Earnings Preview: Micron Technology

| About: Micron Technology (MU)

Summary

Micron’s earnings are expected on April 3, and the company looks well-poised to meet the sky-high estimates.

Micron’s management could also deliver an upbeat outlook due to favorable trends in the NAND and DRAM industry.

Micron’s Elpida acquisition is expected to be an important growth driver due to cost synergies and better products.

The boom in the solid state drive market is another strong reason to invest in Micron.

Chipmaker Micron Technology (NASDAQ:MU) is scheduled to release its fiscal second-quarter results next week on April 3. The company's shares have already gained 10% this year on the back of key customers such as Apple (NASDAQ:AAPL), favorable pricing in the end-markets, and controlled supply in the industry. In this article, we will take a look at the revenue and earnings estimates that Micron is expected to achieve and a look at the company's probable outlook.

Revenue and earnings expectations

According to Yahoo! Finance, Micron's revenue is expected to come in at $3.98 billion, which would represent a year over year jump of 91.3% if achieved. Micron should be able to achieve such a number since it is seeing strong demand from smartphone customers such as Apple, enjoys favorable pricing trends due to the industry dynamics of DRAM and NAND, and has completed the acquisition of Elpida.

The report would contain Elpida's contribution and so, Micron should be able to meet the revenue estimate.

On the earnings front, the company is expected to post a profit of $0.74 per share. When compared to a loss of $0.28 per share last year, this seems like a big improvement. But since a massive revenue jump is expected, Micron should also be able to meet this estimate. In addition, Micron has also been reporting gross margin improvements as a result of Elpida's favorable cost structure and better sales of higher margin items. So, Micron looks nicely positioned to satisfy the earnings estimates.

Gauging the outlook

Micron sees a favorable outlook for the memory industry in the coming quarters due to a significant reduction in the inventory across the DRAM supply chain, especially in the PC and mobile segments due to the fire at SK Hynix's Wuxi facility. Inventory constraints will result in higher prices according to the demand-supply equation, leading to better top line performance from Micron in the future.

On the technology front, Micron is boosting production of its 25-nanometer chips. The company will also launch a 20-nanometer based platform in the second quarter in fiscal 2014. The shrinkage in platform size will lead to margin gains for Micron as it will be able to deliver robust products at a lower price. Micron also claims to be the first supplier to sample low-power DDR4 to its customers and chipset partners.

Micron expects that DRAM industry wafer production will fall approximately 5% in the current fiscal, with total industry bit supply up in the 20% range. Micron will keep its total bit production below the industry production level for the current year, and this will help the company keep pricing stable. Micron also anticipates an upward swing in bit demand. Hence, with a combination of capacity optimizing moves and higher demand, Micron seems to be in a good position.

Micron is also seeing strong gains from the Elpida integration. Micron has started producing 25-nm (nanometer) chips at the Hiroshima and Rexchip fabs. This 25-nanometer platform provides increased storage for portable music, media players, smartphones, and solid state drivers. This platform will give Micron a competitive advantage in the industry since it will be able to deliver more efficient products at lower costs.

Micron is also looking at ways to increase its operational efficiency in an effort to manage its overall capacity efficiently and effectively. Therefore, Micron has sold its Italy- and Israel-based fabs and consolidated production. Micron's volume manufacturing sites are now based in the three geographical areas - Japan, which is focusing on mobile and graphics DRAM, Taiwan, which includes locations of Inotera and Rexchip and addresses computing, server and networking, and finally Singapore that concentrates on high volume, nonvolatile NOR and NAND technology.

With respect to NAND Flash, Micron has a well-integrated and flexible inventory model for its consumers, automotive, mobile, and storage customers. Hence, the company selects the product mix or builds inventory according to demand from the market. Micron has identified a growing number of NAND applications in each of these categories, thus, it has introduced new packages and full system solutions to address these markets. Such a move should help Micron gain market share in each of these categories.

Micron is also seeing increased NAND penetration in the mobile segment due to the sales of mobile computing devices. Also, the growth of solid-state drives is another reason why Micron could be a good long-term bet. The SSD market is growing at a great pace as shipments of client SSDs rose an estimated 53% last year, while enterprise SSDs were up 14%. Enterprise SSD revenue is projected to grow at a CAGR of 43% till 2016, achieving $3.5 billion in revenue.

To capture this market, Micron has made some impressive product development moves. The company started shipping its 20-nanometer enterprise drives to a large OEM customer in the last quarter, and more clients have been lined up for the future. Micron also plans to produce 60-nanometer SSD chips in the third quarter to target the fast growing client SSD market.

Conclusion

Micron has enjoyed a solid run of results in recent quarters and this looks set to continue. Moreover, the company is looking well-poised for future growth. Hence, with a possibly strong outlook ahead, Micron should be able to deliver more gains to shareholders.

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.