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Memory chip maker Micron reported better than experted earnings and revenues after the close Tuesday. $MU had scaled back its forecasts on DRAM and NAND memory chips. Last week JP Morgan slashed its price target on the chipmaker due to the Huawei ban.


micron dram

Micron Dram Wafer, Bullish Demand and Prices for 2019?

Micron Technology, Inc. NASDAQ: MU Reported Earnings After Close Tuesday

$1.05 Beat $0.83 EPS AND $4.78 Beat $4.77 billion forecast in revenue

Earnings

Micron report fiscal third-quarter results after the close with adjusted earnings of $1.05, beating estimates by 22 cents. Revenue was $4.788 billion. Analysts had expected revenues to slide 38.9% to $4.77 billion, causing profits to dive 73.6% to 83 cents per share.

Micron is struggling with excess inventory with customers in the cloud, graphics and enterprise market. Revenues in the graphics and datacenter market are likely to be adversely impacted by higher-than-normal inventories in gaming cards and falling cryptocurrency-related demand. However Bitcoin prices have more than trippled in the past quarter, Bitcoin coin has bounced from $3,000 to $11,000 in that time. This should garner some positive guidance numbers in that area.

The Trump administration blacklisted Huawei last month amid the escalated trade war between the U.S. and China, effectively halting its ability to purchase American-made chips and forcing U.S. companies such as Micron to cut ties with the Chinese giant.

Micron Technology, Inc. NASDAQ: $MU

Market Reaction After hours 34.29 +1.61 (4.93%)

Highlights

"Micron's improved competitive position and strong execution helped us deliver solid results despite a challenging environment," said Micron President and CEO Sanjay Mehrotra. "While we are seeing early signs of demand improvement, we plan to reduce our capital expenditures in fiscal 2020 to help improve industry supply-demand balance."

  • Revenue of $4.79 billion was down from $7.80 billion year over year
  • Operating cash flow of $2.71 billion
  • Share repurchases of $2.66 billion under the authorized buyback program through the first nine months of 2019

Analysts Before Earnings Release

Harlan Sur, J.P. Morgan’s semiconductor analyst cut year-end price target for Micron to $50 from $64 on Friday but maintained its overweight rating.

  • Huawei accountied for 13% of Micron’s sales in the first half of 2019
  • J.P. Morgan expects the ban would weigh on the chipmaker for the rest of the year.
  • “Replacing bits sold to Huawei may take some time to normalize on substitution effects,”
  • “The shape of the recovery may be negatively impacted by trade tensions with potential demand destruction in consumer segments.” .
  • JP. Morgan lowered 2019 earnings estimates for Micron to $5.64 per share from $6.19. The Wall Street consensus is $6.22 per share.
  • Shares of Micron fell 2.64% on Friday. The stock has lost nearly 20% in the second quarter amid the escalated trade war.

Baird analyst Tristan Gerra rates MU a “Sell,” lowered his price target from $32 to $28.

  • Says DRAM and NAND inventories are currently about double the normal levels in the supply chain after Q/Q deterioration.
  • Gerra thinks the NAND downturn could stretch "well into 2020."

Micron Technology Earnings Recap From Last Quarter

Earnings

Micron's net income fell 51.1% to $1.62 billion and earnings dropped 46.8% to $1.42 per share. Adjusted earnings fell 39.4% to $1.71 per share. Revenue decreased 20.6% to $5.84 billion, due to a decline in demand and a drop in the main business segments. Revenue reflected worse-than-expected pricing trends in DRAM and NAND. DRAM revenue was down 28% on lower bit shipments and a decline in average selling prices.

NAND revenue inched down by 2% as lower average selling prices overshadowed stronger-than-expected bit shipments.is expected to post adjusted earnings of $1.65 a share, down from $2.52 a share expected at the beginning of the quarter.

