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Summary

  • DRAM is performing well.
  • NAND is struggling.
  • Earnings will be good but not as good as expectations.

Last quarter NAND and DRAM made up 96% of Micron's (NASDAQ:MU) revenue or $3.94 billion. For the purposes of this article, I will disregard the remaining 4% of the business that is NOR and other.

Of that $3.94 billion, DRAM was $2.79 billion and NAND was $1.15 billion. That is a 71/28% ratio of DRAM to NAND. These are revenue numbers, not wafer numbers. Since DRAM is generating more revenue per wafer, the wafer production ratio will be smaller (something less than 71% DRAM). Average wafer revenue was about $2,280. This is assuming about 576,000 wafer starts per month. Average wafer cost was about $1,500 and gross margin was about 34%.

A 66/34% ratio for DRAM to NAND wafers would produce revenue of $2,420 for a DRAM wafer and $1,996 for a NAND wafer. If we assume 45% margin on DRAM and 15% margin on NAND, the gross margin dollars come out about right.

As you can see the cost of NAND wafers is higher than the cost of DRAM wafers. The reason for this is that the DRAM from Elpida has very little depreciation vs. full depreciation for NAND wafers. This, by the way, becomes a headwind to future reported earnings as money is spent on updating the Elpida facilities.

OK, that is a thumbnail summary of the Micron quarter ended February 2014.

Now what has changed in the quarter just ended?

From the guidance sheet, bit growth for both NAND and DRAM were forecast down to single digits. ASP for both was forecast down a few points. Cost was forecast to be flat on NAND and down a few points of DRAM.

With bit growth and ASP both down, revenue should be down a couple of points. I think DRAM ASP was down in March and April and up in May, so a repeat of February's $4.1 billion seems like a reasonable call.

The bottom line is that revenue and margin look like a duplicate of last quarter. I expect operating expenses to be up about 10% to $573 million and net interest will come down to about $70 million. Income tax will be up about $20 million.

My take on the quarter:

Revenue (mil$) $4100

Gross margin $1400

OP EX $ 573

Interest $ 70

Income tax $ 85

Net Profit $ 742

Shares (MIL) 1200

EPS (non-GAAP) $ 0.56

The Yahoo consensus of 26 analysts is $.70 and the spread among analysts is $.58 to $.79, a much tighter grouping than in the past.

I think Micron's CEO has given shareholders a veiled warning in a recent presentation. In that presentation he has indicated they are on a hiring spree and will have to spend some money to fix the NAND situation.

When I began to grind on these numbers I fully expected that some small beat on earnings would be the result. Imagine my surprise at a 20% miss as the final number. Try as I might I can't see a revenue or margin driver at this point.

With the recent analyst enthusiasm and share price strength, a miss of 20% could be disastrous for the share price.

For the first time I will be playing a short position with puts on Micron for earnings and would recommend that any large gains in the stock be protected with some out of the money puts with an expiration of June 27, 2014.

Good luck.

Source: Thoughts On Micron Earnings To Be Released After The Close