Micron’s Q3’16 Earnings Review: Cost Saving Program & Increased Competitiveness Position To Cut Losses In 2017

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Micron Technology

Micron Technology (NASDAQ:MU) had traded down almost 10% following the company’s release of its Q3’16 earnings. (Fiscal years end with August.)  Though the company’s revenue and earnings were within its guided range, the Q4’16 guidance was below expectations and lowered investor confidence. While Micron expects its Q4 revenue to be slightly up, it forecasts an increase in its net loss sequentially. Most analyst estimates expected positive net earnings for fiscal year 2016, which seem highly unlikely now.

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Q3 2016 revenue was primarily impacted by the continued weakness in the PC segment and the delayed mobile qualifications. Micron claims that it has successfully concluded some of the delayed qualifications and anticipates that it will finalize the remainder during the current quarter.

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On the positive side, recent data points indicate some improvement in channel pricing, though the positive trend is yet to show up in contract pricing.  As a result, Micron continues to take a conservative view of the market environment. Micron’s leading edge technology deployments continue to progress well and the company claims to be on track with its bit growth and cost reduction targets for both DRAM and NAND Flash products. An anticipated improvement in Micron’s competitive position because of the above mentioned factors can drive growth fiscal 2017 onward.

Cost Saving Program To Lower Losses

During its earnings call, Micron announced its plan to implement a cost saving program, aiming to cut costs by approximately $80 million per quarter in fiscal 2017. The company aims to achieve this target by: 1) targeting a more focused set of projects and programs; 2)  closing out a material number of open positions permanently; 3) reducing other positions on a temporary basis; and, 4)  pursuing other non-headcount related spending reductions as well. About half of these savings will appear in the gross margin line of the company while the remainder will be reflected in operating expenses.

Significant Increase In DRAM Volume Shipment Led By The 20nm Transition

  • Micron’s Q3’16 DRAM revenue was up 9% quarter-on-quarter on account of a 22% increase in bit shipments, partially offset by lower selling prices.
  • As the results of its 20 nm ramp and ongoing mobile qualification timeline, DRAM finished goods inventory increased during Q3’16.
  • A near majority of Micron’s DRAM bits being shipped at present are 20 nm, which exceeded 25 nm for the first time in Q3’16. The figure is expected to go up to well over 50% by the end of calendar year 2016.
  • Micron estimates the DRAM industry supply growth in the low 20% range in calendar 2016. Micron’s own fiscal 2016 and 2017 DRAM guided bit growth is in the 28% to 30% range.
  • In Q3’16, Micron enabled its 1X node in manufacturing, and expects to ramp this process in volume starting in 2017.

The 3D NAND Bit Crossover To Complete By This Fall

  • Micron’s trade NAND revenue declined 15% quarter on quarter, driven by a 10% decrease in bit shipments and a 6% decline in ASPs.
  • The company is still in the middle of the planar to 3D NAND conversion, and expects to achieve the 3D bit crossover by this fall.
  • 3D NAND is in low double digit of total NAND, and more than 50% of the NAND bits Micron produces will be from 3D NAND  once the crossover is complete.
  • The Gen 2 3D NAND started initial production in Q3’16.
  • For calendar year 2016, Micron expects industry bit supply growth in the mid 30% to low 40% range with a similar range in 2017 as early 3D conversions create some temporary supply constraints.
  • Micron forecasts its fiscal year 2016 and 2017 NAND bit growth in the 30% to 40% range, expecting to be somewhat below the market in 2016 and somewhat above the market in 2017.
  • With regard to 3D XPoint, Micron claims to be working with market enablers across a number of market segments and continues to believe this innovative technology will be a strong contributor to the company’s future success with revenue in 2017 and beyond.

See our complete analysis for Micron here

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