Micron Technology (NASDAQ:MU) reported Q2, 2016 earnings yesterday. Although the numbers were a mixed bag, the Company suggested a weaker Q3, but reaffirmed that things would begin to improve from the second half of 2016.
Key Highlights From Q2 Earnings
- Average selling prices or ASPs in both DRAM and Non-Volatile products have lowered the second quarter revenue for the Company.
- Approximate 10 percent decline in both DRAM ASP and sales volume.
- Non-Volatile trade revenue declined 6 percent due to a 15 percent plunge in ASP partially offset by an increase in sales volume.
- On a GAAP basis, net loss attributable to Micron's shareholders for the second quarter of fiscal 2016 was $97 million, or ($0.09) per diluted share, compared to the net income of $206 million, or $0.19 per diluted share, for the first quarter of fiscal 2016.
Brace For A Weaker Q3
For the third quarter of 2016, the Company expects to report a gross margin of 16.5%-19% on a non-GAAP basis, which stood at 20% in the second quarter, and at 25% in the first quarter. The loss per share is expected to shift in the downward range of ($0.12)-($0.05).
The Earnings Call Saw The Management On The Back Foot
During the earnings call, things turned, I would say, very interesting as the management faced a barrage of questions concerning the declining gross margin, declining ASPs, and the competitive strength of the Company as it faces an anemic slowdown in PC sales. Sadly, for the most part, the management refrained from giving clear answers to the questions.
On being asked about the increasing working capital requirement and about the rate of cash burn, Ernie Maddock, CFO of Micron Technology said:
If you look at the CapEx discussion we just had where we're saying we're still on track to spend about $5 billion and clearly we've reported on the first half of the year in terms of CapEx spend. I think you've all the information you need to understand within a reasonable estimable range what the cash flow environment will likely look like for the third fiscal quarter.
I strongly believe that the management could have provided a much more accurate answer than this.
When asked about what prompted the management to suggest that the second half of 2016 would be better for the Company's competitive positioning, Mark Durcan, CEO of Micron Technology said:
So there is always a mix piece to the equation that may vary from competitor to competitor, but if you set that aside, I think we've outlined that we think our bit growth and our cost downs, particularly in DRAM starting in Q3, and in NAND later in the quarter are going to be significant relative to what you would expect for an industry average and that's really what drives the fundamental equation relative to relative competitive position irrespective of what market conditions might look like.
Here, I would like to point out that the cost/bit for a DRAM actually went up in Q2 which can be seen below.
At this stage, allow me to put forth some numbers. The Company expects to earn $2.8 billion - $3.1 billion in Q3, in line with the Q2 revenue of $2.93 billion. But if the management was so confident that its cost reduction attempts in DRAM would start yielding results from the third quarter itself, then why the sharp decline in expected gross margin? DRAM, in which the Company is highly confident of lowering the production costs, constitutes approximately 54% of the total revenue. Add to it the fact that the cost/bit for Non-Volatile dropped a significant 12% in the just-reported quarter.
So, if the costs are going to go down in Q3, and the revenue is estimated to remain flat, shouldn't this actually boost the gross margin? The management has already factored in the consistent pressure on the average selling price, which would likely result in increased sales volume, to keep the revenue afloat.
From the earnings call transcript, one can clearly infer that the management remained unsure about the price environment and did not deal directly with the questions concerning the future margins. Apart from repeated attempts to force the cost reduction talks, the management, in my opinion, did not say much about anything, leaving it all to open guesses (and wild speculation).
Disclosure: I/we 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.
Additional disclosure: The Earnings Call Transcript provide much value and reveal important insights regarding the management's approach.