Micron Technology May Have A DRAM Yield Problem - Does It Matter?

| About: Micron Technology (MU)

Summary

Micron Technology noted that DRAM revenues in its most recent quarter increased 22%, but 21% was from ASP increases while only 1% was from an increase in bit shipments.

A recent news article notes that Micron is facing a rough transition to its newest technology node that is resulting in low yields.

While the low yields will impact bit shipment growth, Micron's revenues are being influenced by increased DRAM ASPs because of low bit shipment growth.

CFO, VP Finance, Ernie Maddock noted in Micron Technology's (NASDAQ:MU) Q2 2017 conference call:

"DRAM revenue increased 22% compared to the prior quarter as the result of a 1% increase in bit shipments and a 21% increase in ASPs... DRAM represented 64% of our total revenue."

Moving on, he stated:

"Our technology transitions are on track and will continue to provide benefit to the Company over the next several quarters. We're driving deployment of 1X DRAM with meaningful output expected by the end of the fiscal year. We expect 1X nanometer DRAM to build on our success with 20 nanometer DRAM which is deployed throughout our portfolio and rated number one in quality by multiple enterprise OEM customers."

Now, a recent article in DigiTimes reported that:

"Micron Technology has faced a rough transition to 1xnm process for the manufacture of DRAM memory due to low yield rates, according to a Chinese-language report by Taiwan's Central News Agency."

Although Micron Technology has not commented on the article, it begs the question that with no DRAM capex spend in 2016, does it really matter whether MU's yields may be negatively impacted by the transition?

Table 1 below shows that, in fact, there has been almost no increase in DRAM capacity over the past two years. In fact, total DRAM wafer capacity decreased 3% between 2014 to 2016.

DRAM wafer capacity (12" eq, '000 wpm)
2014 2015 2016 2017
SEC 4,380 4,530 4,455 4,670
Fab11 540 480 480 480
Fab13 1,470 1,440 1,320 1,320
Fab15 2,040 2,040 2,040 2,040
Fab16 330 360 30 0
Fab17 0 210 585 830
SK Hynix 3,030 2,901 2,880 3,185
M10 1,470 1,440 945 945
C2(Wuxi) 1,545 1,440 1,440 1,440
M14 0 21 495 800
Micron 4,335 4,104 4,044 4,044
Manassas 489 384 384 384
Taoyuan (Taiwan, Inotera) 1,386 1,320 1,320 1,320
Hiroshima (Japan, Elpida) 2,460 2,400 2,340 2,340
Other 1,242 1,200 1,200 1,212
Total wafer capacity 12,987 12,735 12,579 13,111
KDB Daewoo Securities Research

Table 2 shows how bit growth in Gb increased at these DRAM companies.

Table 2 - DRAM supply (millions of Gb)
2014 2015 2016 2017
SEC 20,264 27,461 34,349 41,407
SKHynix 13,910 17,234 21,793 27,717
Micron 11,299 11,310 14,094 16,209
Other 2,121 2,308 2,569 2,964
Total wafer capacity 47,594 58,313 72,805 88,297
KDB Daewoo Securities Research

Investor takeaway

Overall I have not been able to identify much process migration among the three DRAM manufacturers. Why? Because it costs money to transition to smaller chip dimensions. And why should they, when increases in ASPs make up the vast majority of revenues - in MU's case 21% increase in revenues from ASPs and 1% from bit shipments.

In other words, process migration is less important (not unimportant) for DRAMs at this period of tight supply and high ASPs, while Micron's capex spend in the near term should focus on 2D to 3D NAND migration and production of 3D XPoint.

Case in point - industrywide, DRAM average selling prices grew 49% in 2016, from US$2.41 in April 2016 to US$3.60 in January 2017. ASPs grew another 21$ in Q1 2017. MU's stock has surged as a result.

For 2017, I see a continuation in DRAM price increases due to little capacity growth, limited process migration to 1xnm, and stocking of DRAMs by device manufacturers. DRAM manufacturers instead are spending Capex on migration from 2D to 3D NAND. Nevertheless, DRAM bit grow will be above 20% in 2017.

Mobile DRAM will grow despite slow smartphone shipments as more smartphone companies are adopting 3-4GB DRAM while top end content of 8GB will grow strongly.

PC DRAM shipments had a surge at the end of 2016 propelled by tight supply as DRAM makers shifted to mobile DRAM earlier in the year. This resulted in higher PC DRAM margins and the migration to these devices spurred by the growth in 8GB (4GB + 4GB) installs.

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.

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Tagged: , Semiconductor - Memory Chips
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