Thud. Thud. What are those sounds? The Q4 Earnings release and Analyst Day Meeting eggs hitting the investment community floor. From what is arguably one of the most significant changes in history of the memory business, you have managed to rip defeat from the jaws of investor confidence and enthusiasm. An extremely clever set of deals over the last 18 months has put Micron in the position to move from a really weak #3 to potentially a very strong #2 - IF you can execute on an operational basis.
You have some promising technology directions which MIGHT give MU a chance to partially protect from the worst of the future memory cycle effects, and now as there are only 3 major DRAM players, one can hope rational behavior will prevail. Under what scenario will future DRAM prices crash by 50% in a short time? Does anyone really believe Samsung (SSNLF.PK), Hynix and Micron (MU) will (for long) run a scenario where the total dollar sales of DRAM shrinks by 50%, where even Samsung would have losses on merchant sales? Will Samsung really want to crash DRAM and NAND prices so Apple (AAPL) and the Chinese smart phone OEMs can attack their handset division from both the high and low-ends? Based upon the long history of DRAM cycles, no one yet believes the future will be different and sometime in the future when 450mm DRAM fabs start-up, this will definitely be tested. That said, it is likely to be four or five years before that theory will be tested. WAY beyond the horizon of Wall Street.
One can only hope your financial team and investor relations group will never be put in charge of your operations. They clearly have no clue on how to deal with Wall Street. If you wonder why Wall Street (or most of the analysts anyway) hates Micron, it is because you almost always surprise them (mostly negatively) and when you have a positive surprise (like $1.51 versus their consensus of $0.24) you blow the release so it is interpreted as a miss.
Your earnings release:
1. Welcome to 2013. Guess what, computers can and do read. Their contextual reasoning is not bad if you write a coherent earnings release where you lay out the key points very clearly. From what can only be described as investor relations malpractice, you wrote an earnings release which instantly ran around the world interpreted as you MISSED earnings estimates. The machines inferred $0.20 because they never got to your later released presentation where you defined how you got to a non-GAAP of $0.29 in a manner where the computers were less likely to get your point. So the after hours tanked big time and set the HFT (High Frequency Trading) platforms up to whack your stock on Friday. A 153M share day with share price down almost 10%, is not a vote of confidence in your message.
Micron falls as confusion surrounds 4Q results
Micron Technology falls following investor confusion over quarterly results
Associated Press - Fri, Oct 11, 2013 12:58 PM ED
Micron's quarterly net misses Street, investors eye tight DRAM supply
In case it is not obvious to you, these are not good headlines after you just announced a $1.7B profit for the quarter, or about 600% of what was expected, and a non-GAAP of $0.29 or a beat of 20%. Before you just chalk it up to buy on rumor sell on news, that generally does not apply when you beat by 600%. Yes the analysts completely discount one-time events, particularly when they really do not understand the impact of what has happened.
You might note
If you think they understand the Micron changes, may I suggest you read their reports after the call, and review the questions they asked on the call. Most reports were dismissive of your answers, with estimates which range by a factor of almost 300% for Q1. As Micron is now 1/2 through Q1, that is not a good sign that IR is doing its job.
If you had not figured out a way to grossly underreport the value of the acquisition of Elpida by taking an additional $2.1B write-off AFTER Elpida took their own $2.8B write-off, your book value would have jumped by not $1.48B, but $3.5B, or almost 2x your cumulative retained earnings loss of $1.9B, catapulting your book value to well over $11 (more on that below).
Also, if your finance team had not run one of the dumbest Yen currency hedges in the history of arbitrage, your prior losses in 2013 would have seemed relatively mild. What part of the message from the Japanese government's response to the March 2011 earthquake and Tsunami did your finance team miss? When the Ministry of Finance and the Bank of Japan said the Japanese economy and manufacturers would be killed if the Yen dropped below 75, if you knew anywhere near as much about Japan as you claim from your history there, why on earth would you create an arbitrage which protected against the entire installment debt over the next 7 years. Could you not project the Japan economy would crash long before that if the Yen stayed below 78 over that period? Luckily DRAM prices have saved you from an incredibly dumb hedge, as it was only a $240M mistake, tiny in the overall Elpida deal. That said, when your finance team inflicts over 12% of your cumulative retained earnings losses, you need to look closely at whether you have the right team doing the job.
