Reading Between The Lines Of Micron's Q1 Report

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

Micron Technology, Inc. (NASDAQ:MU) just reported an absolutely outstanding quarterly report for its inaugural quarter of 2014. Much noise will be made about the highly anticipated quarter, which was the first MU has had in which results from Elpida were included over the entire duration. Analysts will be predominantly talking about most if not all of the following points for weeks to come:

  • Company-record revenues of over $4 billion
  • Operating Cash Flow of $1.5 billion ($838 million in FCF after subtracting CapEx)
  • In terms of DRAM, a 69% increase in revenues and an improvement of over seven percentage points in gross margin

In addition to those three major highlights, let us not forget about the SK Hynix Wuxi fab that has left every investor in the space wondering when it will return to full capacity. After being asked multiple questions during the Quarterly Conference Call that either mentioned the Wuxi facility or straight up inquired about the thoughts of MU's management on the fab, Micron execs have made it clear that they do not believe that the resumption of production at this facility will cause any major hiccup in their business. President Mark Adams believes that the fab will not recoup all in one shot claiming that production will scale up in a "more measured way than some have prognosticated" and that he is not "expecting any significant shock to the market or the system." Management is adamant that Micron's current structure is operating so that it will not skip a beat when SK Hynix's fab eventually comes back.

Complementary to the aforementioned impressive statistics regarding MU's Q1 performance are a series of facts that will be less advertised but will prove to be crucial in the coming quarters and years for MU. The majority of information below was found on Micron's Q1 Conference Call, unless noted otherwise.

Deleveraging The Balance Sheet

Rule number 1 for many investors after being apprised of a lucrative investment opportunity is to examine the balance sheet of the company in question. MU's balance sheet has been a deterrent for many investors since they first looked into the company at some point in the stock's meteoric rise of 2013. Too much debt, plain and simple. CFO Mark Foster has been mentioning for a few quarters now that he had plans to reduce the leverage of MU's balance sheet by way of convertible notes but seldom was any action taken until Q1FY2014. Since FY 2013 ended on November 28th, Micron has conducted a multitude of convertible note transactions which reduced current potential dilution by 3% to 4% with a net effect of a $243 million reduction in debt. Foster followed up on this by stating that the company will "continue to evaluate additional capital transactions in line with our strategic objectives." Given that the company now boasts $4.4 million in cash and investments and the massive influx of $838 million in the form of free cash flow, the CFO has plenty of cash to carry out his debt reduction plans in coming quarters.

Managerial Foresight

Bearish analysts are waiting for the moment when a memory chip producer will finally cross that line that throws the favorable supply and demand environment into a tailspin by flooding the market with products that demand can't keep up with, resulting in falling prices. Micron has made it clear that it will not be the company that crashes the party. CEO Mark Durcan affirms that MU's DRAM bit production, including Elpida will be "well below" the industry for the calendar year as well as providing some insight as to why Micron continues to forge on with its conversion of the Singapore fab from DRAM to NAND.

"We would need to see a fundamental and significant upward shift in this demand consistently above approximately 40% compared to the current CAGR in the low 30% range (speaking about DRAM) before it would make sense for us to bring on additional wafer output."

Durcan projects NAND bit demand to grow at a CAGR of low to mid 40% for the next five years. This kind of subtle statement is an indicator that management is thinking ahead and thinking efficiently, not only for itself but for the industry as a whole. I know management has been criticized here on Seeking Alpha at times and justifiably so, but this is an astute move made by an executive who is clearly thinking a step ahead which can only bring good fortunes for Micron.

Geographical Diversity

Nobody expected the fire at the Wuxi facility, but then again nobody expects something like that to happen, it was a random, albeit unfortunate occurrence for SK Hynix. Micron is in a position to avoid such a negative backlash on business should something unexpected occur at one of its facilities. MU operates buildings in several different locations across the globe which are all responsible, generally, for different aspects of Micron's business. Its Japanese facilities focus mostly on mobile and graphics DRAM, while computing, server and networking DRAM are produced in Taiwan and the predominant producer of the firm's NOR and NAND is located in Singapore. The Boise, Idaho based company has production being done in America as well, with some of its specialty embedded products being manufactured in Virginia. Lehi, Utah is also the home for Micron facilities. MU's strategic NAND and emerging non-volatile production is located there. While of course a catastrophe like the Wuxi fire will have an impact on Micron's business, the geographical dispersion of facilities will protect the company from suffering the same fate that SK Hynix has been experiencing over the last few months.

M&A Is Still Alive And Well

M&A is one of those things in the market that tends to grab headlines and give stock prices a shot in the arm. For example, look at Micron's share price a year ago. Granted, favorable conditions in the memory market played a large part in the ascension of shares but the Elpida deal put Micron on the map. In the Q&A portion of the call, Mr. Durcan alluded to the fact that Micron is still in the M&A market, even if it is not in the way many people think. Durcan mentioned the acquisition not of other companies, but of two executives. Brian Angell for senior leadership in the controller area and Tom Snodgrass in the system level storage solutions area and Durcan stated that the company will continue to bring in people up and down the organization. This may seem miniscule especially when viewed in the context of everything that has been reported about the last three months for Micron, but it is well documented what good management and innovative leaders can do for a company. This is yet another good sign from Durcan and his team of executives as well as the future for Micron.

Pipeline Products

There were multiple products mentioned in the call that will be major aspects of Micron's future business plan.

  • 20 and 25 nanometer DRAM technology, expected to be introduced in the second half of 2014
  • Low-power DDR$ for the debugging of future systems and platforms
  • 3-D NAND samples expected to be released in late Q1-early Q2

Admittedly, some of these products and their functionality are not my area of expertise, so I will allow my fellow SA contributors like Russ Fischer and Electric Phred break down the exact impact of each.


There are many aspects of Micron's first quarter that will satisfy investors but don't forget about some of the impressive figures and managerial tactics that will propel Micron shares in the future. Of all mentioned above, I expect the deleveraging of the balance sheet to have the largest effect, but certainly all of these are reasons to get behind MU, even with the surge shares have seen over the last year.

Disclosure: I am long MU, . 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.