How Important Is Cost Of Sales To Micron’s Expenses And Overall Profitability?

Micron’s (NASDAQ: MU) total expenses have risen gradually from around $15.24 billion in 2017 to about $17.05 billion in 2019. As a percentage of revenues, expenses have remained roughly the same, going from 75% in 2017 to 73% in 2019.
Cost of sales is the biggest expense head for the company, with it being 58.5% of revenue in 2017, before decreasing slightly to around 54% of revenue in 2019. This decrease has helped offset the rise in R&D and S,G&A expenses and has helped in bringing in an additional $1 in earnings per share between 2017 and 2019.
However, with revenue expected to drop slightly in 2020, cost of sales as % of revenue is likely to rise to 60%, leading to a projected drop in net income margin from 27.1% in 2019 to 21.2% in 2020.
Further, by 2021, net income margin is set to cross 30%, and this projected growth has helped drive a >70% rise in Micron’s share price over the past year.
In our interactive dashboard How Does Micron Spend Its Money?, we take a look at the key drivers of Micron’s expenses and net margins.

Micron’s Net Income Margin has remained volatile, increasing sharply in 2018 and dropping back below 30% in 2019 on the back of a 25% drop in revenue. Margins are expected to drop sharply in 2020 due to a further drop in revenue, owing to the ongoing semiconductor supply glut

Breakdown of Micron’s Total Expenses

• Cost of Goods Sold has increased from $11.89 billion in 2017 to $12.7 billion in 2019, driven primarily by growing raw material costs. As a % of Revenue, Cost of Goods Sold has dropped from 58.5% to 54.3% over the same period. The metric is expected to rise in 2020 to around 60% due to a sharp drop in revenue.
  
• SG&A Expense has grown from $743 Mil in 2017 to $836 Mil in 2019. Expense has grown steadily over the past 2 years, but we expect this metric to drop in 2020, as Micron announced plans to cut expenses to weather the ongoing semiconductor downcycle. As a % of Revenues, SG&A has remained roughly flat from 3.7% in 2017 to 3.6% in 2019.
• Research & Development (R&D) Expenses increased from $1.82 billion in 2017 to about $2.44 billion in 2019 due to continuous spending on advanced semiconductor wafer technology. As a % of Revenue, R&D expenses have increased from 9% to 10.4% during the same period, and is expected to roughly remain the same over the next 2 years.
• Other operating expenses went from $1 million in 2017 to about $49 million in 2019. This metric primarily includes restructuring charges and other miscellaneous expenses. We expect this metric to be around $61 million in 2021. As a % of Revenue, we expect other operating expenses to remain around 0.2% over the next 2 years.
• Micron’s Non-Operating Expense Has Decreased From $672 million in 2017 to $328 million in 2019. There was a sharp drop in 2019 due to a drop in net interest expense, as Micron’s interest income exceeded interest expense. Micron’s total debt has dropped from $11.13 billion in 2017 to $5.85 billion in 2019. Going forward, we expect non operating expenses to drop further to around $272 million by 2021.
• Micron’s Income Tax Expense has increased from $114 million in 2017 to $693 million in 2019, with the Effective Tax rate rising from 2.2% to 9.8% during the same period. Effective tax rate is expected to be around 10% in the near term.

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