Micron Closes Its Fiscal 2014 On A Strong Note Driven By Healthy Memory Market Conditions

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Micron Technology

Leading memory products manufacturer, Micron Technology (NASDAQ:MU) reported another strong quarter with a 48.7% growth in Q4 2014 revenue, driven by robust market demand, solid operational execution and the acquisition of Elpida concluded in the prior year quarter. Net income for the quarter came in at $1.15 billion or $0.96 per diluted share. For fiscal year 2014 (ended August), Micron reported record revenue of $16.4 billion, record net income of over $3 billion and record free cash flow of $2.6 billion.

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 continued to perform strongly in fiscal 2014, reflecting healthy market conditions.

With a large and diverse memory product portfolio across a number of end-market segments, and the second largest installed manufacturing capacity, Micron 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. Beyond ongoing advanced component and technology development, its main operational focus areas for fiscal 2015  are: technology deployment, optimizing manufacturing capacity and focusing on growing the memory systems and subsystem solutions.

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Our price estimate of $30 for Micron is slightly below the current market price. We are in the process of updating our valuation for the company.

See our complete analysis for Micron here

Improving DRAM Market Dynamics – Mobile & Servers Are The Fastest Growing

Micron’s DRAM revenue increased approximately 5% sequentially, primarily due to an increase in bit sales volume and stable Average Selling Price (ASP). The company saw a continued healthy demand-supply balance in the computing, the server networking,  as well as the enterprise market segments. DRAM cost per bit was flat and gross margin remained in the high 30% range, in the quarter

On the client side, Micron continued to receive strong demand signals from its PC customer base and achieved record revenue and bit shipments in the server segment. In fiscal 2014, Micron registered a 40% year-on-year growth in DRAM per server and and saw strengthening ASPs as customers added more memory per system. Demand for Micron’s networking products remained strong (growing 19% sequentially) driven by the LTE build-out in China and other emerging markets. The company expects to see significantly more 4G handsets sold utilizing this capacity, which continues to drive higher memory content per phone. The flourishing graphics business was an important contributor in lifting Micron DRAM ASPs and margins in fiscal 2014. The company claims to be seeing strong gaming console demand ahead of the holidays and remains  optimistic for a good Q1 2015 in graphics.

Micron expects the DRAM demand-supply situation to continue being favorable for the foreseeable future. For calendar year 2014, Micron expects DRAM industry supply growth of around 30%. For 2015, it forecasts growth in the low to mid 20% range, and beyond 2015 expects industry supply growth to slow down to the high teens to mid-20s range. The mobile and server segments are the fastest growing in terms of DRAM demand, with annual growth projected in the range of 50% – 60% and over 40%, respectively. [1]

NAND Is The Most Rapidly Growing Memory Product

Micron’s Trade NAND revenue increased 6% in Q4 2014, backed by a 13% increase in bit sales volume partially offset by 6% decrease in ASPs. The ASP decline outpaced the cost per bit reductions (2%) which led to a 3% decline in Trade NAND gross margin.

During its analyst day conference last year, Micron declared that NAND products are the most rapidly growing and the most elastic segment of the memory market. Rising global mobile device shipments and increasing demand for Solid State Drives (SSD’s) are the most important trends driving current demand for NAND Flash products. Micron continued to make progress in both the client and enterprise SSD market. It set new records for total SSD revenue (for both client and enterprise SSD’s), gigabytes shipped and overall units in Q4 2014. Its client SSD shipments to tier 1 OEMs increased 23% quarter over quarter.

Micron remains focused on improving the fundamentals of its NAND business as it believes there is an upside to its performance relative to competition in the coming quarters. It projects industry supply growth in the high 30% to low 40% range for calender year 2014, with 10% increase in industry wafer production and the remaining supply growth coming from technology. It estimates 2015 industry supply growth to be in the high 30% to mid-40% range. It believes that due to high elasticity of demand for NAND and client enterprise storage applications, the demand growth could be significantly higher in coming years.

Micron aims to continue diversifying its NAND business and target more attractive end market applications. The company believes that growth in the segment will be driven by: 1) chip level innovation (including TLC and 3D NAND); 2) investment in system-level capabilities; 3) additional organization capabilities; and, 4) focused execution on growth and diversifying markets.

Q1 2015 Outlook

– Total revenue in the range of $4.45 billion to $4.7 billion.

– DRAM gross margin to be up a couple of points sequentially. DRAM bit production up mid to high single digits, ASPs up low single-digits, and cost per bit down low single-digits.

– Trade NAND gross margin expected to be down 1 to 2 percentage points sequentially. Trade NAND bit production is expected to be up high teens, ASPs down low to mid-single digits, and cost per bit down low single digits.

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Notes:
  1. Micron Technology (MU) Management JP Morgan Technology, Media & Telecom Conference (Transcript), Seeking Alpha, May 21, 2014 []