Micron’s Q4’15 Earnings Preview: PC DRAM & 3D NAND In Focus

Leading memory chip manufacturer, Micron Technology (NASDAQ:MU) has lost almost 35% of its  market value since it reported its Q3 2015 earnings on June 25th. (Fiscal years end with August.)  While Q3 typically is a sequentially down quarter, the company’s revenue in the quarter came in at the lower end of its guidance and below analyst expectations, suffering 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. Micron is set to announce its Q4 2015 and fiscal 2015 earnings on October 1st, and below are some of the trends that one should watch out for.

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: 1) the ramp up of its 25-nm DRAM technology; 2) driving scale output at more advanced nodes such as 20-nm DRAM and 16-nm TLC (triple level cell)  NAND; 3) new and differentiated products including 3D NAND, mobile NAND, and eMCPs (embedded multi-chip packages);  4) increased adoption of enterprise SSDs (solid state drives); and, 5) the Inotera contract change. Despite the present short-term weakness, Micron remains confident of its long-term growth prospects and continues to deploy advanced process technology, both to enable leading edge products for its customers and to drive ongoing manufacturing efficiency.

We will update our price estimate of $24 for Micron after the Q4 2015 earnings release.

See our complete analysis for Micron here

Signs Of Stabilizing PC Demand

At the Citi 2015 Global Technology Conference earlier this month, Micron admitted to seeing signs of stability in the PC market and DRAM spot pricing, with reductions in inventory throughout the network and the channel. PC’s account for almost 30% of Micron’s DRAM business, which in turn accounts for over 60% of the company’s revenue and more than 50% of its valuation, in our estimation.

In line with the industry profile, 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. The proportion of PC DRAM to total DRAM is expected to decline in the future, as the DRAM demand for mobile devices and servers increases. However, Micron believes that for at-least the next three to five years, PCs will be a significant source of demand for its DRAM business. Thus, any adverse development in the PC market will have a direct impact on Micron’s business. Weaker-than-expected PC demand and the impact it had on DRAM pricing has had an adverse impact on Micron’s earnings over the last two quarters.

Many industry experts are of the view that PC sales bottomed in Q2 2015. Most believe the launch of Windows 10 in late July and the roll-out of Intel’s Skylake CPU lineup will spur PC demand in the coming months. Additionally, Micron believes that the PC content growth over the course of next two to three years might increase by a mid- to upper single-digit range. ^[1]

To date, Micron has indicated that it was too early to determine whether or not the worst in PC demand is behind us. It thus will be interesting to see what additional PC market developments the company highlights in its Q4 2015 earnings call.

Ramp-Up Of The 3D NAND Technology

While Micron’s DRAM revenue has seen an year-on-year decline in the last two quarters, mainly on account of weak PC sales, the company’s NAND Flash revenue continues to see strong growth.

3D NAND is a breakthrough in overcoming the density limit currently facing the planar (2D) NAND architecture and floating gates used in conventional flash memory.  And it is expected to account for an increasing proportion of NAND Flash industry’s overall supply in the coming years. TrendForce projected that 3D NAND accounted for only 3% of the NAND Flash industry’s overall supply at the beginning of the year, since the majority of the manufacturers are still in the testing and sample delivery phase. However, it expects the 3D NAND market share to reach 20% by the end of 2015. ^[2]

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.

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 this technology and the elastic character of the storage market the company will sell into.

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1. Micron Technology’s Management hosts Citi 2015 Global Technology Conference (Transcript), Seeking Alpha, September 8, 2015 [↩]
2. Must-know overview of Micron Technology: A DRAMatic growth story, Market Realist, April 24, 2014 [↩]