Micron’s Q2’15 Earnings Review: Focus On Technology Transition In 2015 Impacts Short-Term Bit Growth

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Micron Technology

Leading memory chipmaker Micron Technology (NASDAQ:MU) reported its fiscal Q2 2015 earnings on April 1. (Fiscal years end with August.)  A diversified product portfolio and balanced customer base helped the company report revenues at the mid-point of its guided range. At $4.2 billion, revenues declined 8.9% sequentially (Q2 is a seasonally down quarter) but increased 1.4% annually. Gross margins in DRAM and trade NAND were in line or better than Micron’s guidance. The company reported net income of $934 million or $0.78 per share, 28% higher than Q2 2014.

Though Micron expects the market conditions will remain favorable for its business in 2015, led by constrained supply in DRAM and solid demand for both DRAM and NAND, it expects its DRAM and NAND output growth to lag the industry growth in 2015. For calendar 2015, Micron is focusing on technology enablement and as a result expects its bit growth to be below industry average in the near term. As the company benefits from the conversion to 20-nm, it expects its bit growth to be in line with or slightly above the industry bit growth.

There are a number of significant factors that Micron believes will deliver growth, margin improvement and strong financial results towards the end of 2015 and heading into fiscal 2016. Among other things these include 20-nm DRAM, 16-nm TLC NAND, 3D NAND, mobile NAND, eMCPs, enterprise SSDs, and the Inotera contract change.

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Our price estimate of $32.23 for Micron is almost 20% above the current market price. We are in the process of updating our model for the Q2 2015 earnings.

See our complete analysis for Micron here

Micron To Allocate Less Production For PC DRAM In Q3’15; Focusing On Technology Transitions to Drive Long-Term Growth

In Q2 2015, Micron’s DRAM revenue declined 13% sequentially as a result of a 9% decrease in bit sales volume and a 6% decrease in average selling prices. In addition to weakening PC demand, the lower bit sales were largely attributable to an extra week in Q1 2015. The DRAM gross margin came in better than expected as bit cost decreases nearly offset the decline in selling prices. Though the company saw some pricing pressure in the PC segment, all other markets remained healthy. In Q2 2015, PCs and servers accounted for a little over 30% and 20% of Micron’s total DRAM revenue (respectively), while networking, AIMM and graphics each accounted for less than 10% of total DRAM revenue.

Given the current short-term weakness in the global PC market, Micron is allocating less production to PCs and continuing to shift more bit production towards the other faster growing segments. The company’s DRAM guidance for the current quarter (mentioned below) anticipates taking strategic action to reduce PC DRAM sales given the recent demand and price weakness. However, Micron believes that the PC DRAM segment will show improvement in the second half of the calendar year, based on the stabilizing demand outlook.

Micron is currently working on executing key technology transitions over the second half of the year. The company is working on expanding the 25-nm production and preparing fabs for advanced technology deployment, including 20-nm in subsequent 1x and 1y nodes. The 20-nm technology, which is being deployed this year, reduces wafer output by about 15% to 20% for a given square foot of clean room space compared to 30-nm. Micron claims that the above mentioned nodes are increasingly challenging and thus act as a short-term headwind in terms of bit shipments. Micron expects commercial volume in the second half of 2015, with the majority of DRAM bits on 20-nm by the first half of calendar year 2016.

For calendar year 2015, Micron expects its DRAM bits produced to be up mid-teens, although product mix adjustments including an increased mix of DDR4 and mobile DRAM could impact bit growth.

Increasing Value-Added Applications & Transition To 3D NAND To Impact Short-Term NAND Bit Growth

Micron’s trade NAND revenue increased 3% sequentially in Q2 2015, as the 12% increase in bit sales volume was partially offset by a 9% decrease in the average selling price. The trade NAND gross margin declined to the low 20% range as cost reductions per bit only partially offset the decline in selling prices. Micron claims to be seeing signs of some stability in NAND pricing, which has gone through some challenging quarters of late.

Micron plans to significantly reduce its NAND supply to the spot market by 30% quarter over quarter, and as a result its trade NAND bit growth in the coming quarters will be limited. The company’s trade NAND bit growth will be below the industry in calendar 2015 as it adjusts it portfolio to more value-added applications and prepares for a 3D manufacturing ramp throughout 2016. On completion of its Singapore fab expansion and the ongoing conversion of existing planar capacity to 3D NAND, Micron anticipates 40% to 50% NAND bit growth per-annum over an extended time horizon.

Last week, Micron and its joint venture partner Intel (NASDAQ:INTC) announced the availability of their 3D NAND technology, the world’s highest density flash technology used in laptops, data centers, tablets and mobile phones. With more storage in a smaller space, the 3D NAND technology offers significant cost savings, low power usage and high performance for a range of mobile consumer devices as well as the most demanding enterprise applications.

The company is currently in pilot production of its first generation 32 layer  3D NAND, with early sampling in progress. It expects to be in co-production of both MLC and TLC versions by the end of calendar 2015 with system level solutions following soon thereafter. Micron expects 3D NAND to be a meaningful percentage of trade NAND supply in calendar 2016 and to represent a majority of its NAND bits by 2017. The company claims to be seeing early benefits of its NAND product and technology re-positioning, and expects the improved performance of Micron 3D NAND technology to open up expanded segment opportunities.

Q3 2015 Guidance

– Revenue in the range of $3.80 billion to $4.05 billion, a 6% sequential decline at the midpoint of the range.

– DRAM gross margins to be down sequentially based on flat bit sales, high single-digits decline in average selling prices and low single-digits decline in cost per bit.

– Trade NAND gross margin to be relatively stable compared to Q2 2015, based on bit production down low single-digits, ASPs up single-digits primary from a higher mix of mobile products and cost per bit up mid single-digits also primarily on mix.

– SG&A to be relatively stable over the next several quarters, in the 180 million to 190 million range.

– R&D to trend up slightly over the next couple of quarters in line with development activities.

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