FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (TMF Ralegh)

Micron Electronics Inc.
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900 E. Karcher Rd.
Nampa, ID 83687
(208) 893-3434
http://www.mei.micron.com

ALEXANDRIA, VA., (June 22, 1997) /FOOLWIRE/ -- Micron Electronics Inc. reported third quarter 1997 earnings on June 16, 1997. On a conference call to discuss the quarter's results were Joseph M. Daltoso, CEO, and Erik Oaas, CFO.

ERIK OAAS, CFO. Net income for the third quarter of fiscal 1997 was $19.7 million, or $0.20 per share on net sales of $511.4 million, compared to net income of $14.1 million, or $0.15 per share on net sales of $412.3 million for the third quarter of fiscal 1996. Net income for the first nine months of fiscal 1997 was $72.3 million, or $0.77 per share on net sales of $1.44 billion, compared to net income of $18.1 million, or $0.20 per share on net sales of $1.31 billion for the first nine months of fiscal 1996. We're pleased to note that Q3 sales were up approximately 24%. This was due primarily to a 30% increase in PC sales, a nearly 50% increase in SpecTek memory products sales, partially offset by a 4% decline in contract manufacturing revenues. The decline in contact manufacturing revenues was attributable to the industry-wide decline in semiconductor memory pricing in the same period.

CURRENT CONDITIONS. We indicated in our May 13 press release that PC sales were expected to decline approximately 10% compared to our second fiscal quarter this year. PC sales actually declined only 7%. As we reported today, this was due to a decline in average selling prices and unit sales of desktop PCs, partially offset by increased unit sales and average selling prices for notebook PCs and server products. We have noted a softening in demand for our products in the consumer segment, which led to the lower level of sales in that channel. We were pleased that the net sales for notebook products were up approximately 14% compared to the second quarter, which indicated increased market acceptance of our broadened notebook product offering. Although our server products contributed only two percent of overall net sales, an increase of over 50% from second quarter levels resulted from our growing emphasis of the corporate channel as well as increasing acceptance of the Micron product family in this rapidly-expanding market segment.

We look forward to adding the NetFRAME high-end enterprise server products to the company's overall product line in future quarters. This acquisition further emphasizes our intent to compete vigorously in this channel. Finally, from the PC perspective, international sales increased to 6.2% of total PC net sales, compared to 4.3% in the second quarter of this year. At nearly $24 million in revenues, this is the highest level of international PC sales the company has ever recorded, with approximately 23% of those sales coming from start-up operations in Japan. We have recently initiated our first major advertising campaign in Japan and are encouraged by the preliminary sales results.

SPECTEK AND CONTRACT MANUFACTURING. SpecTek memory product sales were up significantly both sequentially and quarter-over-quarter. This was primarily attributable to consistent quarterly increases in megabit shipments over the past two years and a shift in product mix toward higher value components. The SpecTek team has executed well at its plan to increase unit sales through both test time reductions and implementation of increased test capacity. Although the components sourced from Micron Technology in the third quarter remained relatively flat, compared to the second quarter levels at approximately 80%, the SpecTek operation has engaged with a third major semiconductor manufacturer in this quarter.

Although revenues from the contract manufacturing operation were relatively flat quarter-over-quarter, sequential sales increased approximately 16% due to a shift in mix to more complex printed circuit board assemblies and systems-level builds. Moreover, equivalent unit shipments increased approximately 20% sequentially. This operating was pleased to report sales of $1.2 million from the new Malaysian start-up operation this quarter, which represents only the second quarter of operations. Micron CMS currently has 11 manufacturing lines in Nampa, five in Durham, North Carolina, and one in Penang, Malaysia. That's an increased of two lines over the second quarter of this year.

PROFIT MARGINS. In gross margin, Micron Electronics reported a significant increase this quarter as compared to the third quarter of 1996, primarily resulting from higher gross margins provided by SpecTek and the PC operations. As indicated in our May 13 press release, we expected the company's overall gross margin percentage to decline approximately two to three percentage points this quarter. Actual results for the quarter reflected a decline of approximately 2.4 percentage points from our fiscal second quarter. This correlates with decline PC gross margin percentages of approximately the same amount. This quarter, we noted a shift in consumer demand toward a higher percentage of the value-priced desktop configurations and certain notebook configurations, which have a lower gross margin percentage than the company's other PC systems. In addition, we noticed a slight sequential increase in RAM component unit costs. Our average PC shipped this quarter had 36 MB of RAM compared to 31 in the second quarter. Those factors had an adverse impact on PC gross margins. The SpecTek gross margin percentage increased slightly from second quarter levels due to the slight industry-wide increase in RAM pricing and improved testing efficiencies.

