Micron Technology (NASDAQ:MU) eked out a small earnings beat of 37 cents on revenues of $3.6 billion for their 4Q report released on October 1. These were against consensus of 32 cents and $3.56 billion. The company guided down for 1QE 2016 with an EPS estimate of 20 to 26 cents. This report left sell-side analysts scrambling to lower their price targets and lower their estimates for the 1Q and FY 2016. Most did this while still sounding positive and debating whether an earnings "trough" will happen in the November or February quarter. The stock has performed surprisingly well after the earnings call.
So what did the analysts say? I read a lot of Wall Street research and think it's helpful to summarize the first six reports that have crossed my desk:
| 1Q est. | 2016 est. | 1Q '16 revenue (billions) | 2016 revenue (billions) | Price Target | Mention 3D ? | |
|---|---|---|---|---|---|---|
| Morgan Stanley | .24 | 1.08 | 3.546 | 14.516 | 16 | no |
| Credit Suisse | .23 | 1.20 | 3.475 | 14.720 | 25 | no |
| Bernstein | .26 | 1.69 | 3.536 | 15.658 | 25 | no |
| Goldman Sachs | .24 | 1.15 | ? | 13.803 | 15 | no |
| Stifel | .23 | 1.88 | 3.500 | 15.300 | 23 | no |
| Deutshe Bank | .23 | 1.30 | 3.473 | 15.781 | 20 | no |
If I were CFO Ernie Maddock, the management team, investor relations or the board of directors, I would detect that something is wrong with the company story to have such a huge dispersion in the numbers above. As such things go, this is a pretty wide spread by knowledgeable bulge bracket firms.
If I were the analysts, I'd be ashamed I hadn't mentioned two of the biggest products to come down the memory turnpike in quite a while: 3DNAND and 3DXpoint. Both have been developed with processor powerhouse Intel (INTC) which is Micron's partner in their IMFT joint venture. Management dropped some interesting tidbits (see below) which analysts should have picked up. The analysts, who are the only ones allowed to ask questions on the earnings calls, could have done us a huge favor by drilling in to determine how much of the staggering $1.8 billion in quarterly capex could be attributed to these new technologies or if they had inquired about the product ramps, etc.
So what about the 3D products? In his remarks in the body of the call, CEO Mark Durcan made this powerful statement which few of the analysts picked up and followed up on:
We are ahead of our previously communicated schedule on both the 20 nanometer DRAM and 3D NAND conversions. We expect 20 nanometer to represent more than half of our DRAM output in fiscal year 2016 and our 3D NAND is on track to be a majority of our NAND output by the end of the calendar year 2016. An important milestone for our 3D NAND progress is beginning tool installation in the Singapore Fab by the spring of 2016 and we are on track to meet that timeline.
To my ears, this was the most important section of the entire call. I take it to mean that the 60% of revenues derived from DRAM will be fixed during 2016 and believe that will mean a margin jump of 10-plus points back to normal levels. On the 40% NAND part of the business, 3DNAND will be in full flower by the end of next year. And since Hynix and SanDisk (SNDK)/Toshiba have yet to demo a product, this will be, at that point, a duopoly business between Samsung (OTCPK:SSNLF) with their VNAND and Micron/Intel with their 3D offering. Certainly, Hynix and SanDisk will get a product out, but they will be too new with little real world experience or reliability testing within this timeframe. I subscribe to the view of those who feel Samsung is having trouble with their VNAND and that ultimately the floating gate approach of Micron/Intel will prove superior to the charge trap approach of Samsung.
This earnings call was the first time, since the abruptly curtailed Micron analyst day, to tackle the management team on the record. At analyst day, CEO Mark Durcan made this amazing statement on 3DXpoint:
We will have a similar relationship with this 3D XPoint memory but we will also be developing our own sockets for owner applications in areas that are maybe of less interest to Intel and in some cases in competition with Intel. In terms of how quickly will this market grow and how quickly we'll become significant, I think that is hard to know exactly today. But it could easily be. In the 2018 timeframe could easily be of the same order of magnitude as our DRAM businesses in that timeframe. So maybe not the same size maybe half the size in 2018 but it will be a significant additive revenue stream to Micron at the time.
