Micron’s Q1’15 Earnings Preview: The Company Will Benefit From The Improving Industry Dynamics

In 2012, macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered Micron Technology’s (NASDAQ:MU) top line growth and impacted its profitability. However, increasing consolidation in the industry, rising demand from non-PC markets, increasingly diversified end markets, and improving memory product prices, returned the company to profitability in fiscal 2013. 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.

Micron is set to report its Q1 2015 earnings on January 6th, and we expect it to retain its growth momentum in the quarter. The company projects revenue in the range of $4.45 million to $4.70 million, which equates to 13% year-on-year growth at the mid point of the range. 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, in our view. 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.

Our price estimate of $32.40 for Micron is slightly below the current market price. We will update our model

See our complete analysis for Micron here

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

PCs have traditionally been the major buyers of DRAM, and a slowdown in the PC market considerably impacted DRAM demand in the last few years. The rising proportion of demand from the mobile device and server segments is driving growth in the DRAM market. Currently PC, mobile devices and servers account for 40%, 30% and 15% of the DRAM demand, respectively. 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]

Micron believes that DRAM industry is in a bit of an under-supply at present. It claims that demand is growing, but at a rate that the industry can supply just by investing in technology. The company believes that the existing capacity base, in terms of the net wafers produced (so-called wafer starts in the industry), is sufficient to cater to DRAM demand as supply growth is in balance with demand growth. Although the mix that the company is producing may vary (between PC, mobile and servers), Micron’s manufacturing capacity is flexible and can be adjusted to accommodate those variables.

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 also an important contributor in lifting Micron DRAM ASPs and margins in fiscal 2014. The company admitted to 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 projected 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.

NAND Is The Most Rapidly Growing Memory Product

Micron believes 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. (Read: Here’s Why Micron Will Benefit From Higher Mobile Shipments and Here’s Why Enterprise SSD Is An Important Business For Micron) Micron continued to make progress in both the client and enterprise SSD market in fiscal 2014. 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.

The company 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 is projecting 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 advances. 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 high density, Triple Level Cell and 3D NAND); 2) investment in system-level capabilities; 3) additional organization capabilities; and, 4) focused execution on growth and diversifying markets.

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