Micron’s Q3’15 Earnings Preview: Technology Transition To Impact DRAM & NAND Output For 2015

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Micron Technology

Leading memory chipmaker Micron Technology (NASDAQ:MU) will report its Q3 2015 earnings on June 25th. The increasing consolidation in the industry, rising demand from non-PC markets, increasingly diversified end markets, and improving memory product prices, helped return the company to profitability in 2013. As a result of the continued improvement in market dynamics, 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 fiscal year 2014 (ended August 2014). The growth momentum has continued so far in fiscal 2015, with revenue and net income increasing by 7% and 73%, respectively, in the first half of fiscal 2015 compared to the same period last year.

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. For Q3 2015, Micron expects revenue in the range of $3.80 billion to $4.05 billion, a 6% sequential decline at the midpoint of the range.

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 at a more than 20% premium to the current market price.

See our complete analysis for Micron here

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

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 Q3 2015 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.

At present, about 30% to 33% of Micron’s DRAM business is focused on PC’s, 20% to 25% on mobile applications, 20% on servers (enterprise & cloud data center servers), and the remaining on networking, automotive and industrial applications. [1] We believe Micron will benefit from increasing its focus on other high growth segments, including mobile, servers and automotive applications. (Read: Micron Focuses On Mobile, Servers & Automotive As It Reduces Its DRAM Dependence On PCs)

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.

 

NAND To Be Comparitively More Volatile In The Short-Term

Compared to the DRAM market, Micron believes that the NAND market will have more volatility in the short-term, though the market remains very attractive in the long-term. For 2015, Micron projects NAND supply growth in the high 30% to mid-40% range with a significant portion of the range based on deployment of Triple Level Cell (TLC) memory.

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.

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.

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Notes:
  1. Micron’s Management presents at Morgan Stanley Leveraged Finance Conference, Seeking Alpha Transcripts, June 4, 2015 []