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Micron Electronics CEO working on turnaround plan

Joel Kocher has spent the past two years trying to move a second-tier, consumer-oriented PC maker into new markets and to return its core business to profitability.

       
    If Micron Electronics sold PCs the way its native Idaho moves potatoes, the company would lead all competitors. But Micron is more like Maine, once a contender in the tater biz, trying to recover past glory.

    The task facing Micron CEO Joel Kocher is a tough one: moving a second-tier, consumer-oriented PC maker into new markets and returning its core business to profitability. The former Power Computing and Dell Computer executive has spent two years on a turnaround plan that for the first time looks hopeful.

    Along the way, Kocher has experimented successfully with new sales techniques to boost revenue. The company last October rolled out its Subscription Computing program, offering customers PC hardware, Web hosting and Internet access for a monthly fee.

    We took a dramatic step towards making money. We've given guidance that we 
think we can make a profit in the PC business in the second fiscal quarter. But Micron, which typically sells PCs direct to customers, has benefited most from a retail deal with Best Buy. Micron sells some systems on store shelves and through retail kiosks. In June, the company expanded the program, VelocityNet Direct to other retailers, including Radio Shack Canada.

    During its fourth fiscal quarter, Micron beat earnings estimates by three times analysts' projections. But the company's SpecTek operation, which sells dynamic random access memory (DRAM) chips, largely carried the quarter, with the PC business making modest gains year-over-year.

    Kocher spoke with CNET News.com's Joe Wilcox about the turnaround, fourth-quarter results and future prospects.

    CNET News.com: You just had a great quarter with signs of strength, but PC growth could have been better. What's your take on your PC business going forward?
    Kocher: Obviously it could have been better on the year-ago quarter, but let's not focus on that. I don't think you can. Remember, in a turnaround scenario, you've got declining revenues. The most indicative metric you can point to, especially at the end of a fiscal year, is the sequential growth rate, not the year-on-year growth rate.

    We were up 15 percent sequentially in revenue, 36 percent sequentially in units. I would challenge you to find anyone who grew that quickly from the calendar second quarter to the calendar third quarter of this year. There isn't anyone who grew faster than that. Though the year-on-year number, I would like it to look better, we were in decline in the first quarter, second quarter and third quarter. We turned it in the fourth quarter.

    How important is your multipronged sales strategy: direct, retail and subscription computing?
    Obviously, we're attacking on several fronts. We still have a direct PC business, and that is still important to us. Subscription Computing is important to that. It's certainly not a dominant part of our business, but we do offer hosting and other Internet (services) to our direct customers.

    The retail consumer business is also very important to us, in unit growth and gross-margin dollars contribution. Our gross-margin percentage on retail consumer products is lower than on direct, but it still positively contributes and clearly helped us make significant progress in our operating performance for the fourth quarter. Every couple of years something will happen and everyone will start singing 
the blues how the PC business is slowing down and prognosticating 
saturation. It never happens.

    Has your PC business returned to profitability yet?
    We didn't quite make money. We're getting closer. We took a dramatic step towards making money. We've given guidance that we think we can make a profit in the PC business in the second fiscal quarter.

    How important will your VelocityNet Direct retail effort be in reaching profitability?
    Very important.

    Do you think it is unusual for a historically direct PC maker to embrace retail so aggressively?
    Of course it is. We're a much smaller player. If you've followed us over the last couple of years, we've struggled with the direct-to-consumer business because of our lack of scale. We decided this was a lot better way for us to attack the marketplace, and it helps us a lot with our national brand recognition.

    It's putting us in lots of places where people can see us, and just think of Best Buy's 100 million circulars a month. Unquestionably, that's going to help us a lot on the brand front.

    You currently offer three or four PC models on store shelves. Will we see an expansion?
    I would expect you to see additional products offered at the stores. In fact, we announced an AMD product (Sept. 22). That product is now being offered at Best Buy, and we were the first vendor to market with the AMD Duron processor. So, the answer is, yes, you will see additional products.

    Does that include portables, which you now don't offer at retail?
    Yes.

    Returning to your Subscription Computing business, that was a major shift in garnering revenue. Where do you see that business going?
    It's been steady. If you look at our entire business?we're at 85,000 to 90,000 customers on a recurring revenue model. Obviously, not all of those customers have hardware at this point in time. We're working to get hardware into their businesses.

    But I think the whole point is given the focus on Internet services, we are signing customers into a recurring revenue model on a pretty aggressive clip. That's approaching 100,000 after nine months. That's not bad.

    Do you plan to extend your Subscription Computing/Internet services strategy to retail?
    One of the reasons we moved into that (sales) channel is we felt we would be able to enlist our partners into an Internet services program at some point. That's probably all I can say at this point, but we are definitely working on it.

    Your memory business contributed a large chunk of the quarter's revenue. Why is DRAM doing so well right now?
    Probably the biggest reason is we are in a DRAM upcycle. There's no question about it. We did improve our capacity over the last two quarters, so we were able to push through much more product. I think that's why you saw such a dramatic increase in the business; all that new capacity came online.

    What's your response to all the jitters about slowing PC sales going into the second half?
    I've been in this business for a long time, and every couple of years something will happen and everyone will start singing the blues how the PC business is slowing down and prognosticating saturation. It never happens.

    It may slow down a little bit, but it always accelerates again. The latest numbers I've seen show 18-percent PC growth in the U.S. market. But for a mature market, there are a lot of product categories that would take 18-percent growth.

    It's down from last year because it was torrid. Twenty-two-percent growth last year was torrid. And that was driven primarily because of the (Internet) rebates--MSN, AOL--and all the free PC stuff. I think we saw a big bubble last year. But I'll take 18 percent. I think that's healthy.

    As you look at your business, is there some area you are looking most to expand into?
    I'm clearly interested in Internet-centric computing and driving our hosting business. Very clearly that's a huge priority for us. The second thing we're very interested in is driving our VelocityNet program forward. We know that model works; it's innovative. You'll see us aggressively expand that over the coming quarters.