2. Unless you are hiding a major happy surprise where you would like to finally impress the financial community, delaying the 8K with the Elpida pro-forma for a week is not a winning strategy. They have written their reports, earnings season is in force and you will be an afterthought. Maybe you don't want people to really look at the 8K. Right now it appears either you want to hide something or you are incredibly incompetent. Next time you have some kind of major event where you have an end of quarter financial announcement timed within a few days of having to release a major SEC release, put them out at the same time, and allow enough time to actually make sure people understand what you have done and the implications.
3. I know it is beautiful up in Idaho with lots of things to do on a weekend. I had better things to do this weekend, but felt this was important, because the Micron IR group has blown the opportunity to change the way Wall Street views Micron. May I suggest you go spend the weekend on the SanDisk (SNDK) IR site, reading their presentations and listening to their calls. SanDisk has had its share of problems over its history, but the way SanDisk communicates with Wall Street, as well as their performance, puts them WAY ahead of Micron in favorability. They are simply in a different league.
Let's compare the analyst estimates for Micron and SanDisk Q4 2013.
You have just reported over $1.00 EPS for all of FY 2013, giving MU a trailing P/E of under 16. How many analysts had projected that? ZERO. Look at the wide range of revenue and earnings projections for the current quarter, which we are now 1/2 through. Do you really not have enough insight into the quarter by Oct 10, that you cannot work with the analyst community to make sure they don't have ridiculous estimate ranges? This makes everyone look incompetent.
Look at how tight the range of projections for sales and profits are for SanDisk.
You have just had your quarterly call and SanDisk has not yet even updated their guidance. You actually have analysts who think you will have $3.3B in revenues this quarter. In a timeframe where your next competitor has been running barbecues in their Wuxi factory and spot memory prices have skyrocketed, you also have projections which expect your revenues to SHRINK this quarter while adjusting for Elpida.
If you listen to a SanDisk conference call and a Micron conference call, you will hear the difference between a call between trusted friends and what might be colorfully described as a hostage negotiation. You make it clear you do NOT want to be on the call and a number of the analysts send out their juniors as obviously they don't want to be there. Unless you are planning on going private, you might want to find a way to make it a rewarding experience for everyone, as it is going to happen 4x per year anyway.
4. Your Analyst Day event. You had 13 months to prepare for that day. From Judge Sontchi's decision, you had over 45 days. Did you not get the memo on why far more people wanted to attend than usual. They were not there primarily to get an update on your overall business, they wanted real details on Elpida's results. You filed pro-forma Elpida September 2012 financials in Feb 2013. You could not give an update as of June or even March 2013? Seriously? Anyone who had gone to Pacer.gov would have gotten more information about Elpida than you provided to the audience. So you had a drop of the stock due solely to the disappointment in the way you presented the information, or lack thereof. The story should be far better than the Street has yet to recognize, because of their antipathy to Micron due to the long history of disappointment.
One day sometime in the future, the era of 450mm wafer fabs will occur. Capital Expenditures of $10B will be required. You and your shareholders will be far better served if you start fresh now in the way you deal with the financial community.
Now as you may know, I have been the unofficial cheerleader for Micron on Seeking Alpha. I have been a strong supporter of the major changes you have made to the future of Micron. I am saddened that you have unnecessarily shaken the confidence of your supporters and investors where instead of focusing on your missteps in getting the excellent news out, they should be focusing on your new structure and what the new opportunities are for Micron. For my next installment, I am going to give you the framework you should be using to explain why most of the analysts have completely missed the implications of how Micron has changed, and what kinds of information you can put forward which will properly inform your stakeholders so they can see the kind of progress you are making.