SG&A expenses in total dollars and as a percentage of net sales increased slightly in the third quarter as compared to the same period in 1996 and sequentially. This was primarily attributable to increased selling and administrative costs associated with PC operations and costs associated with the start-up of our call center in Japan. Absent the costs associated with Japan operations, SG&A in total dollars and as a percentage of net sales would have declined from Q2 levels.

From a liquidity perspective, the company ended its third fiscal quarter with a strong balance sheet. Cash and equivalents were just under $200 million and total inventories declined to approximately $88 million. Inventory turns this quarter increased to a rate of 18 annual turns compared to 15 turns last quarter. Principal uses of cash this quarter were capital expenditures of $35 million for expansion and capacity improvements of the company's manufacturing operations. Construction for the new PC manufacturing building in Nampa is underway with targeted completion to occur in the second calendar quarter of 1998. The company has certain credit facilities in place which provide for borrowings of up to $120 million. As of the end of the quarter, the company was eligible up to the full $120 million, but there are no borrowings outstanding.

NETFRAME ACQUISITION. Finally, on June 10, the company entered into an agreement to acquire NetFRAME Systems Inc., by means of a cash tender offer with an aggregate price of approximately $14 million. The pending transaction is expected to be completed in fiscal Q4. We expect the dilution to our earnings in the fourth quarter of approximately $0.02 to $0.03 per share.

JOSEPH M. DALTOSO, CEO. NetFRAME is a leader in high-end enterprise servers. This acquisition will immediately launch Micron Electronics into this rapidly growing market with leading-edge products. When the acquisition is completed, we will become the first direct computer provider to provide its customers a complete line of products from the high-end enterprise server to desktop solutions. In addition, the combination with NetFRAME provides the company with access to an installed base of corporate customers and an experienced enterprise sales and marketing organization. Finally, we believe we are getting some excellent management talent and technical staff through this acquisition. To provide a little background on NetFRAME, the company had approximately $74 million in sales last year. It has been losing money as it transitions its product line from its proprietary systems to more open standards. Its client base includes large multi-national companies and governmental agencies, including American Express; United and Delta Air Lines; Goldman, Sachs; Price Waterhouse; and the Internal Revenue Service.

NetFRAME introduced its first Windows NT-based enterprise servers in December of 1996. The servers have been well received by the company's customers. With Micron Electronics' financial resources to support manufacturing and marketing efforts, NetFRAME will be able to expand its presence in the corporate market. NetFRAME will operate as a subsidiary of Micron Electronics and will remain in Milpitas, California. We believe that there are advantages to having a presence in Silicon Valley, including access to new technologies and its strong engineering talent pool. Bob Puette, NetFRAME president and CEO, will remain with in those positions of the subsidiary and will continue to drive its growth.

With NetFRAME, the company can immediately offer a full line of server products. We also believe that there are increased opportunities to sell our desktops and notebook PCs to the corporate and government customers, markets that we have specifically targeted over the past twelve months and where we excellent growth potential.

GUIDANCE ON UPCOMING QUARTERS. Going forward, we anticipate sequential growth in PC sales in the fourth quarter with slight improvement in our gross margins. SpecTek, which had an outstanding quarter, will be in all likelihood experiencing sequentially flat to down sales with gross margins remaining stable to down slightly. CMS will see slight sequential growth with gross margins staying in the same range we experienced in the third quarter.

QUESTION AND ANSWER SESSION.

April was the toughest portion of the quarter, but the company saw business picking up in May and that trend was continuing into the present quarter.

NetFRAME does have a net operating loss carryforward, but the company has not determined to what extent it will be able to take advantage of such NOL carryforwards. In any case, it would not be a significant tax advantage whatever it ends up to be.

NetFRAME has approximately 40 field sales representatives located throughout the world. Micron is starting to make its move into field representation on a direct basis and not just selling machines on an outbound basis. We think that their sales organization will be a critical sales component for us for a number of reasons. One, it gives us a very high end enterprise-oriented sales group that is used to calling on chief information officers and making very detailed and complex presentations. We think that that is very critical because, while we've made a lot of progress over the last few years, the Micron brand is only becoming a well-known brand name in small increments on the corporate side. We think that by having this topline sales force out there that can go in an talk about the Micron name and the products that we offer and the solutions that we can provide will be very beneficial to us. Getting that field sales force was a significant factor in the acquisition. From a sales standpoint, NetFRAME sells to a variety of different channels. They sell direct to the customer and they also use VARs. We will probably continue in that arena to use whatever sales channel we can to move product. We are not against using VARs. If they're buying in volume, we would give the same types of discounts we would give any of our direct customers that buy in the same like volume. We like to have the direct relationship with the customer, but we realize that there are lots of customers in the corporate world that like to have an interface with the value added reseller channel. We're not predisposed either way, we just want to make sure we can execute on the sale. Though we have a more direct bias at Micron Electronics, with this enterprise server we will be very open to selling it in whatever channel we can to move product.

