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Micron's Earnings Beat, Swings to Profit

Zacks Equity Research

Micron Technology Inc. (MU) reported third quarter fiscal 2013 earnings per share of 4 cents beating the Zacks Consensus Estimate of 3 cents per share. After posting losses in the past seven quarters, this quarter’s beat seems to be a sigh of relief for Micron. The beat can be attributed to favorable memory market condition that led to higher shipments and improved average selling price (ASP). Nevertheless, lackluster PC demand and macro uncertainty remained headwinds.


Micron reported revenues of $2.32 billion, up 6.7% year over year and 11.5% sequentially. The quarter’s revenues came above the Zacks Consensus Estimate of $2.26 billion. The improvement was mainly due to higher DRAM and NAND shipments.

DRAM revenues grew 23.0% from the prior quarter aided by 6.0% hike in sales volume and 16.0% surge in ASP. NAND sales grew 7.0% sequentially due to an 8.0% increase in ASP. NOR flash sales remained flat sequentially.

Higher DRAM ASP was the effect of balancing supply with slowing PC demand. NAND fundamentals improved due to continuous growth in SSD sales.

Operating Results

The company's gross margin for the third quarter was 24.0%, up from 10.8% in the year-ago quarter. The margin expansion was primarily due to higher sales of NAND flash and DRAM chips, better ASPs as well as lower cost of production for DRAM products. DRAM bit costs decreased 5.0% from the prior quarter, primarily due to higher concentration of lower cost products from Inotera (In Jan 2013, Micron entered into an agreement with Inotera, a DRAM memory foundry services provider, under which Micron will purchase all of Inotera’s DRAM chips).

Selling, general and administrative (SG&A) expenses decreased 18.6% year over year to $127.0 million. Research and development (R&D) expenses declined 2.2% year over year to $226.0 million. Operating margin was 6.4% versus (8.7%) in the year-ago quarter. Operating margin improved on higher revenues and lower costs.

Micron recorded net earnings of $43.0 million or 4 cents per share compared to a net loss of $320.0 million or 32 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Micron ended the third quarter with cash and short-term investments of $2.55 billion, up from $2.23 billion in the previous quarter. Receivables were $1.50 billion, up from $1.23 billion in the previous quarter. Inventories increased 0.6% from the prior quarter to $1.73 billion.

The company had $3.62 billion in long-term debt, down from $3.65 billion in the prior quarter. Cash generated from operations was $624.0 million, significantly up from $236.0 million in the prior quarter. Capex was $235.0 million.


Micron did not provide any specific guidance for revenues or earnings. However, it mentioned its optimism for the end markets such as mobile, server, networking enterprise and embedded based on strong demand for its memory chips. Micron is also confident of witnessing supply/demand balance for DRAM and NAND memory chips in 2013 and 2014. The chip maker expects industry-wide DRAM wafer capacity to get reduced, which will bring down the supply, ultimately boosting ASP. Micron is confident about growing demand for NAND due to increasing use of solid state drives in smartphones.

For the fourth quarter 2013, Micron expects DRAM ASPs to be up mid-to-high single-digits from the prior quarter. Projected bit costs are expected to be flat sequentially and projected production volume to be up in high single-digits. NAND ASP is expected to be down mid single-digits, sequentially. Bit costs are expected to be down high single-digits, while bit production is expected to be up high single-digits.

Revenues from NOR, which have been more or less consistent over the past few quarters, are likely to decline approximately 30% in the fourth quarter due to the rapid transition of the wireless business to NAND-based solutions.

Management also expects SG&A expense between $135.0 million and $145.0 million. Research and development expense is expected to be between $230.0 million and $240.0 million.

Micron also confirmed that it has made substantial progress in securing the necessary approvals related to the Elpida acquisition and is hoping to close the transaction by the end of fourth quarter.

Our Take

Micron’s third quarter results were impressive as it reversed the loss story of the past seven quarters. Both the top and bottom lines were ahead of the Zacks Consensus Estimate. Moreover, management’s upbeat view on the DRAM and NAND market fundamentals was the key driver for the quarter.

We believe tight expense control, manufacturing efficiency and secular shift toward mobile DRAM will benefit Micron’s fundamentals in the coming quarters.

The much awaited closure of Elpida’s acquisition is likely to boost Micron’s market share in the memory market. However, it may not be easy for Micron to capture share from SanDisk Corp. (SNDK), a key player in the NAND zone. Nevertheless, with support from Apple Inc. (AAPL) and Intel Corp. (INTC), its prime NAND customers, the situation could be in Micron’s favor going forward.

Currently, Micron has a Zacks Rank #2 (Buy).

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