Micron (MU) announced earnings yesterday, beating on revenue but missing badly on income, with a net loss of $286 million, or $0.28 per diluted share, on net sales of $2.1 billion. This is the company's 7th consecutive earnings miss.
I have previously written about MU and suggested staying away from the stock, and I'm glad I did. The stock dipped more than 2.5% on the day, presumably on some information leakage, though the stock is slightly up in after-hours trading.
So what happened? And where do we go from here?
Hedging and Asset Sale Losses
MU lost $120 million on currency hedges relating to the Elpida purchase. As the CFO stated:
With the weakening of the yen, approximately one half of the savings from the lower purchase price for Elpida is reflected as a loss on the hedge and has been included in our income statement for the quarter. Any reduction in purchase price will not be recognized on our balance sheet until the transaction is closed using the exchange value at that time. We do not provide any guidance on hedging gains or losses given the extreme volatility of the yen at this time.
This is great news for the stock - these short term losses need to be marked to market, while the decrease in cash outlay is saved until the deal closes. This means that there's $240 million in value that is waiting to come back on the balance sheet, flowing through the income statement.
Revenue Way Up, and yet...
Surprising no-one, DRAM revenue shot up this quarter, supported by much higher prices. Gross margin across DRAM products increased quarter to quarter by about six points. NAND prices were reported flat.
And yet, cash flow from operating activities was flat, and inventories were down. This is mostly due to a loss of $62 million due to sale of the company's facility in Avezzano, Italy. This is less good - it speaks to assets being marked too high or not depreciated fast enough. But it's great for us: MU is hiding a pretty decent quarter as it's cleaning up parts of its books.
The Way Forward
As I wrote last time, I don't have a ton of faith in management, given how poorly things have gone for the company of late. But this was actually the type of quarter that makes the company look like a good investment. Much cleaner books and the street seeing a terrible bottom line make the company a much better potential buy than it was before this report.
Still, I remain skeptical of the company's management. Some of their comments about CapEx commitments on the Elpida transaction seem misguided. Typically, assets purchased out of bankruptcy need huge amounts of investment - think of homeowners who can't pay their mortgages and are turning over their homes.
I'm going to stay away from MU until they start telling a story on the Elpida transaction that makes sense. But for investors with more risk appetite, jumping in now makes a lot more sense than it did before the call.