Just about a year ago I was listening to the Micron (MU) presentation at the Goldman Sachs technology and Internet Conference. The President of Micron, Mark Adams, was a presenter at that conference. The audio was not great, but Mark mentioned, in a somewhat cheerful tone, that one of the challenges with the combined Micron and Elpida (OTC:ELPDF) would be, paraphrasing here, running at an eight billion "clip" going to a 16 billion "clip". He didn't say "sales", "revenue" or even "dollars". Eight clip to 16 clip … in a kind of garbled way. I was astonished that no analyst seemed to catch that or ask questions about that number.
It took until the recent fiscal first quarter earnings report, the first full quarter of combined Micron/Elpida operations, for the "16 billion clip" to present itself. First quarter revenue was $4.04 billion, which, of course, annualizes to over $16 billion in sales. Nice job Mark. After grinding more numbers than I wanted to, I have come up with what I think is a reasonable split between the operations; $1.6 billion for Elpida and $2.44 billion for Micron. So, the business is roughly 40% Elpida and 60% old Micron.
Per the quarter fact sheet, the company is now 69% DRAM, 26% NAND, and 5% other. At 26% of the business, with much of it being consumed internally, we can set NAND aside for a moment.
The summary sheet tells us that DRAM bit growth and ASP will be flat for the second quarter and that DRAM bit cost will be down "high single digits." Now, the guidance sheet looks really straight forward, but, using "bit" information makes it quite difficult to interpret. For example, bit growth and bit ASP can both be flat, but if the actual chips sold are migrating from 2Gb to 4Gb (which they are), DRAM sales could be up some percentage … like 10% and gross margins would also be up. The guidance sheet tells us that bit cost will be down "high single digits." Which is a function of ongoing shrinks and the 2 to 4Gb migration mentioned above.
Micron has always provided their guidance in this format; bits (or GB), not dollars, and their accuracy has left something to be desired. So, I'm going to do some guessing:
I think that the second quarter will see the 60% DRAM part of the business grow by at least 10% and cost will fall at least 10% for a 20% positive move in gross margin.
The above are possible improvements that are internal to Micron, but external factors are also at work here. Prices on the 60% DRAM part of the Micron business have been rising since December 4, 2012 and I didn't hear any skid sounds that the upward trend of DRAM price stopped at the end of the first quarter. Remember, Mark Adams figured the company at $16 billion run rate almost a year ago, DRAM spot price increases have continued to increase maybe another 70-100% since then. The fact is that these large and continual price increases on any product take time to be reflected in the contractual part of the business. Inertia and time lag can actually cause contract pricing to continue to increase even after the spot market has peaked and begun to decline, which it hasn't. Given that, it is totally probable that sales, due to unit price increases, could have increased during the second quarter by 5%. Since the guidance sheet is in "bits", it can't catch these price adjustments.
All that said, DRAM sales (60% of the business) could be up 15% with 10% lower costs.
In the guidance sheet "Trade NAND" is that portion of the business that is sold, in a variety of density, as discrete chips, to the outside world. Since about half of the output of NAND is captive to Micron's Crucial Solid State Drive division, only about 13% of Micron's NAND business is exposed to the general market. So, in the case of NAND at Micron, the bit ASP doesn't mean much (it is forecasted to be down "high teens"), but bit production and bit cost are very important. Bit production is forecasted to be up "high teens", while bit cost is forecasted to be down "mid teens". Decoded, this is neutral for sales to the outside world and wonderful for the part of NAND production that is used by the Crucial Division.
Doing all the gives and takes and discussing it all in great detail last night with my 16 month old grandson, we have agreed that the Micron second quarter sales will be about $4.44 billion with gross margin of 40% and earnings per share of $.95 per share. The street is expecting $3.97 billion sales and $.61 per share. The street range on sales is $3.46-$4.65 billion and the range on earnings is $.44-$.80 per share. Not exactly a consensus.
We will see if I and my grandson can beat the street estimates.
BTW, that same Goldman Sachs meeting this year is on Wednesday of next week, February 12, 2014. Maybe Mark Adams will tell us that the challenge now is to run a company at a 22 billion "clip".
As soon as this Friday we could get some actionable information at the Micron winter analyst conference. Micron also gets to thump their chest at two Stifel Nicolaus meetings on Monday and Tuesday of net week.
I'm in Micron again big, with leverage.