We did see some decline in average selling prices, predominantly on the lower-end configurations that we targeted more specifically toward the consumer segment. With regard to the impact of that on a going-forward basis, we do anticipate that there will be some improvement there, but we expect that that will probably take a little bit of time. The demand from a unit standpoint has been pretty linear. The difference between the pre-announced 10% sequential decline in revenues and the actual 7% decline was all unit-related and not ASP-related.

NetFRAME outsources much of its manufacturing, some of which is already done by Micron CMS in Nampa. We would talk a very active role in materials procurement and building of machines because our relative economies of scale are obviously much larger than what NetFRAME has been able to bring to bear. We will take over much of the operational aspects of the company, and the part of NetFRAME staying in Milpitas will be the engineering team, marketing, and management. We're looking probably at a smaller operation in Milpitas.

The amount of dilution to MEI's earnings will not be ascertainable until more than half the shares of NetFRAME are tendered. Any write-off that comes along with not be significant.

We would sell PCs along with NetFRAME servers through the VAR channel. We have done business with VARs in the past and the only issue is what their margin is. We try to go in with a very rigid pricing practice which is based mostly on volume and the type of product we're selling, which is difficult to get VARs involved with, particularly on the desktop side. Certainly, if we felt we had the opportunity and the overall equation made financial sense for us to bundle a bunch of our departmental servers, the VAX line, or any of Client Pros or notebooks in with a NetFRAME server sale, we would give that full consideration.

As we sell more into the corporate arena, we're finding that we run into Compaq all the time. We've not really heard anyone comment on Compaq Direct. While we've seen the mentions in the press, we've not really met them out in the field.

The fourth quarter is normally a larger quarter for us with governmental contracts. Government and education revenue percentage this quarter was 20% of total revenues.

I'd hesitate to say what the total sequential revenue growth number will be, but we believe we will see moderate total revenue growth as we move from the third quarter to the fourth.

Unit growth weakness was seen more on the consumer side than elsewhere in the business. The decline was not due to loss of market share but was due to seasonal factors.

We believe our margins can increase because our execution was not where we wanted it to be. We believe that there will always be margin pressure in this business. In the last quarter, though, we put ourselves in a position, especially with a few specific products, where we were perhaps overly aggressive with our pricing. That significantly hurt our margins. Looking at where margins went from Q2 to Q3, there is room to build that back up. I'm not saying that they're going to return in the short term to their historical highs, where they were six months ago, but we do believe that we can improve margins from where they are currently. We still find that the direct providers are the price and value leaders in the market today, so we believe that we can still be aggressive across product lines, take care of gross margin better than we have in the past, and move forward from where we are today.

Corporate sales represented 20-21% of revenues in the third quarter.

NetFRAME was one of the first server companies to have redundant systems where you could hot swap out a broken component. Getting some of NetFRAME's technology will serve Micron's product line.

Obviously, with the substantial drop in sales that they've experienced, it's going to be quite a battle for us to get in and retain and reconvert some of the customers they've had in the past, but again, a lot of this was due to high pricing on machines and the lack of compatibility with open industry standards our there for either hardware or software. Now that they're bringing these products out, we can go back in and use that technology combined with our backing here at MEI to get in and get some of that business back.

There are two ways to attack an overhead problem at an unprofitable company like NetFRAME. One is to substantially grow sales, which we think by having the Micron name out there and having new products coming on line, that we'll be in a good position to do. Additionally, we believe that we'll have to take a look at their costs and overhead structure. In order for us to get the financial results we'd like to see, in as quick a manner as possible, we will be definitely trying to address both the sales side and the cost side of the overall equation.

Typically, the enterprise servers NetFRAME sells run anywhere from $5,000 to $15,000 on a typical stand-alone basis. If you start clustering these, which many of the customers do, you could literally be looking at sales into the hundreds of thousands of dollars. A typical sale runs just under $30,000 for each individual sale.

Processor mix is similar to what Dell is doing as far as it relates to Pentium MMX, Pentium classic, and Pentium Pro.

There is still some seasonality on the consumer side while corporate and government activity remains strong. We expect the consumer business to grow sequentially.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.