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Micron's (MU) Shares Gain on Q3 Earnings Beat, Upbeat Guidance

Zacks Equity Research

Micron’s MU shares rallied nearly 6% yesterday during the extended trading session after the company reported better-than-expected results for third-quarter fiscal 2020.

The company’s fiscal third-quarter non-GAAP earnings per share of 82 cents beat the Zacks Consensus Estimate by 5.1% and surpassed its guided range of 75-80 cents as well. Nonetheless, non-GAAP earnings registered a year-over-year decline of 21.9%.

Quarterly revenues of $5.44 billion outpaced the consensus mark of $5.32 billion and increased 13.6% from the year-ago quarter’s $4.79 billion. The memory chip maker’s revenues also came in line with the higher-end of management’s guided range of $5.2-$5.4 billion.

Micron Technology, Inc. Price, Consensus and EPS Surprise

Micron Technology, Inc. Price, Consensus and EPS Surprise

Positive Near-Term Demand Scenario

Apart from the upbeat fiscal third-quarter performance, 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 pandemic’s impact on global economic and business activities. The memory chip maker revealed that it has ample inventory to counter the near-term supply-chain disruptions caused by the pandemic.

Furthermore, the company is witnessing stronger memory chip demand from data-center operators. In its conference call, Micron stated that the work-and-learn-from-home necessity is spurring demand for cloud storage. Furthermore, the lockdown has enhanced the usage of online services globally. Therefore, data-center operators are boosting their cloud-storage capacities to accommodate the growing demand for cloud services.

Meanwhile, the global lockdown is thwarting demand for smartphone, automotive and consumer electronics. Per the company, analysts forecast the end-unit sale of smartphones, autos, and PCs to remain significantly lower than the pre-coronavirus levels.

Nonetheless, the company projects demand from smartphone and consumer-electronics makers to keep improving and boost inventory consumption across the supply chain. In the PC category, consumer demand has softened, while demand for enterprise laptops and Chromebooks has shot up.

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

Furthermore, the company noted that majority of its fab and assembly facilities operated at full production capacity throughout the fiscal third quarter. Additionally, the company estimates that industry supply growth might be partially muted during the second-half of 2020 compared with the pre-COVID-19 level.

Now, let’s discuss the fiscal third-quarter performance.

Revenue Details

DRAM revenues of $3.59 billion, accounting for 66% of total revenues in the fiscal third quarter, grew 5.6% year over year and 16.3% sequentially. Bit shipments rose nearly 10%, sequentially. On a sequential basis, ASP increased in the mid-single-digit percentage range.

NAND revenues of $1.67 billion, representing 31% of the total top line, were up 50.8% on a year-over-year basis and 10% quarter on quarter. While NAND ASP increased in the upper single-digit percentage band, shipment quantities grew in the low-single-digit percent range sequentially.

Business-unit wise, revenues of the computing and networking business (CNBU) unit grew 7% from the year-ago quarter and 13% sequentially to $2.22 billion. This sequential growth was mainly driven by stronger demand for data-center products and double-digit quarter-over-quarter pricing improvements. Quarter-on-quarter growth was partially offset by supply-constraint for certain compute DRAM products, which limited the company’s ability to meet some demand.

Revenues of $1.53 billion from the Mobile Business Unit (MBU) climbed 30% on a year-over-year basis and 21% sequentially. This sequential growth was mainly driven by solid bit shipment growth in Micron’s LPDRAM product.

The Embedded Business Unit revenues logged $675 million, down 4% from the year-ago quarter and 3% from the previous quarter, primarily due to reduced demand from the automotive sector.

Revenues from the Storage Business Unit (SBU), comprising SSD NAND components and 3D XPoint totaled $1.01 billion, up 25% year over year and 17% sequentially. This sequential growth mainly resulted from improved pricing and increased data-center SSD demand.

Margins

Micron’s non-GAAP gross profit of $1.8 billion declined 4.2% from the prior-year period, but increased 29% sequentially. Non-GAAP gross margin slipped from 39% in the year-ago quarter to 33%. However, gross margin expanded 400 basis points (bps) sequentially.

Underutilization charges at the Lehi Lab had a negative impact of nearly $155 million of 285 bps. Nonetheless, sequential growth in gross profit and margin was chiefly aided by increased pricing at both DRAM and NAND, and improvements in product mix.

Micron’s non-GAAP operating income of $981 million declined from the year-ago quarter’s $1.11 billion. Non-GAAP operating margin contracted from 23% to 18%. However, on sequential basis, non-GAAP operating profit and margin improved 81% and 700 bps, respectively.

Balance Sheet and Cash Flow

The company exited the reported quarter with cash and short-term investments of $8.66 billion compared with the $7.5 billion recorded at the end of the prior quarter.

Micron’s long-term debt increased to $6.36 billion from the $5.2 billion witnessed at the end of the fiscal second quarter.

The company generated operating cash flow of $2 billion during the fiscal third quarter and free cash flow of $101 million. In the first nine months of fiscal 2020, the company generated operating and free cash flows of $6.04 billion and $250 million, respectively.

The company repurchased shares worth $40 million in the reported quarter. During the first three quarters of fiscal 2020, Micron repurchased $134 million worth of its common stocks.

Guidance for Q4

Buoyed by the better-than-expected quarterly results, Micron has issued an upbeat guidance for the fiscal fourth quarter. The company anticipates revenues of $5.75-$6.25 billion (mid-point $6 billion) for the quarter. The Zacks Consensus Estimate for fiscal fourth-quarter revenues is pegged at $5.43 billion.

For the fiscal fourth quarter, Micron expects non-GAAP gross margin of 35.5% (+/- 150 bps). The company estimates higher underutilization charges due to contracted production volumes of approximately $135 million in the quarter to hurt the gross margin.

Operating expenses on a non-GAAP basis are likely to be $850 million (+/- $25 million).

Earnings per share are anticipated to be $1.05 (+/- 10 cents). The consensus mark is pegged at 75 cents.

Zacks Rank & Other Stocks to Consider

Micron currently carries a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the broader technology sector are Atlassian Plc TEAM, NVIDIA Corporation NVDA and Axon Enterprise, Inc AAXN, all carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term earnings growth rate for Atlassian, NVIDIA and Axon is currently pegged at 22.6%, 16.9%, and 15%, respectively.

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