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Micron's (MU) Q2 Earnings Beat Estimates, Q3 Guidance Solid

Zacks Equity Research

Despite the business disruptions caused by the coronavirus outbreak, Micron MU reported stronger-than-anticipated results for second-quarter fiscal 2020 on Mar 25. The company’s fiscal second-quarter non-GAAP earnings per share of 45 cents beat the Zacks Consensus Estimate by 18.4% and surpassed its guided range of 35 cents (+/- 6 cents) as well.

Moreover, quarterly revenues of $4.8 billion outpaced the consensus mark of $4.6 billion. The memory chip maker’s revenues also came in line with the higher-end of management’s guided range of $4.5-$4.8 billion.

Nonetheless, top and bottom lines both declined on a year-over-year basis. While revenues fell 17.8%, non-GAAP earnings slumped 73.7%.

Micron Technology, Inc. Price, Consensus and EPS Surprise

Micron Technology, Inc. Price, Consensus and EPS Surprise

Micron Technology, Inc. price-consensus-eps-surprise-chart | Micron Technology, Inc. Quote

Positive Near-Term Demand Scenario

Although the company suffered a significant year-over-year fall in revenues and earnings, management’s positive commentary on the current-quarter performance is boosting investor sentiment.

During the earnings conference call, Micron president and CEO Sanjay Mehrotra stated that the company stood resilient to the coronavirus impact on global economic and business activities. The memory chip maker revealed that it has ample inventory to counter the near-term supply-chain disruption caused by the COVID-19.

Furthermore, the company is witnessing stronger memory chip demand from PC manufacturers and data-center operators. In its conference call, Micron stated that coronavirus-led global lockdown is spurring demand for PCs and notebooks as more and more workers and students work and learn from home.

The work-and-learn-from home necessity is also driving demand for cloud storage. Furthermore, the lockdown has enhanced the usage of online services globally. Therefore, data-center operators are enhancing their cloud-storage capacities to accommodate the need of growing demand for cloud services.

Nonetheless, the global lockdown is thwarting demand for smartphone, automotive and consumer electronics. The company now projects demand from the aforementioned categories to remain below prior expectations during the second-half of fiscal 2020.

Citing the change in the near-term demand scenario, the company has moved its memory supply from smartphone to service the rising demand in data-center and PC markets.

Furthermore, the company stated that Chinese smartphone production volumes have begun to rebound. Also, two of its factories in Malaysia, which were completely shutdown, are now operational and running production on a limited basis.

Now, let’s discuss the second quarter performance.

Revenue Details

DRAM revenues of $3.1 billion, accounting for 64% of total revenues in the fiscal second quarter, slid 26% year over year and 11% sequentially. Bit shipments rose more than 20%, year on year, but were down nearly 10% sequentially. On a sequential basis, ASP was flat.

NAND revenues of $1.5 billion, representing 32% of the total top line, were up 9% on a year-over-year basis and 6% quarter on quarter. While NAND ASP increased in the upper single-digit’s percentage band, shipment quantities declined in low-single-digit percent range sequentially. Shipments grew approximately 20% year over year.

Business-unit wise, revenues of the computing and networking business (CNBU) unit deteriorated 17% from the year-ago quarter and 1% sequentially to $2 billion. The CNBU segment includes revenues from 3D XPoint. Excluding revenues from 3D XPoint, CNBU revenues declined 7% sequentially due to softer sales in the PC market.

Revenues of $1.3 billion from the Mobile Business Unit (MBU) dropped 22% on a year-over-year basis and 14% sequentially.

The Embedded Business Unit revenues logged $696 million, down 13% from the year-ago quarter and 5% from the previous quarter.

Revenues from the Storage Business Unit (SBU) comprising SSD NAND components and 3D XPoint totaled $870 million, down 15% year over year and 10% sequentially. Excluding 3D XPoint sales, SBU revenues increased 9% sequentially.

Margins

Micron’s non-GAAP gross profit of $1.4 billion slumped 52.3% from the prior-year period. Non-GAAP gross margin slipped from 50.2% in the year-ago quarter to 29.1%. Underutilization charges at the Lehi Lab had a negative impact of nearly 295 basis points.

Micron’s non-GAAP operating income of $542 million declined from the year-ago quarter’s $2.1 billion. Non-GAAP operating margin contracted from 36.2% to 11.3%.

Balance Sheet and Cash Flow

The company exited the reported quarter with cash and short-term investments of $7.5 billion compared with the $7.6 billion recorded at the end of the prior quarter.

Micron’s long-term debt of $5.2 billion remained flat quarter on quarter.

The company generated operating cash flow of $4 billion during the first half of fiscal 2020. Adjusted free cash flow during the first six months of fiscal 2020 is $149 million.

The company repurchased shares worth $159 million in the first half of fiscal 2020.

Guidance for Q3

Buoyed by better-than-expected quarterly results, Micron provided an upbeat guidance for the fiscal third quarter. The company anticipates revenues of $4.6¬-$5.2 billion (mid-point $4.9 billion) for the quarter. The Zacks Consensus Estimate for fiscal third-quarter revenues is pegged at $4.86 billion.

For the fiscal third quarter, Micron expects non-GAAP gross margin of 31% (+/- 150 bps). Higher underutilization charges due to contracted production volumes are likely to be a dampener.

Operating expenses on a non-GAAP basis are likely to be $825 million (+/- $25 million).

Earnings per share are anticipated to be 55 cents (+/- 15 cents). The consensus mark is pegged at 57 cents.

Zacks Rank & Stocks to Consider

Micron currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader technology sector are Inphi Corporation IPHI, Ultra Clean Holdings, Inc. UCTT and SAP SE SAP, each sporting 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 Inphi, Ultra Clean Holdingsand SAP Systems is currently estimated at 37.6%, 14% and 9.5%, respectively.

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