This is quite a guidepost. Micron currently derives 60% of its revenue from DRAM, or about $9.6 billion. Durcan is saying 3DXpoint could be a $4.8 billion business in 2018.
Here's the back of my envelope: Micron finishes its planar 20nm DRAM size reduction and its 16nm NAND reduction in 2016, restoring our existing base business to more solid profitability. 3DNAND grows revenue and generates duopoly pricing and attendant excellent margins during 2016 and 2017. During that period Micron should once again be generating $2 to $3 in earnings per share. Then in 2018 3DXpoint has ramped to the $4.8 billion number mentioned above. Since this is effectively monopoly pricing I believe they will achieve Intel-esqe gross margins of 60%-plus and will easily throw another $1-$1.50 to the bottom line. Presto: A Micron Technology generating $3 to $4.50 in EPS in the 2018 time frame.
So....why did none of the six analysts listed in the table above probe deeply into the 3D picture? I don't know since it's consuming ravenous amounts of capex right now and is probably also inflating the R&D and SG&A budgets as they ramp both products with no revenue. The analysts did us a disservice on the call by remaining mostly mute on this important subject.
Evasive Answers. Management is not going to get away with their evasive answers in Q&A sessions. It annoys analysts and may spark a firestorm with activist hedge fund investors who have relied on chripy management presentations and stayed in the stock for this year's 50%+ stock price slide. Here are some excerpts from the earnings call with the [speaker] in brackets:
- [Durcan] "...we can't really provide too much color on that or else it would sort of negate why we chose to go to this more broad-based guidance across the company's revenue stream."
- [Maddock] "...So without being overly specific, I think the best thing I can do is refer you back to that curve and the gross margin guidance we have provided and you can sort of draw the picture from there."
- [Maddock] "I can't really comment on that,..."
- [Durcan] "So your right, we're going to play this by ear...."
- [Durcan] "It's difficult to necessarily forecast, because we'll keep adopting our overall approach as the market conditions weren't. "
- [Adams] "Unfortunately we are going to probably point on that with the revenue qualification."
- [Maddock] "...we can't tell you whether it's a headwind or a tailwind ...."
Kipp Bedard, VP of investor relations, has said the company benchmarks Sandisk. Micron management would do well to listen to SanDisk's CFO Judy Bruner who does a wonderful job answering most questions, even in difficult situations. Ernie should listen to every presentation made by Stacey Smith, Intel's CFO over the past several years. Stacey presides over a business immensely more complex than Ernie's and always imparts good information on his business. I hope Ernie will spare us Stacey's haiku.
Micron needs to figure out that not everything is secret. They should proudly provide regular, say monthly, progress reports on stock repurchases. They should get back to filing 8-Ks, as would be advisable, on their convertible retirements. They can't just announce the Automata Processor and leave shareholders in the dark for more than a year, even as universities and researchers are being well briefed. Same with the Hybrid Memory Cube.
Russ Fischer. All of us here on Seeking Alpha owe a HUGE debt of gratitude to Russ Fischer who was the first writer to pound the table hard about Micron. Many of us benefited by following his exit (late in my case) from the stock last year. Unfortunately, Russ has had a series of strokes and has spent the past two weeks in the ICU. His daughter has given me permission to post this and the link to a Caring Bridge site where his condition is updated and well wishers can leave messages. I wouldn't send him anything or bother him at the hospital. Just leave a message on Caring Bridge that you are one of the SA faithful and wish him well. He's on the mend and has already asked to be logged onto his Scottrade account and has lowered his blood pressure by reading research on Micron and Intel. We can expect him to post about 100x opportunities in drug and medical stocks based on his recent journey.
Conclusions. Micron is in an earnings trough, for sure. I tend to agree with those analysts who think the nadir may be the February quarter. As is clear from my discussion on the 3D products, I believe the acceleration out of the trough may be neck snapping. Management needs to get their act together on these earnings calls - everything is not a deep dark secret. Analysts need to push management and try to ask them answerable questions and push them really hard when they don't get answers.
