Micron’s Q4’15 Earnings Review: Industry Dynamics To Improve In Fiscal 2016

-20.51%
Downside
93.78
Market
74.54
Trefis
MU: Micron Technology logo
MU
Micron Technology

Leading memory chip manufacturer, Micron Technology (NASDAQ:MU) lost almost 35% of its  market value since it reported its Q3 2015 earnings on June 25th. The stock rose marginally in after hours trading yesterday as Micron’s Q4 2015 earnings (reported on October 1st) came in within its guided range and beat Wall Street estimates. Weak macroeconomic conditions and the persisting weakness in PC demand, coupled with Micron’s lagging DRAM and NAND output (or “bit” growth) in comparison to the industry (due to the ongoing technology transitions), has impacted the company’s growth rate in the last few months.

While its Q4 2015 earnings were impacted by the continued weakness in the PC sector, Micron believes that the memory industry fundamentals remain favorable over the long term. Depending on how the end market demand plays out, the company will continue to manage product mix and allocate its capacity to maximize its opportunities over time. Micron seems confident that the demand environment will stabilize and improve next year, and expects industry supply and demand for both DRAM and NAND to be relatively balanced in 2016.

Quick Snapshot of the Q4 2015 and Fiscal 2015 Earnings

Relevant Articles
  1. Up 12% This Year On AI Tailwinds, Will Micron Stock See Further Gains Following Q2 Results?
  2. Digital Infrastructure Stocks Including Micron Had A Solid Year. What Lies Ahead?
  3. Why Digital Infrastructure Stocks Such As Micron Are Outperforming
  4. Will Surging Demand For High-Bandwidth Memory Help Micron Stock?
  5. How Will The Chinese Chip Ban Impact Micron?
  6. With Memory Markets Moving Toward Equilibrium, Is Micron Stock A Buy?

For Q4 2015, Micron reported earnings of $3.6 billion, down 6.6% sequentially and 14.8% year to year. The gross margin for the quarter declined to 26.9%, compared to 31.2% in Q3 2015 and 32.8% in Q4 2014, mainly on account of pricing pressure in the PC DRAM space. On the positive side,  Micron reported record revenue in the automotive segment and saw continuous strength in its industrial multi-market business. Net income and diluted earning per share (EPS) for the quarter came in at $471 million and $0.42, respectively.

At $16.2 billion, Micron’s fiscal 2015 revenue declined 1% compared to fiscal 2014. Net income ($2.9 billion) and diluted EPS ($2.47) for the year was down 5% and 3%, respectively.

We are in the process of updating our price estimate of $24 for Micron.

See our complete analysis for Micron here

PC DRAM Demand Remains Weak & Uncertain, But Micron Sees Healthy Demand In Other Segments

Micron’s Q4 2015 DRAM revenue declined 8% sequentially, primarily as a result of lower selling prices resulting from the continued pressure in PC DRAM ASPs. However, overall demand and gross margins in other segments remained relatively healthy. Though Micron did see some short term improvement in pricing at the end of August and early September, the company expects the challenges in the DRAM pricing environment to persist in the current quarter.

PC demand remains weak, and it is difficult to determine whether or not the worst in PC is behind us. Whether the launch of Windows 10 and Intel’s Skylake CPU lineup will spur demand in the coming months is yet to be seen. In response to the PC softness, Micron lowered its bit shipments into the PC segment by approximately 20% and shifted bits towards other more stable segments. It anticipates additional reduction in PC-DRAM production in Q1 2016.

In Q4 2015, PC as a percentage of Micron’s DRAM revenue was the low 20%, down from about 30% in Q3 2015. The mobile and server business was in the low 30% and low to mid-20% ranges, respectively, up from high 20% and low-20% ranges in the prior quarter, respectively.

Micron expects to be above the market in DRAM in calendar year 2016, based on market growth assumption of low to mid 20s. A majority of this growth will occur in the latter half of fiscal 2016 and then continue into fiscal 2017. The company expects 20 nm to represent more than half of its DRAM output in fiscal year 2016.

 

Demand For NAND Is Relatively Stable; 3D NAND To Put Micron In A Stronger Competitive Position

Micron’s Trade NAND revenue declined by approximately 7% in Q4 2015, primarily as a result of lower bit sales volume. NAND gross margin in the quarter was relatively flat compared to the prior quarter as both bit cost and selling prices decreased marginally. The company claims that the demand for NAND is relatively stable as compared to DRAM.

A significant part of Micron’s capital investment is focused on enabling innovative new products to support technology advancement in its NAND business. The company claims to be encouraged by customer response to early samples of its 16 nm TLC products and the early 3D NAND product. It expects these investments in aggregate to accelerate its growth over the next 12 to 18 months. Micron expects the majority of its NAND production on 3D by late next year, which the company believes will put it in a stronger competitive position.

For trade NAND, Micron expects its bit growth to be below the market in calendar 2015 and 2016, based on market growth assumption of bit growth in mid to high 30s. The fab expansion and 3D conversions are expected to position the company to significantly outgrow the market in fiscal 2017.

 

Q1 2016 Non-GAAP Guidance

– Consolidated revenue in the range $3.35 billion to $3.6 billion.

– Gross margin in the range of 24.5% to 27%.

– Operating expenses between $580 million and $620 million. Operating income between $260 million and $320 million.

– Tax rate in the mid-teens.

– EPS between $0.20 and $0.26 per diluted share.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research