Micron's Earnings Confirm That Market Dynamics Are Improving

| About: Micron Technology (MU)
This article is now exclusive for PRO subscribers.

Micron Technology (NASDAQ:MU), one of the leading manufacturers of memory products (DRAM, NAND, and NOR), witnessed an 8% decline in revenues in calender year 2012 on account of persistent weakness in the memory market. The memory market is highly cyclical in nature and is currently seeing excess supply. The slow demand on account of macro headwinds combined with intense competition further put pressure on selling prices which in turn impacted Micron’s bottom line. However, judging by Micron’s Q2 2013 earnings release on March 21, it looks like the memory market fundamentals are improving.

Owing to strong growth in NAND and DRAM products, Micron reported $2.1 billion in its Q2 2012 revenues, a 13% q-o-q and a 3% y-o-y increase. Additionally, gross margins grew from 12% in Q1 2013 to 18% in Q2 2013 and operating loss declined to $23 million compared to $97 million in the previous quarter. With its inventory declining by more than $350 million y-o-y over the past 12 months, Micron claims that the supply dynamics in the memory market are improving.

The company remains committed to building a large and diversified memory business. With declining inventory across its product portfolio, rising content growth across devices and an industry shift to higher growth markets -- mobile, server, networking enterprise and embedded -- we believe the memory market can revive this year onward. With its acquisition of Elpida Memory, which is expected to complete by the first half of 2013, we believe Micron is in a good position to leverage growing demand for memory products.

Increasing Strength in DRAM as Demand From Alternate Markets Rises

Micron’s DRAM revenues increased by ~25% on an annual as well as sequential basis primarily on account of 38% higher bit sales, which were partially offset by a 10% sequential decrease in DRAM prices. Strong operational performance and more volumes from Inotera led to higher DRAM production in the quarter. In January ’13, Micron entered into a new supply agreement with Inotera based on which it agreed to purchase all of Inotera’s manufacturing output beginning 2013 as opposed to half of Inotera’s output as per the earlier agreement.

The sequential decline in DRAM’s average selling price was due to a higher concentration of sales in the PC market which have lower per bit selling prices as well as lower per bit costs compared to other DRAM products. However, Micron’s quarter-to-date average selling prices for DRAM are up a few percentage points whereas its projected bit costs are down mid to high single digits.

While PCs continue to account for the majority of global DRAM sales, rising contribution of alternate markets including mobile, tablets, servers, automation and networking contribute to higher DRAM shipments both via rising volumes as well as increasing content in these devices. We believe a shift from PCs to alternate growth segments will help drive demand as well as stabilize declining DRAM prices in the future.

Micron claims that currently 35% and 17% of the bits produced in DRAM are consumed by PCs and networking markets, respectively. While PC growth has slowed down, DRAM bit shipments in networking were up 20% compared to Q1 2013 and we estimate the proportion to rise in the future.

Elpida’s Acquisition Will Increase Micron’s Share In Mobile DRAM

Micron’s acquisition of Elpida Memory is expected to make it the second largest DRAM manufacturer behind market leader Samsung (OTC:SSNLF). Elpida’s acquisition will increase Micron’s overall trade capacity by almost 45% which will enable it to leverage future growth in the memory market. Though the additional capacity will be initially used only for DRAM production, the company has the flexibility to support future NAND production with the added capacity.

Elpida has a strong presence in the mobile DRAM market, which is one of the fastest growing market for DRAM products. Micron currently generates less than 10% of its revenue from mobile DRAM, but with Elpida on board the proportion can significantly increase in the future. Research firm iSuppli forecasts the combined share of mobile handsets and tablets in the DRAM market to reach 26.7% by the end of 2013, almost double from 14.1% in Q1 2012.

Higher Volume and Rising Content in SSD's and Mobile Devices to Drive NAND Demand

Micron’s NAND revenue grew by 8% sequentially primarily due to increased production from higher output of 20 nm devices, as average NAND selling prices were flat compared to Q1 2013. The company claims that it is witnessing stabilizing demand-supply balance as rising shipments of SSDs (40% q-o-q increase in sales), smartphones and tablets fuel demand for NAND products.

According to iSuppli, the tablet consumption of NAND flash is estimated at 2.3 billion gigabytes (Gb) in 2011, an increase of four times from 476.8 million Gb in 2010, and NAND shipments for tablets are forecast to reach 12.3 billion Gb by 2014.

For the current quarter, while Micron anticipates growing demand for SSDs and smartphones to help gain momentum in NAND production and demand, its estimates the trade NAND average selling price to decline by mid single digit. A shift to high density product mix in both NAND and embedded solution business segments will lower both the selling price and cost per Gb.

Q3 2013 Outlook

  • Trade NAND selling price and cost per bit will be down mid-single digit
  • NAND bit production is expected to be up mid to high single digit
  • Selling prices for DRAM products will increase by mid-single digit; projected cost per bit to decline by mid to high single digits
  • Projected DRAM volume will increase by a few percentage points
  • NOR revenue and costs expected to be relatively flat
  • S,G&A expenses to be between $135 and $145 million
  • R&D expenses to be between $225 and $235 million
  • Total capex for the fiscal year to be between $1.6 and $1.9 billion

We are in the process of updating our price estimate of $6.53 for Micron Technology.

Disclosure: No positions.