Micron's Guidance Implications

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About: Micron Technology Inc. (MU)
by: Elazar Advisors, LLC
Summary

Micron said a lot at CSFB which should prep us for earnings Dec. 18.

Their call-out of low-end of revenue guidance implies memory pricing dropped meaningfully from last quarter.

If it continues, which they hinted it should, then revenues and margins should continue to drop quarter-to-quarter.

That lack of momentum can continue to weigh on the shares.

Micron (NASDAQ:MU) gave a guidance update when appearing at a recent CSFB conference. Backing into the revenue guide it implies a steep fall-off in memory pricing. If prices continue to fall we think revenues and margins will continue to drop each quarter, meaning no bottom is yet in sight.

Here's what Micron said November 28th which is timely ahead of their earnings December 18th.

"And we saw that overall demand also and the market - overall market environment weakened through the course of the quarter. So, consequently, we had guided in the last earnings call for our revenue range for FQ1 to be $7.9 billion to $8.3 billion and our quarter is not finished yet. It actually finishes tomorrow. But I will share with you how we see it tracking. We expect our revenue for FQ1 to be near the low end of the range that we guided to previously.

And, overall, Micron continues to execute actually very well and we had guided in terms of EPS to $2.95 plus or minus $0.07 in our last September earnings call, through strong execution; we actually see our EPS for FQ1 to be somewhat above the mid-range that we had guided to, mid-range -- midpoint of the range that we are guided to, midpoint being $2.95, we see it somewhat above the $2.95. And I think what’s important to understand is that, that is a very robust level of profitability for the company and the company absolutely continues to execute well."

"Demand Weakened Through The Course Of The Quarter"

The demand trend was headed lower through last quarter and that likely continued this quarter. That makes you think that their low-end of revenue update means this quarter also saw a slowdown through the quarter.

That can set up that they may want to be more conservative going into next quarter's guide when they report Dec. 18.

While bulls want to point out that the company says the demand "drivers" are still in place, actual current demand (as opposed to their drivers) has slowed.

The "drivers" refers to the secular stories like AI and IoT should drive the company's business. But whether it's inventory adjustments or end demand forcing customers to reduce inventory, "demand weakened."

Companies don't always know the exact reason and when things slow. Companies are usually hopeful it's for short-term reasons. But I don't think they really know.

Much of tech saw a slowdown in Q3 so I'm not so sure if Micron's slowdown was just a one-time inventory adjustment. It could be more.

"Demand Less Than Supply Growth in 2019"

At CSFB Micron said,

"...you know it could be that the demand, it would be somewhat less than the supply growth in calendar year ‘19."

They're talking about DRAM and I think that's worse than they previously said on their last earnings call back in September. Here's what they said on their last earnings call:

"So, as we mentioned, we see DRAM to be healthy in Q1. And we definitely see healthy demand supply trend for DRAM beyond that as well, given the well diversified growth drivers for DRAM. So, overall, we see DRAM in balance.

The company went from saying DRAM supply-demand was in balance back in September to now saying at CSFB in late-November that demand could track below supply growth for 2019.

I think that's an important change guiding to a slowdown in their 2019 expectations of their main business, DRAM.

"More Capex Reductions Needed"

You see above Micron is worried about the demand picture slowing. That demand is slowing pricing as we'll show below based on their "low-end" revenue guide at CSFB.

Here's more proof pricing is dropping and Micron is worried about it.

Here's what they said at CSFB:

"And it could be that some of the supply cutback, capex reduction, etc., that have been talked about on the DRAM side, maybe a little bit more is needed as well to further accelerate the overall industry environment.

Micron is saying that supply needs to drop further industry-wide before pricing catches any support. Until then pricing still has risk.

And they saw that in their recent quarter which is why they guided to the low end of their previous revenue guidance for the quarter that's about to be reported.

"Expect our revenue for FQ1 to be near the low end"

The two main drivers to their business are DRAM and NAND. Last quarter (page 29) DRAM made up 70% of their business. That's the big driver to their overall model.

When we modeled out to get to the low end for this quarter, or around $7.9B in revenues, we had to drop our DRAM pricing meaningfully to get there.

Here's our bit growth and ASP history and assumptions. (You can get our full earnings model by joining).

Calendar 2017 2017 2017 2017 2018 2018 2018 2018 2019
Fiscal 2017 2017 2017 2018 2018 2018 2018 2019 2019
Quarter Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Month Feb May Aug Nov Feb May Aug Nov Feb
A E E
DRAM Bit Growth (QTQ) 1.00% 5.00% 5.00% 4.00% 5.00% 0.00% 7.00% 8.00% 6.00%
ASP (QTQ) 21.00% 14.00% 8.00% 5.00% 12.00% 7.00% 0.00% -11.00% -11.00%
4 Quarters Volume 74.5% 50.2% 31.4% 15.8% 20.4% 14.7% 16.8% 21.3% 22.5%
4 Quarters Price 6.3% 36.1% 56.4% 56.4% 44.8% 35.9% 25.8% 6.7% -15.2%
DRAM YOY Rev Growth 80.8% 86.3% 87.8% 72.2% 65.2% 50.6% 42.7% 28.0% 7.2%
NAND Bit Growth (QTQ) 18.0% 17.0% 3.0% 7.0% 11.0% 0.0% 30.0% 1.0% 5.0%
ASP (QTQ) -6.0% 3.0% 5.0% -2.0% -15.0% 7.0% -15.0% -19.0% -20.0%
4 Quarters Volume 51.2% 96.6% 79.2% 52.2% 43.1% 22.3% 54.4% 45.7% 37.9%
4 Quarters Price -12.5% -4.1% 1.7% -0.4% -9.9% -6.4% -24.2% -37.4% -41.1%
NAND YOY Rev Growth 38.7% 92.4% 80.8% 51.8% 33.2% 15.9% 30.2% 8.4% -3.2%

This is what drives their revenue growth so this is what we model to get our assumptions.

We take their bit growth and ASPs sequentially for four quarters and voila you get a year-over-year revenue growth rate.

We get our bit growth expectations straight from their guidance (Page 7). We then back into how many quarters are left in the year to figure out what the bit growth should be in coming quarters. That's the bit growth side of the revenue equation.

From there all you need to figure out is what price change or ASPs gets you to their low-end of $7.9B in revenues.

We needed to drop DRAM ASPs 11% sequentially to get there.

In our last report we backed into their 2019 ASP guide to probably be looking for down 14-15% for the year. But if DRAM is going to be down 11% each quarter that 14%-15% for the year is way too low.

Micron is going to have to make some downward adjustments vs. their previous internal outlook.

My guess is they are going to need to be more cautious on 2019 based on pricing tracking much lower than their original expectations.

I believe that should come out in their upcoming earnings call.

The low end of their revenue guide at CSFB was an initial hint to that.

Conclusion

Micron's secular story comments as always point to multiple end-market drivers. But parsing between their words and guidance you can see pricing is dropping fast. DRAM pricing is the most important driver to the Micron earnings model. If this continues you will continue to get down sequential revenues and margins going forward. Until that turns it's tough to buy given the continuing slowing fundamentals.

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