Conference Call, 09/24/97 Micron Electronics Q4

FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Micron Electronics
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900 E. Karcher Road
Nampa, ID 83687
(208) 893-3434
http://www.micronpc.com

ALEXANDRIA, VA (September 24, 1997)/FOOLWIRE/ --- Micron Electronics reported their fourth quarter and fiscal 1997 results on Monday and held their quarterly conference call Tuesday morning. Consolidated earnings per share for the fourth quarter were $0.16 per share and $0.92 for the year. The NetFrame acquisition had a negative impact of about $0.07 per share in the fourth quarter.

STRONG SALES. These results reflect strong sales in the quarter, particularly the PC systems. This was especially true in August when they achieved a record sales month. Their strong August was attributable to increases across the board in sales to consumers, corporate, and government customers and was driven in part by some focused promotional campaigns they ran during the month.

TOTAL PRODUCT SOLUTION. This was an important quarter for them. With the completion of the NetFrame acquisition on August 28th, Micron became a company that is able to offer a total product solution, serving the personal computing needs of both the individual consumer and the corporate enterprise market through the efficiencies and flexibility of the direct sales channel. They are moving aggressively to integrate the NetFrame product line and field sales force into the Micron Electronics program and to make it a profitable part of their business going forward.

VALUE-BASED SOLUTIONS FOR CORPORATE MARKET. It is their contention that the successful PC companies of the future must be able to deliver the value-based solution set to the enterprise customer and they believe they have the pieces in place to do that. Success in the corporate arena will depend on their ability to continue to offer new products with state of the art technologies. This month they introduced three new PC systems targeted at the corporate user. The two desktop PCs and notebooks provide features such as built-in networking and management capabilities. Additionally, during this quarter they announced availability of their newest workstation, powered by their proprietary, internally developed Samurai chipset. Benchmarks versus other similarly priced workstations show a clear price/performance differential in favor of their offering and they look forward to bringing additional product enhancements to market.

FLEXIBLE FINANCING. Corporate customers also need flexible financing options and Micron is initiating the most competitive leasing program in their industry on October 1st in conjunction with AT&T Capital Corporation. The program provides flexible lease terms and pricing. As an added feature, customers have an option to trade in their PCs from any manufacturer.

STRATEGIC PARTNERSHIPS. Also critical will be their ability to form strategic partnerships. They teamed with Microsoft recently to offer Windows NT as a platform on all of their PCs. They are also teaming with Oracle to offer Oracle on NT as a software option for the enterprise user. Due to their build-to-order capabilities and manufacturing prowess, this software will be pre-installed and configured to the user's individual needs at the factory, versus shipping in a bundled form that the user must then install themselves. They are continuing to actively pursue additional alliances with other industry leaders so they can put together other offerings that give value to their customers.

TELEVISION ADVERTISING. They are working to build more visibility for Micron Electronics in national markets. On September 28th they will launch their first national television advertising program scheduled to run on high visibility programs like Major League Baseball games, Monday Night Football, and PGA tournaments.

TIER 1 FROM GARTNER. They have made a great deal of progress in the quarter and over the last fiscal year in positioning the company to address the evolving needs of the marketplace. They are honored to have received from the Gartner Group the news that they have been placed in the tier one category for US desktops. Recognition from such an industry-respected organization is an important milepost as to the progress they have made as a company. They are very excited about the opportunities they have and are entering fiscal 1998 with significant momentum.

FINANCIAL RESULTS. Consolidated net sales in the quarter were $513.1 million, 12.2% above the fourth quarter last year. Net income was $15 million compared with $26.4 million in the fourth quarter last year. Earnings per share were $0.16 compared with $0.29 a year ago, which included several one-time adjustments resulting in a benefit to earnings of $0.03 per share. On an operating basis, including NetFrame's losses in the recently completed quarter, Micron earned $0.20 per share. The NetFrame acquisition had a negative effect on the company's earnings in the fourth quarter of $6.4 million or $0.07 per share which includes the operating losses of NetFrame since July 18, 1997 and a one-time charge of $3.9 million or $0.04 per share for the writeoff of in-process R&D resulting from the acquisition.

UNIT SALES. Unit sales of PC systems increased 37% from the prior fiscal year. Unit sales breakdown by product mix for the fourth quarter were as follows: 90% were desktop PCs, 9% were notebooks, and 1% was servers.

SALES BY CHANNEL. In terms of channels, the combined consumer/small and home office channel represented about 41% of sales. Sales to corporations were about 19%. Government was approximately 29%. International was about 7%. The remainder, 4%, were sales through alternate channels.

ASP DOWN. Average selling prices for PCs declined in fiscal 1997 due to changes in their product mix. Essentially, they experienced increased demand through the year for fully featured but lower priced desktop and notebook PCs.

PROCESSOR BREAKDOWN. The processor breakdown in their fourth quarter shipments was about 40% for each of the Pentium and MMX processors. The Pentium demand declinded sharply and MMX showed a steady increase. The balance was split almost equally between Pentium Pro and Pentium II. They are pleased with this level of demand for Pentium II-based PCs in the first quarter of its introduction into the Micron product line.

CONTRACT MANUFACTURING. Revenues from their contract manufacturing business was negatively effected by the declining price of DRAM in fiscal 1997 compared to fiscal 1996. Although the MCMS operations experienced a 22% decline in revenues year over year, the business has made a healthy transition to less memory-intensive products and customers and production volumes are up significantly. The company's new Malaysian startup is operating profitably.

MEMORY PRODUCTS. Net sales from the company's memory products operation, despite a sharp decline in DRAM pricing were only slightly lower in fiscal 1997 compared to fiscal 1996. This was accomplished by a near tripling of megabit shipments this fiscal year compared to fiscal 1996. New test equipment and reduced test times were the contributing factors to this substantial increase in production and shipments. In addition, they transitioned to higher-density memory components.

GROSS PROFIT MARGIN. The gross profit margin in the fourth quarter was 16.8% compared with 15.6% in the third quarter. The improvement reflected an increased gross margin for PC systems. The 16.3% in the fourth quarter compared with 14.6% in the third quarter and 23.9% in the fourth quarter of fiscal 1996. The gross margin improvement in PCs was largely attributable to lower component costs relative to declining ASPs.

NETFRAME CHARGES. Included in their financial results this quarter was a non-recurring pre-tax charge of $3.9 million for the writeoff of in-process R&D related to the acquisition of NetFrame. They are well along the way toward completing the consolidation of the two companies. They expect that the acquisition will reflect a loss in the first quarter of 1998 and will be positive from there on.

CASH. The company's balance sheet remains quite healthy with $184 million in cash. This reflects the total cash purchase of NetFrame for $17.4 million.

INVENTORY. Micron built inventories at the end of the quarter in anticipation of the strongest PC buying season of the year. Inventory turns remained relatively flat for the fourth fiscal quarter compared to the third quarter.

NEW BUILDING. Finally, construction of the company's new PC manufacturing building is on schedule for a completion date in the first calendar quarter of 1998.

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