Micron Reports A Strong Quarter With Elpida On Board

Helped by improving memory market dynamics, rising product prices and inclusion of Elpida Memory in its portfolio, Micron Technology (NASDAQ:MU) reported strong Q4 2013 results Thursday, October 11. Including the $1.5 billion acquisition gain, the company reported net sales of $2.8 billion and a net income of $1.7 billion. For fiscal year 2013, net sales ($9.1 billion) expanded by 10% and Micron reported a net profit of $1.2 billion as compared to a loss of $1 billion a year ago. Excluding the gain realized from Elpida, Micron’s full year operating income improved to $236 million compared to an operating loss of $612 million in fiscal 2012, as it benefited from a reviving memory market.

With a large and diverse memory product portfolio and the second largest installed manufacturing capacity, Micron is in a strong position to benefit from the improving industry dynamics. ^[1] Nevertheless, with the unpredictability in memory product prices we maintain a cautions outlook for Micron.

We are in the process of updating our price estimate for Q4 2013 earnings. At present, our price estimate of $13.47 for Micron is at a more than 20% discount to the current market price.

See our complete analysis for Micron here

Elpida’s Acquisition Doubles Micron’s DRAM Business & Increases Its Mobile Penetration

Supported by a 42% rise in sales volume and a 5% increase in ASPs, Micron reported a 50% q-o-q growth in its DRAM revenues ($1.24 billion). In addition to improving DRAM market dynamics and increasing prices, Micron’s DRAM segment benefited from the inclusion of Elpida sales for a month. Micron completed its acquisition of Elpida in July this year. Excluding Elpida sales for August, Micron’s revenue was up 16% q-o-q driven primarily by the increase in DRAM prices for the second consecutive quarter.

Samsung and SK Hynix were the top two players in the DRAM market with shares of 37% and 26%, respectively. ^[2] However, as per research firm IDC, Micron and Elpida together account for 28% of the market, making Micron the second largest DRAM player behind Samsung. The fab assets acquired from Elpida and Rexchip have increased Micron’s manufacturing capacity by approximately 45%. ^[3]

Additionally, the acquisition of Elpida helps Micron expand its footprint in the mobile DRAM market, the fastest growing DRAM segment. Though Micron is the leader in enterprise DRAM solutions for networking and servers, it generated less than 10% of its revenue from mobile DRAM. Elpida on the other hand has a strong presence in mobile DRAM and targets mobile phones as well as tablets. Sourcing chips for iPhone and iPad for quite some time, Elpida is Apple’s key supplier.

In its earnings call, Micron declared that mobile DRAM now accounts for over 30% of its DRAM bits, similar to PCs. The inclusion of one month of Elpida’s results accounted for approximately 20% of the total DRAM bit shipments in Q4 2013. ^[4]

Elpida’s Product Mix Lowers DRAM ASPs

DRAM product prices have significantly improved in the last few months as strong demand coupled with their restricted supply has eased downward pressure on prices. According to Bloomberg, the prices of memory chips have increased 19% this month subsequent to the fire at SK Hynix’s factory in China. ^[5] Micron witnessed a 5% growth in its ASPs in Q4 2013, and expects prices to grow mid single digits (sequentially) in the current quarter.

Micron claims that the Elpida’s product mix has a lower average price compared to Micron’s DRAM product portfolio, which it believes will offset some of the price increase in the future. Micron has a higher mix of premium ASP segments such as networking and servers, while Elpida has a higher mix of sales in wafer form. Currently, Elpida sells approximately 20% of its volume in wafers which reduces the ASP and cost per bit.

Since manufacturers are devoting their capacity to produce mobile DRAM products, commodity DRAM products have been in short supply. Thus, buyers are building up their commodity DRAM inventory to avoid any potential supply shortage in the future. The trend might not last in the long run as the underlying cause for the price rise is more due to the strategic move of OEMs rather than any fundamental change in market demand for commodity DRAM. Additionally, Micron claims that its OEM contract pricing, while increasing, continues to lag the rising spot market.

SSD Demand Is Driving NAND Growth

Micron earned 5% higher revenues sequentially from the sale of NAND Flash products, as the 17% growth in sales volume was offset by an 11% decline in ASPs. Much of the increase in sales volume was due to growth in Micron’s SSD business, which it believes to be growing significantly faster than the overall SSD market. At present, Micron earns 50% of its NAND revenues from SSDs and around 30% and 10% from consumer segment and mobile, respectively. ^[4]

Micron branded SSDs and sales of strategic SSD customers consume more than 60% of the company’s NAND trade bit. Micron branded SSD revenue for fiscal 2013 grew by 76%. At present, 50% of Micron’s trade NAND revenues is accounted for by either Micron branded SSD or the company’s customers who serve the SSD market with Micron’s NAND technology. The company is building a large solid foundation in SSDs, through the expansion of its own SSD product lines as well as through strategic customer engagement in the space.

Micron anticipates NAND demand to rise at an average annual rate of 43% in the next five years and believes that the rising mobile shipments as well as growing demand for SSDs will be the primary growth drivers.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Acquisition Of Elpida Memory Inc. By Micron Technology, Seeking Alpha, April 2, 2013 [↩]
2. Micron Seeks Profit Even in Worst of Times With Elpida Deal, Bloomberg, July 31, 2013 [↩]
3. Micron and Elpida Announce Closing of Sponsor Agreement Transactions, Micron Press Release, July 31, 2013 [↩]
4. Micron Technology’s CEO Discusses F4Q13 Results – Earnings Call Transcript, Seeking Alpha, October 10, 2013 [↩] [↩]
5. Earnings Preview: Micron Technology, Seeking Alpha, September 24, 2013 [↩]