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On January 7, 2014, Micron Technologies (NASDAQ:MU) reported its first quarter 2014 results. The following are the results insights and my analysis of the results.

Results summary:

For the latest quarter, Micron posted a revenue of $4 billion, up from $1.8 billion a year earlier, and a net profit of $358 million, as against a loss of $275 million a year earlier. Operating income for the quarter stood at $551.0 million, which is a significant improvement from an operating loss of $97 million reported during the year-ago quarter. However, excluding the effect of inventory step up and settlement related costs the operating income for the quarter stood at $895 million, representing an operating margin of 22.14%. The earnings per share stood at $0.34.

Segments: (year over year)

The company reports its revenues under four segments: DRAM Solutions Group ("DSG"), Wireless Solutions Group ("WSG"), NAND Solutions Group ("NSG"), Embedded Solutions Group ("ESG"). Three out of the four main segments showed major improvement.

  • DRAM Solutions Group ("DSG"):

DSG segment generated 44.2% of Micron's revenue during the quarter. The segment's revenue stood at $1.8 billion, up 197.5%. The rise in the revenue is fueled by:

  • The acquisition of Elpida.
  • Higher average selling prices.
  • Higher output due to improvements in product and process technology.

Operating profit touched $432 million as compared to a loss of $112 million. Operating margins improved from a negative of 18.7% to a positive of 24.2%.

  • Wireless Solutions Group ("WSG"):

WSG segment generated 26% of Micron's revenue during the quarter. Due to the acquisition of Elpida, the segment's revenue grew by whopping 300% to touch $1.1 billion. Operating profit touched $176 million as compared to the loss of $64 million. Operating margins improved from a negative 24.3% to a positive of 16.7%.

  • NAND Solutions Group ("NSG"):

NSG segment generated 20% of Micron's revenue during the quarter. The segment's revenue grew by 30% to touch $806 million. Operating profit improved from $13 million to $95 million. Operating margins improved from 2% to 12%.

  • Embedded Solutions Group ("ESG"):

ESG segment generated 9% of Micron's revenue in the last quarter. Due to the increase in volumes, the segment's revenue grew by 31.7% to touch $366 million. Operating income declined from $78 million to $66 million. Operating margins declined from 28% to 18%. Margins declined due to lower average selling prices.

Conclusion:

For the quarter the company reported an excellent result due to the full impact of Elpida acquisition and favorable market trends. The company achieved record quarterly revenue of over $4 billion, with over 19 percentage-point improvement in gross margins (YoY).

Elpida acquisition significantly altered the product portfolio of the company in the favor of DRAM. During the quarter 69% of the company's revenues came from DRAM as compared to just 39% a year earlier. The contribution from NAND showed a decent growth in absolute terms but in percentage terms it declined from 44% to 26%. In order to balance the future product mix, the company is currently converting its DRAM fabrication facility in Singapore from DRAM to NAND Flash. The conversion is expected to be completed in a phased manner during the current year. The conversion will affect NAND margins during initial phases but is a good step for the long term stability of the company.

The company generate nearly 95% of its revenues from the sale of DRAM and NAND products.

  • DRAM:

The sale of DRAM gigabit increased by 253% during the quarter due to the full contribution from the acquired Elpida facilities, and improved product and process technologies. During the quarter, DRAM products produced by the acquired Elpida facilities constituted 56% of the company's aggregate DRAM gigabit production. The two key things that came good during the quarter are the increase in average selling price (10%) and reduced per gigabit cost (-27%).

Future:

In the near future, the higher average selling price and cost reduction will drive the margins for the company in DRAM business. In the absence of any new capacity additions, the industry wide supply of DRAM is expected to show only a modest growth.

As mentioned by the company:

"We expect to see the DRAM industry wafer production down about 5% in 2014 with total DRAM industry bit supply up in the mid-20% range."

This supply forecast lags behind the demand growth, which is currently showing a CAGR of low 30%. So, the demand-supply balance is expected to remain favorable in the times to come. This should keep a good pricing environment. More importantly, most of the increase in the supply is likely to come due to the improved process technology, which means that the cost of production will decline in the near future. So, the company's DRAM business is expected to show healthy margins in the foreseeable future.

  • NAND Flash:

The sale of NAND gigabit increased by 36% during the quarter due to the transition of the DRAM facility in Singapore to NAND Flash production, and improved product and process technologies. The average selling price declined by 8%. However, the cost per gigabit decline by 20% to offset the decline in the average selling price and to boost margins.

Future:

In the near future, the higher production volumes due to the ongoing DRAM to NAND conversion project and cost reduction will drive the margin as well as revenue growth for the company in NAND business. However, the average selling price may decline further due to unfavorable product-mix and more contribution from the DRAM to NAND conversion project.

As mentioned by the company:

"For NAND, we are projecting industry supply growth in the low 40% range for calendar 2014. This includes a 10% increase in industry wafer production with the remaining supply growth coming from technology. Micron's total NAND supply growth was below the industry in 2013 but it will be slightly above the industry in 2014, given our DRAM to NAND conversion."

This supply forecast lags behind the demand growth, which is currently showing a CAGR of mid 40%. This means that the demand-supply balance is expected to remain favorable in the times to come.

Since the last few years, the global DRAM and NAND market has been going through a phase of rapid demand as well as production growth but with a steep decline in average selling prices. Such an environment has brought a lot of uncertainty in the industry. The industry's attitude towards the capital investments for capacity addition has become more conservative. This is expected to improve the demand-supply environment particularly in DRAM market, as the new capacities are not coming up.

All in all, Micron, following its merger with Elpida, is increasingly becoming a more and more competitive player in the market with more capacity and better product mix. The current favorable demand-supply balance and healthy market conditions along with the addition of cost-effective manufacturing facilities of Elpida will allow the company to deliver a better performance in the near term.

Its conservative approach towards the capacity addition will add strength to its balance-sheet, but on the negative side this approach also means that the company will not able to show a significant growth in volumes in times to come.

Though, the long-term outlook still depends on the actual demand-supply balance at any given time. But, for the time being, the company is all set to deliver better performance due to the reasons discussed above.

Valuations:

Currently the company is available PEx of 14* and market cap. of over $25 billion.

The nature of company's business, which is extremely volatile, highly capital intensive and very competitive (due to the presence of competitors like Samsung Electronics (OTC:SSNLF), SanDisk Corporation (NASDAQ:SNDK) and SK Hynix Inc), as well as the significant run-up in the share prices (due to Elpida acquisition and improved business environment) during the last twelve months (see the chart below) demand a caution.

*this also reflects the positive effect of one time acquisition related gain of over $1.4 billion.

MU Chart

MU data by YCharts

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This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.