Micron Earnings Review: Increase In Bit Shipments Help Micron Post Strong Q4’16 Results

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Micron Technology

Micron Technology (NYSE:MU) announced its Q4 2016 earnings on October 4th. (Fiscal years end with September.) Although the company’s topline and bottomline in Q4 were down on a year over year basis, they came in at the higher end of its guided range. Going ahead, Micron expects to see improvement in its revenues and margins, driven by improvement in the DRAM pricing. After suffering three consecutive quarters of net losses, Micron expects its bottom-line to turn positive in Q1’17. Robust overall demand for memory products and a stabilization in the PC market, coupled with tight industry supply of memory products, together are likely to help the company improve its bottom-line going forward.

Micron’s DRAM revenue, which contributed to 60% of its overall revenue in Q4, increased by 13% sequentially in Q4 due to 20% increase in bit shipments partially offset by a 6% decline in the average selling price. Furthermore, cost reductions resulting from the ramp-up of the the DRAM output at the  20 nanometer process node helped the company improve its DRAM gross margins by approximately 2 percentage points.

Additionally, the company’s non-volatile NAND revenue increased 12%, as a result of 13% increase in bit shipments that was partially offset by 1% decline in the average selling price. However, Micron’s non-volatile trade gross margins decreased by a couple of percentage points, as a result of an increase in the cost of production associated with the move to 3D NAND production. In the table below, we list down the key metrics as reported by the company in Q4’16:

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Screen Shot 2016-10-05 at 5.10.50 PM

Source:sec-filings

Note: The above figures are taken at the mid-point

Micron Poised To Deliver Strong Operational Growth In FY 2017

Going forward, the company believes that it is on track to deliver stronger operational performance resulting from cost per bit reduction and bit growth. Micron aims to ramp-up its 3D NAND output and DRAM output at the 20 nanometer process node to improve its margins and deliver stronger revenue growth. Specifically, the company pointed out that it expects to reduce DRAM and NAND cost per bit by 20% and 25%, respectively, from its ongoing cost reduction initiatives.

It must be noted that Micron announced its plan to implement a cost saving program in Q3’16, aiming to cut down 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.

Stabilising PC Market Contributing To Improvement In DRAM Prices

We recall that in Q3 Micron’s net sales remained relatively flat sequentially and declined by 24% on a year over year basis. Furthermore, the company’s gross margins declined by 3 percentage points sequentially in Q3, due to a decline DRAM prices. Micron’s revenue growth and margin improvements are dependent upon DRAM sales, which contributed to around 60% of its overall revenues in Q3. One of the major factors driving down DRAM prices in the past is the continued weakness in the PC market. PC shipments witnessed a year-on-year decline of 11.5% and 4.5% in Q1’16 and Q2’16 respectively. Nevertheless, a report by IDC suggests that PC market is better positioned in the second half of 2016, because of an improvement in the inventory levels, stronger business demand and a sequential decline in the prior year comps arising from the expiration of free Windows 10 upgrades. The stabilizing PC market has likely contributed to improved revenues and margins for Micron in Q4.

See our complete analysis for Micron here

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