess importantly, the biggest issue with consolidation is the price at which the buyer and seller agree and kind of curious of your view around valuations. (A) Yeah, well, obviously we wouldn't comment on anything we're thinking about or engaging in. But I will say that the DRAM market, the industry in general has been under a lot of pressure. You can look at the financial results of a number of these companies. In fact, if you look at our last quarter compared to the quarters of a couple of our competitors, I think Elpida lost about $500 million - $600 million, Hynix had lost about $500 million. And obviously we're not happy to be losing any money but it's certainly a lot better than what their financials look like. And I think that a number of those companies continue to weaken. As they do continue to weaken, they're going to have to figure out what they're going to do. And so I think that will drive some further consolidation. I think that's inevitable, and so we're just going to continue to look at whatever opportunities might exist out there.

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