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Micron (MU) Q3 Earnings and Revenues Top Estimates, Fall Y/Y

Zacks Equity Research

Micron Technology, Inc. MU reported third-quarter fiscal 2019 non-GAAP earnings per share of $1.05, which surpassed the Zacks Consensus Estimate of 75 cents but were lower than the year-ago quarter’s figure of $3.15.

Micron’s revenues of $4.8 billion in the quarter under review exceeded the Zacks Consensus Estimate of $4.66 billion but dropped around 33% on a year-over-year basis.

Industry oversupply and higher-than-expected decline in DRAM and NAND pricing remain concerns. Moreover, restriction on sales to Huawei negatively impacted its DRAM and NAND revenues.

Although the company is reporting a drastic year-over-year fall in revenues and earnings, its better-than-expected third-quarter fiscal 2019 results coupled with an improved outlook for DRAM are positives.

With progress in customer inventory adjustments in most of its end-markets, the company expects bit demand for DRAM to return to healthy year-over-year growth in the second half of 2019. Micron anticipates a strong uptick in DRAM bit shipments for the cloud, graphics and PC markets during the fiscal fourth quarter and thereafter.

Micron Technology, Inc. Price, Consensus and EPS Surprise

Micron Technology, Inc. Price, Consensus and EPS Surprise

Revenue Details

DRAM revenues of $3 billion, accounting for 64% of total revenues in the quarter under discussion, plunged 45% year over year and 19%, sequentially. Sequentially average selling price (ASP) of DRAM approached 20% while shipment quantities were flat. Bit shipments in DRAM were adversely impacted by the Huawei ban.

NAND revenues of $1.5 billion, representing 31% of the total top line, were down 25% on a year-over-year basis and 18% quarter over quarter. While NAND ASP decreased in the mid-teen’s percentage band, shipment quantities contracted in the mid-single digit range sequentially. The timing of demand from a large customer benefited NAND bit shipments. When adjusted for Huawei, bit shipments came in better than the company’s prediction owing to solid component sales. High-value solutions contribute to more than two-thirds of NAND revenues.

Business unit wise, revenues of the computing and networking business (CNBU) unit deteriorated 48% from the year-ago quarter and 13% sequentially to $2.1 billion. Weak pricing across major market segments remained a headwind. However, normalized customer inventory levels — particularly in graphics and client — expanded shipment volume in the quarter.

Revenues from the Mobile Business Unit (MBU) of $1.2 billion declined 33% on a year-over-year basis and 27% sequentially due to lower shipments to Huawei. Adverse pricing and DRAM volume were dampeners. Nonetheless, sturdy growth in managed NAND products led to a skyrocketing 200% increase in bit shipments.

The Embedded Business Unit revenues logged $700 million, down 22% from the year-ago quarter and 11% from the previous quarter due to softer pricing, inventory adjustments in the consumer segment and macroeconomic downturns.

Revenues from the Storage Business Unit (SBU) comprising SSD NAND components and 3D XPoint totaled $813 million, down 29% on a year-over-year basis and 20% sequentially due to competitive pricing. Moreover, large one-time sale that the company undertook in the year-ago quarter induced a tough year-over-year comparison on component volumes.

Margins

Micron’s non-GAAP gross profit of $1.88 billion slumped 60% from the prior-year period. Non-GAAP gross margin fell from 60.9% in the year-ago quarter to 39.3%, attributable to lower pricing of both DRAM and NAND. Notably, DRAM and NAND production cost reductions were also not enough to outweigh the impact of a steep decline in prices on the company’s gross margins.

Moreover, IMFT related underutilization charges had a negative impact of nearly 200 basis points.

Micron’s non-GAAP operating income tanked 72.6% year over year to $1.1 billion. Non-GAAP operating margin fell from 51.5% in the prior-year quarter to 23.2%.

Balance Sheet and Cash Flow

The company exited the quarter with cash and short-term investments of $6.689 billion compared with $7.533 billion at the end of the preceding quarter.

Micron’s long-term debt reduced to $3.563 billion from $3.604 billion in the prior quarter.

The company generated operating cash flow of $2.7 billion compared with $3.44 billion in the previous quarter. Adjusted free cash flow during the reported quarter was $500 million, down from $1 billion in the sequential quarter and $2.2 billion in the year-ago period.

During the quarter under consideration, the company repurchased 4 million shares worth $157 million under the authorized buyback program. The company bought back shares worth $702 million in the February quarter and around $1.8 billion in the November quarter. So far this fiscal, the company repurchased 67 million shares for $2.7 billion.

Outlook

Management is optimistic that 5G adoption, advent of the foldable phones and advanced cameras will drive growth for the company’s products.

As CPU shortages begin to improve, DRAM bit shipments are likely to return to growth curve in the PC market. In automotive, while slowdown in global auto sales is a woe, rising demand for in-vehicle infotainment and advanced driver assistance systems is likely to steadily drive content growth.

Micron has slightly raised its outlook for DRAM bit demand while keeping the supply forecast intact. For 2019, DRAM bit demand is envisioned to surge in mid-teens percentage (earlier low to mid-teens) and bit supply is likely to grow by a mid-to-high teens percentage.

Coming to NAND, there is a glut in the market with surplus supply due to industry’s transition from 2D NAND production to 3D NAND. NAND bit demand is still assumed to grow in mid-30s percentage.

NAND bit demand is inversely related to price declines. However, due to the ongoing transition of SSD portfolio, NAND shipment growth in the fiscal fourth quarter is likely to be limited. Nonetheless, management is upbeat that demand elasticity will lead to stabilization in the NAND market in the second half of 2019.

However, as inventory levels for suppliers remain elevated, the company believes that in order to draw a demand-supply balance, further cuts in CapEx and bit supply will be required. All these prompted the company to tighten its capital expenditure budget for fiscal 2019 to approximately $9 billion from the past estimate of $9-$9.5 billion.

Moreover, to tackle the market congestion, the company announced that it will continue to idle 5% of its DRAM wafer starts. Moreover, it is slashing its NAND chip wafer starts by about 10%, up from 5% announced earlier.

For the fiscal fourth quarter, the company guided revenues of $4.3-$4.7 billion. The mid-point of $4.5 billion is above the current Zacks Consensus Estimate of $4.48 billion.

The company projects earnings in the range of 38-52 cents per share for the fiscal fourth quarter, which is significantly below the current Zacks Consensus Estimate of 59 cents.

Micron expects non-GAAP gross margin of 29% (+/- 150 bps) for the fiscal fourth quarter. Operating expenses on a non-GAAP basis are likely to be $785 million (+/- $25 million).

Zacks Rank and Stocks to Consider

Currently, Micron has a Zacks Rank #5 (Strong Sell).

A few better-ranked stocks in the broader technology sector are eGain Corporation EGAN, Rosetta Stone RST and j2 Global, Inc. JCOM, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for eGain, Rosetta Stone and j2 Global is currently projected at 30%, 12.5% and 8%, respectively.

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