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Key Takeaways from Micron’s Second Quarter

April 07, 2014 | About:
ICRAOnline

ICRAOnline

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Memory chip maker Micron (MU)'s second-quarter 2014 results came above the Street’s expectations. On the day of release, shares grew 1.46% in after-hours but fell at the close due to huge volume trading. Revenue almost doubled year over year, which helped the company to recover from the loss recorded in the year-ago quarter. Let’s dive deeper for some key takeouts after having a quick glimpse of the reported figures.

Quarter Snapshot

Second-quarter adjusted earnings of $0.85 per share were up from $0.77 per share in the first quarter and were above the Street’s estimate of $0.76. Micron had reported a net loss of $0.28 in its second-quarter 2013, but didn’t record any one-time items during the period. The turnaround was possible mainly because of higher revenue and cost-reduction efforts.

Revenue grew 2% sequentially and 98% year over year to $4.1 billion and was higher than the Street’s expectation of $3.99 billion. Reasons for yearly improvements have not been provided by the company in its call transcript. The sequential gain was on account of higher sales of NAND flash chips. Sales of DRAM (Dynamic Random Access Memory) chip were flat.

Margins improved both sequentially and year over year. The sequential growth was driven by higher DRAM margins.

Although figures are quite impressive, the quarter’s performance was hit hard by NAND pricing.

NAND Pricing Is a Concern, But Holds Long-Term Potential

NAND revenue grew 11% as bit growth surged 35% sequentially, but was partially offset by an 18% decline in pricing. Although cost per bit declined 12%, the rate of decline was lower than the drop in the selling price.

Micron expects NAND bit production in the third quarter to be down by high-single digit and cost per bit to remain flat. But it expects price declines to moderate a little.

The company also projects higher demand from solid state drive (SSD) vendors, which is encouraging. SSDs use NAND chips as a component. Lower NAND prices will make SSDs cheaper (generally SSDs are costlier than hard disk drives) and hence push up demand.

Lower prices will also increase SSD usages, helping Micron witness a better demand scenario for its NAND chips going forward.

DRAM Looks Stable

DRAM revenue in the quarter remained flat sequentially as there was no bit growth. DRAM pricing fell by merely a percentage point. But bit cost decreased at a higher rate (8%) than pricing, which led to margin expansion. The acquisition of Japanese chip-maker Elpida helped Micron manufacture chips efficiently.

Micron expects DRAM bit production to be down by low-single digits mainly due to the shift of Singapore fab’s capacity to NAND. Industry supply is expected to remain under control as major suppliers including Micron, SK Hynix (HXSCL) and Samsung (SSNLF) have restricted production of DRAM chips to match the demand scenario. Last September, a fire in SK Hynix’s Chinese plant halted production temporarily. This also added to the shortage in the DRAM industry.

The shortage is expected to benefit DRAM pricing. But Micron expects pricing to decline by low-single digit owing to lower demand from the PC industry — a major consumer of DRAM chips.

However, Micron expects to offset the price drop by a low-single digit decline in cost per bit.

Better Liquidity

Micron amassed cash balance of $4.5 billion, up from $3.9 billion in the previous quarter. This huge cash pile will help the chip maker to invest continually in developing efficient production technologies and boost profitability. Micron is currently on track to develop cost-efficient 16 nanometer NAND chips. It is also planning to start mass production of 3D NAND chips by 2015. For the DRAM business, it is preparing to go beyond PC and mobile and deliver high-performance DRAM chips for servers.

To Conclude

As expected, Micron’s second-quarter performance was encouraging. Although pricing in NAND continued to be a major deterrent, the growth in volume is healthy. Controlled DRAM capacity led to supply restriction, which favored pricing and margins, as well. A huge amount of cash will help Micron formulate plans for a better future. Currently, the stock’s one-year return is more than 140%. With expected growth in NAND demand, transition into lower geometries and 3D platform, and improving supply/demand environment in the memory market, Micron looks firm enough to deliver profitable growth going forward.


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