Micron Business Update

SeekingAlpha published a transcript of Micron Q2 2007 conference call. Some quotes from questions and answers session are below:

Shawn Webster - JP Morgan

Thanks. Finally, can you tell us what your sensor -- give us an update on your sensor business and tell us what it did sequentially or what percentage of sales it is now?

Steven R. Appleton

In terms of percentage of sales, it is in double digits, between 10% and 15% of total sales. We had negative growth quarter over quarter in both unit shipments and revenues, and I would attribute that to probably three factors, and I will list them in order of significance. Number one would be the impact of the seasonal slowness in demand, if you will, as well as some inventory accumulation to some of our customers occurred, both with mobile phone units themselves as well as semiconductor components. The second would be the increased competitive environment in the CMOS image sensor area. I believe we have lost a bit of market share, as we have seen some pretty aggressive competition from a variety of different players. Number three would be this phenomenon of very low-end mobile phones kind of encroaching on the camera-embedded portion of the mobile phone business. We are basically seeing kind of a near-term retrenchment in camera phone penetration as a result of the growth of the markets, specifically in India and China, of phones without cameras.

Shawn Webster - JP Morgan

Do you feel like you are seeing a bottom in terms of orders and excess inventory out there? How should we think about your sensor business looking forward?

Steven R. Appleton

It is going to be tough for us to replicate the kind of growth that we had in place for the last couple of years -- no question about that, as a result of two of those factors that I mentioned earlier, the competitive environment as well as the low-end phones.

We are seeing our camera module integrators, we believe now they are flush on inventory. In other words, they have worked off the inventory that they have accumulated through Q4 and the first part of Q1. In terms of whether we can get, how quickly we can get back to the levels we were going out of 2006, difficult to say.

Nicolas Gaudois - Deutsche Bank

The first question to follow-up on the image sensors, if you could give us a bit of granularity on what profitability did with revenues down in the quarter, and how should we look at this going into the May quarter? I will have follow-ups. Thank you.

Wilbur G. Stover

On imaging, we ran low 40% last quarter and we were mid 30’s this quarter.

Nicolas Gaudois - Deutsche Bank

Great, and next quarter, should we think about this for the business [assuming] a bit of revenue growth maybe or flat for revenues in the May quarter?

Wilbur G. Stover

We are going to stay away from guiding gross margins. It is not something we have historically done for any of our segments.

Daniel Amir - WR Hambrecht + Co.

Thanks a lot. A couple of questions here on the image sensor side. What was the percentage of your one-megapixel and above revenue unit and what is the VGA mix right now?

Steven R. Appleton

Okay, on the mix by pixel density in the quarter we completed, about two-thirds 1-megapixel and above, and that would be split roughly 50-50 at 1-megapixel one-third, and two and above about one-third. That leaves VGA at about one-third as well.

In the quarter that we are in, by the way, I am not sure if you asked the question but in the quarter that we are in, I would anticipate the mix is probably going to be roughly in line with that. You did ask a second question. I did not catch it.

Daniel Amir - WR Hambrecht + Co.

You answered both my questions but then the other question is related to the inventory situation on the image sensor, how long do you feel that this is going to take until you are back to more of a normal ordering pattern?

Steven R. Appleton

Well, I think you are asking two questions. The normal ordering -- the inventory position, we are heavy, as we mentioned in the opening comments. We are at about a quarter, slightly more than a quarter’s worth of finished goods inventory. We have made adjustments in terms of our wafer inputs to get those back in balance, and our assumptions are we are going to be roughly in balance going out of our current fiscal year, so it is another quarter-and-a-half until we are where we want to be in terms of inventory mix.

Now, having said that, lots can change. We have proven that we are not experts at predicting how quickly the business is going to expand or how quickly it may contract due to inventory problems, so that could change. But given the scenario that we are looking at right now, it looks like it is going to be about the end of the fiscal year before we have inventories back in balance of where we would like them to be.

Aaron Husock - Morgan Stanley

Thanks for taking my question. I was wondering if you could comment on how much image sensor pricing was down sequentially in the February quarter. And then also, you mentioned that you felt like your customers had finished working through their excess inventory image sensors. Do you think that business can actually be up sequentially in the May quarter, or are you actually seeing the weakness in end demand for handsets, your largest customer now impacting that?

Steven R. Appleton

From a pricing standpoint, we were relatively flat quarter over quarter. I don’t want to misrepresent that. We are reducing prices as we need to in order to remain competitive, but we are continuing to migrate up in terms of pixel density and those higher pixel density chips typically sell at a higher average selling price.

In terms of sequential growth in Q3 versus Q2, it is difficult to say. We still have roughly 60 days left in Q3, so it is really difficult for me to say what is going to happen.

Krishna Shankar - JMP Securities

What is your revenue mix by product line, CMOS image sensors, NAND, PC and specialty DRAM?

Steven R. Appleton

We ran approximately 50% in core DRAM, approximately high teens in specialty DRAM, high teens in flash, and as Mike mentioned earlier, about 11% in image sensors.

TheStreet.com comments:

"Micron's business providing image sensors for camera phones -- the company's most profitable product line -- is also under pressure.

Micron said image sensor sales declined on both a unit and revenue basis in the second quarter due to a "reduced appetite" for the chips from cell phone handset makers, increased competition and the popularity of less expensive low-resolution camera phones.

Micron executives said they probably lost market share in the second quarter, and noted that the image sensor business would have trouble replicating the growth rates it has notched up in past years.

Image sensors accounted for a large chunk of Micron's inventory, which increased 16% sequentially to roughly $1.3 billion. And executives acknowledged that it might take the rest of the fiscal year before inventory levels for image sensors come back down to desirable levels."

Bloomberg.com writes:

"Micron is the biggest supplier of camera sensors to Motorola, the second-largest mobile-phone maker, according to Jefferies & Co's Lau. Motorola's forecast of a loss for the first quarter has contributed to a ``bleak outlook'' for Micron, he wrote in an April 2 report.

Micron also may have lost share in the camera-sensor market to newer rivals including Samsung, Mike Sadler, Micron's head of sales said. The product accounts for 25 percent of Micron's profit, according to Doug Freedman, an analyst at American Technology Research in San Francisco. ``It's going to get worse next quarter before it gets better,'' he said."