Micron Retains Its Growth Momentum In Q3’14

Strong market demand and solid operational execution helped Micron Technology (NASDAQ:MU) witness another quarter of strong growth in fiscal Q3 2014. The company reported net sales of $3.98 billion, 72% higher than Q3 2013. Its net income increased from $43 million and $731 million in Q3 2013 and Q2 2014, respectively, to $806 million in Q3 2014.

In 2012, macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered Micron’s top line growth and impacted its profitability.  However, increasing consolidation in the industry, rising demand from non-PC markets and improving memory product prices returned the company to profitability in fiscal 2013. Micron has performed strongly in the first three quarters of fiscal 2014 and is confident of retaining its growth momentum in the last quarter as well.

Micron believes that the favorable long-term outlook for the memory market will fuel its growth this year and beyond. With a large and diverse memory product portfolio across a number of end-market segments, and the second largest installed manufacturing capacity, it is in a strong position to benefit from the improving industry dynamics. The company intends to be measured and prudent in its capital spending in the future, and will regulate capital expenditures based on the return profile of the investment.

Our price estimate of $22 for Micron is at a significant discount to the current market price. We are in the process of updating our valuation for the company.

See our complete analysis for Micron here

Improving Memory Market Dynamics

Excess manufacturing capacity, combined with soft market demand, lowered the profitability of memory products in 2012. However, the industry consolidation in 2013 improved the demand-supply balance considerably. With manufacturers holding back supply, and a better macro environment fueling demand, market dynamics in the industry are improving. In its Q1 2015 earnings call, Micron mentioned that the supplier base is consolidated in DRAM and stabilized in NAND. The company believes that in both the markets, the industry is in a stage of maturity such that each supplier has sufficient scale to compete.

Micron, along with other market players, is focusing on leveraging its present technologies to deliver value-added devices to its customers. Capital spending in the DRAM market in the last few years has been more focused on process technology migration, rather than on building new capacity. It believes that long term DRAM demand will be in line with or above supply. As applications requiring memory continue to grow and Micron’s customer base continues to diversify, the company remains committed to delivering differentiated and system level products.

Micron expects the NAND industry supply growth to be in a similar range as DRAM. NAND demand going forward will be in balance relative to the supply. However, as 3D production becomes more predominant heading into 2016, the industry may witness a slowdown in supply growth because of the technology complexity and additional clean room space required.

The company has no plans to expand its wafer production in calendar 2015, and expects the bit growth it generated from technology to be in line with growth for both DRAM (20% range) and NAND (low 40% range).

Higher Costs To Impact Short Term NAND Gross Margin

At 34%, Micron’s Q3 2014 gross margins were stable compared to Q2 2014. Though DRAM revenue declined marginally sequentially, both Average Selling Prices (ASP) and cost per bit decreased in the low-single-digit range, resulting in relatively stable DRAM margins compared to the last two quarters. On the Trade NAND side too, gross margins were stable in Q1 2015 with generally flat mix adjusted prices and costs. The company reported lower Trade NAND sales volume on account of higher SSD sales, which have a longer back end manufacturing cycle time.

Based on the quarter-to-date ASP trend and projected mix for the quarter (Q4 2014), Micron estimates DRAM gross margins to be flat to up slightly, but Trade NAND gross margins to be down a couple of points. It expects DRAM bit production to be up low single digits, ASPs to be flat and cost per bit to be down low single digits. On the other hand, Trade NAND bit production is expected to be up low to mid-teens, with ASPs  down low to mid single-digits and cost per bit flat compared to Q3.

Key factors affecting Micron’s guidance for lower NAND gross margins in Q4 2014 include an  increasing mix of high-density NAND sales at lower ASPs, continued growth in client SSD volumes with some initially higher costs that impact margins, and the effect of a legacy pricing arrangement with a customer that is trending lower through Q1 2015.

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