It has been about a month since the last earnings report for Micron (MU). Shares have lost about 1.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Micron due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Micron Q2 Earnings Miss Estimates
Micron reported second-quarter fiscal 2019 non-GAAP earnings of $1.71 per share, which missed the Zacks Consensus Estimate of $1.73 and also came in lower than the year-ago quarter’s figure of $2.82.
Micron’s revenues in the quarter under review dropped around 21% on a year-over-year basis to $5.84 billion and missed the Zacks Consensus Estimate of $5.92 billion. The year-over-year decline was primarily due to higher-than-expected decline in DRAM and NAND pricing.
Notably, seasonality, weak smartphone and enterprise server sales, inventory adjustments with several key customers, pause in cloud hardware spending and Intel’s CPU shortages adversely impacted the company’s performance. Moreover, 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.
Revenues from DRAM products, which accounted for 64% of total revenues in the quarter under discussion, were down 28% year over year and 30% sequentially. Sequentially average selling price (ASP) of DRAM dropped in the low-20 percentage range while shipment quantities declined in low double digits. On a year-over-year basis, DRAM bit shipments were down in mid-single digits.
NAND revenues, representing 30% of the total top line, declined 2% on a year-over-year basis and 18% quarter over quarter. While NAND ASP decreased in the mid-20 percentage band, shipment quantities grew in the upper single-digit range sequentially. The timing of demand from a large customer benefited NAND bit shipments. Management mentioned that more than two-thirds of NAND revenues in the first half of fiscal 2019 was from high-value solutions, which increased 55% over the same period last year.
Business unit wise, revenues of the computing and networking business (CNBU) unit declined 34% from the year-ago quarter and 34% sequentially to $2.4 billion. Decline in pricing across major market segments coupled with inventory adjustments at some of the customers in the graphics, PCs and cloud markets remained a headwind.
Revenues from the Mobile Business Unit (MBU) of $1.6 billion increased 3% on a year-over-year basis backed by strong growth in managed NAND products. However, the metric slipped 27% sequentially on account of adverse memory and storage pricing and weakness in high-end smartphone unit sale.
The Embedded business unit logged revenues of $800 million, down 4% from the year-ago quarter and 14% from the previous quarter due to weaker pricing and lower DRAM volumes.
Revenues from the Storage Business Unit (SBU), comprising SSD NAND components and 3D XPoint, totaled $1.1 billion, down 19% on a year-over-year basis and 11% sequentially, owing to lower SSD revenues, which were partially offset by increase in component revenues.
Micron’s non-GAAP gross profit of $2.9 billion declined 23.9% from the prior-year period. Non-GAAP gross margin contracted 820 basis points (bps) from the year-ago quarter to 50.2%. 3D XPoint underutilization costs had an impact of nearly 160 basis points. Further weaker-than-expected pricing of both DRAM and NAND was a dampener.
Nonetheless, the strength of the company’s high-value solutions, driven by managed NAND products, and efficient cost management helped it maintain overall NAND gross margins in the high 30s, despite a steep price fall in the industry.
Micron’s non-GAAP operating income fell 41.9% year over year to $2.1 billion. Non-GAAP operating margin contracted 13 bps to 36.2%.
Balance Sheet and Cash Flow
The company exited the quarter with cash and short-term investments of $7.533 billion compared with $5.563 billion at the end of the preceding quarter.
Micron’s long-term debt reduced to $3.6 billion from $3.73 billion in the prior quarter.
The company generated operating cash flow of $3.44 billion compared with $4.81 billion in the previous quarter. Adjusted free cash flow during the reported quarter was $1 billion, down from $2.3 billion in the past quarter.
During the quarter under consideration, the company repurchased shares worth $700 million under the authorized buyback program. In the first half of fiscal 2019, the company repurchased 63 million shares for $2.5 billion.
Higher levels of customer inventory, soft server demand at several enterprise OEM customers, worse-than-expected CPU shortages coupled with macroeconomic uncertainties are key challenges for Micron in 2019.
However, Micron anticipates DRAM bit shipments to start increasing in the fiscal third quarter. Further, the company expects memory demand to improve in the second half of calendar 2019 due to normalization in most customer inventories by mid-year.
Coming to NAND, oversupply in the markets owing to industry’s transition to 64-layer 3D NAND chips accelerated bit growth is a concern. A modest sequential decline in NAND bit shipments is expected in the fiscal third quarter. Nonetheless, management is optimistic that demand elasticity and seasonal trends will lead to an improvement in NAND demand in the second half of calendar 2019.
Taking all these factors into consideration, Micron expects demand growth for DRAM and NAND industry bit to be lower than supply growth. Notably, DRAM bit demand for calendar 2019 is expected to grow in low-to-mid teens percentage while bit supply is likely to grow by a mid-to-high teens percentage. NAND bit demand is projected to grow in mid-30s percentage while bit supply is expected to increase high-30s percentage.
All these led to the company to revise its capital expenditure budget for fiscal 2019 to approximately $9 billion from the prior guidance range of $9-$9.5 billion. Further, to tackle lower DRAM demand among customers, the company is idling 5% of its DRAM wafer starts.
For fiscal third quarter, Micron guided revenues of $4.8 billion (+/- $200 million) and EPS of 85 cents (+/- 10 cents). The company projects non-GAAP gross margin between 37% and 40%. Operating expenses on a non-GAAP basis are likely to be $785 million (+/- $25 million).
However, management is optimistic that 5G adoption, advent of foldable phones and upcoming innovations in AR/VR will drive sustained content growth and reignite smartphone unit sales beginning 2020. Further, 5G adoption beyond mobile is likely to foster demand for memory and storage, particularly in IoT devices, wireless infrastructure and data centers.
Slowdown in memory demand at data centers as a result of ongoing customer inventory adjustments and software optimizations at some cloud customers is an overhang on Micron. Nevertheless, management anticipates improvement in customers’ inventory position and the introduction of new server processors that support higher memory densities to drive demand in the second half of calendar 2019.
In the graphics market, Micron expects increase in sales of high-performance GDDR6 DRAM and expansion in its customer base to contribute to stronger growth in the second half of calendar 2019. Moreover, rising demand for in-vehicle infotainment and advanced driver assistance systems will steadily fuel growth in the automotive market.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -37.98% due to these changes.
Currently, Micron has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Micron has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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