Micron’s Dismal Q3’15 Result Is A Temporary Setback, As Long-Term Growth Potential Remains Intact

Leading memory chip manufacturer Micron Technology’s (NASDAQ:MU) stock declined by more than 15%, as the company reported a disappointing Q3 2015. At $3.85 billion, Micron’s Q3 2015 revenue was at the lower end of the company guidance and below analyst expectations, declining 3.2% year on year and 7.5% quarter on quarter. The company’s net income ($491 million) and diluted EPS ($0.42) declined by almost 39% from a year ago. While Q3 typically is a sequentially down quarter, Micron’s performance also suffered from the dual impact of near-term market headwinds, driven primarily by weakness in the PC sector and the impact it had on DRAM pricing.  Still, the pricing weakness is transient.  Accordingly,  the company is making heavy capital investments  today to position itself for next generation production capabilities and for technology leadership.

Despite short-term weakness, Micron remains confident of its long-term growth prospects, and continues to deploy advanced process technology to enable leading edge products for its customers and to drive ongoing manufacturing efficiency. The company is executing on key milestones in technology deployment and product introductions, which has impacted its short term growth. There are a number of significant factors that Micron believes will deliver growth, margin improvement and strong financial results heading into fiscal 2016. Among other things these include, ramp up of its 25-nm DRAM technology, driving scale output for the 20-nm DRAM, 16-nm TLC (triple level cell)  NAND, 3D NAND, mobile NAND, eMCPs (embedded multi-chip packages), enterprise SSDs (solid state drives), and the Inotera contract change.

Our price estimate of $29.96 for Micron is at a more than 20% premium to the current market price. We are in the process of updating our model for the Q3 2015 earnings.

See our complete analysis for Micron here

PC DRAM Demand To Improve In The Second Half Of Calendar ’15; Other Growth Segments To Drive DRAM Growth 

Micron’s Q3 2015 DRAM revenue declined approximately 13% compared to the second quarter, reflecting a 10% decrease in per bit average selling prices (ASP) and relatively flat sales volumes.

Given the weakness in the PC market, Micron allocated less production to PCs and shifted more bit production towards the other relatively stable long-term growth segments – namely mobile and cloud servers. Mobile, the overall growth rate from a segment demand standpoint is up 50% and PC bit demand is up 5%. Micron believes that by the end of the year, notwithstanding the decrease in unit sales, there will be a small net growth in bits into the PC segment.

At present, about 30% of Micron’s DRAM business is focused on PC’s, 25% on mobile applications, 20% on servers (enterprise & cloud data center servers), and the remaining on networking, automotive and industrial applications. 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)

As Micron manages its product mix and distributes its capacity to a broad set of value added market segments overtime, it expects DRAM ASPs to stabilize. Consistent with its prior expectations, the company estimates DRAM industry supply bit growth to be in the mid-20% range in calendar 2015 and in the low to mid 20% range in calendar 2016. Additionally, it believes that DRAM demand in calendar 2015 in aggregate either equal or exceed supply. It expects its DRAM output growth to lag the industry growth.

3D NAND Will Ramp Up To A Significant Percentage Of Trade NAND In 2016

Micron’s trade NAND revenue increased approximately 3% sequentially in Q3 2015, driven by a 6% increase in ASPs which was partially offset by a slight decrease in sales volumes. The increase in trade NAND ASPs was mix related as higher ASP units grew relatively faster than the overall average. The trade NAND bit growth was approximately flat due to mix shifts in favor of longer term design win opportunities for both Micron managed NAND and MCPs for mobile and SSDs for the storage business.

Consistent with its stated strategy to improve its storage business, Micron made significant progress on key milestones in Q3 2015. The company announced availability of its new 16-nm TLC planer NAND components last quarter, and several channel customers have already started buying its TLC NAND to input them into SSDs, consumer drives, memory cards and other products.  In this way it is offering high density storage products to market based on these advanced technologies.

While the industry continues to consume planer NAND at increasing rates, Micron plans to start volume production of its  high performance 3D NAND later this year. The company is currently sampling a 32 layer 3D NAND device that it will initially ramp before moving to a second generation of 3D device starting in the back half of 2016. The company believes 3D NAND will ramp up to a significant percentage of its total trade NAND supply in calendar 2016. It claims to be making good progress with the  fab expansion in Singapore, and expects the market to demand all of the 3D NAND output it can produce there, given the attractive cost and performance of its technology and the elastic storage market the company will sell into.

In April 2015, 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 higher memory density on smaller die, 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. (Read: Micron-Intel JV Unveils Its 3D NAND Technology)

Micron forecasts NAND industry supply bit growth will be in the high 30% range this calendar year and in the mid 30% range next year. Management believes that supply and demand will be in balance this year and that unconstrained demand will be above supply in future periods, based on currently known capacity plans.

Q4 2015 Outlook

– DRAM gross margin to be down mid-single digits sequentially, with bit production flat to slightly up, ASPs down mid to high-single digits and cost per bit up low-single digits.

– Trade NAND gross margin to be flat sequentially, based on bit production down low to mid-single digits, relatively stable ASPs and flat cost per bit.

– SG&A and R&D expenses of approximately $180 million and $400 million, respectively.

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