Micron was expected to post adjusted earnings of $1.65 a share, down from $2.52 a share expected at the beginning of the quarter. Micron forecast $1.65 to $1.85 a share. Estimize calls for earnings of $1.83 a share. In the year-ago quarter, Micron reported earnings of $2.82 a share. Analysts expect revenue of $5.85 billion from Micron, according to FactSet, down from $7.5 billion forecast at the beginning of the quarter, before Micron predicted revenue of $5.7 billion to $6.3 billion. Estimize expects revenue of $6.08 billion. In the year-ago quarter, Micron reported revenue of $7.35 billion.

Micron Technology, Inc. NASDAQ: $MU

Market Reaction After hours $43.63 USD +3.50 +8.72%

 Highlights

  • Revenue from Mobile rose by 3% on strong growth in managed NAND products.
  • Revenue from Compute and Networking plunged by 35% as weak seasonality and pricing dragged volume down.
  • Revenue from Embedded declined by 4% due to a decrease in automotive business, weaker pricing and lower DRAM volumes.
  • Revenue from Storage decreased by 19% year-over-year

Micron Technology Q2 2019 Earnings

Outlook

Looking ahead into the third quarter, the company expects revenue of $4.8 billion, plus or minus $200 million, and adjusted earnings of $0.85 per share, plus or minus $0.10 per share. Adjusted gross margin is predicted to be in the range of 37% to 40% and adjusted operating expenses are anticipated to be $785 million, plus or minus $25 million.

Diluted GAAP EPS is projected to be $0.51, plus or minus $0.10. Investments in capital expenditures, net of amounts funded by partners, were $2.45 billion for the second quarter of 2019, which resulted in adjusted free cash flow of $988 million.

For fiscal 2019, the company lowered capital expenditures target to about $9 billion from the prior estimate range of $9 billion to $9.5 billion. The company ended the second quarter with cash, marketable investments, and restricted cash of $9.22 billion for a net cash position of $2.99 billion. Micron repurchased an aggregate of 21 million shares of its common stock for $702 million during the quarter in connection with its $10 billion share repurchase authorization.

Heading Into Earnings Ratings:

  • 18 analysts have a buy rating on Micron,
  • 13 rate it a hold 
  • 1 recommends selling MU.
  • The average price target is $47,  an upside of nearly 22 percent from Monday's  close. 

In February, Morgan Stanley said DRAM may not even bounce back this year as the market appears “fundamentally oversupplied.”  Analysts at KeyBanc Capital forecast flash memory chip shortages from a pullback to oversupply.

Cowen analyst Matthew Ramsay in a note said commentary from Micron and other memory chip makers “indicate to us that many of these problems should be alleviated by the second half of 2019 as certain players scale back capacity/investment and compute chip supply catches up with demand as customer inventories are digested.  That said, it may be a bumpy couple of quarters in the meantime for DRAM/NAND”.

Highlights and Outlook

Last year Micron guided first quarter results below street estimates which was ignored by the market until  CFO Zinsner later clarified during the earnings conference call that the lower guidance projection was due to the expected impact from the 10% tariffs on $200 billion of Chinese goods, which will go into effect on September 24.

China is a prime revenue driver for the country, accounting for over 50% of its topline. While it does not make semiconductors in China, numerous assembling and packaging works take place in the country. Therefore, Trump’s tariffs, which will be raised from 10% to 25% by the end of 2018, will likely dent Micron’s gross margins by at least 50 BP.

$MU will now be forced to shift at least a part of its Chinese operations to assembly plants in Singapore. Micron results were driven by strong demand for its DRAM and NAND chips across markets 

DRAM Production Expansion a Risk or Opportunity?

Micron expansion of additional clean room spaces in Singapore and Japan. The new Japan space was expected online for production at the beginning of 2019, with Singapore online at the end of 2018. This was all before the cryptocurrency price collapse crushed earnings.

The concern for investors from the expansion was fed by NAND prices becoming evident in DRAM pricing. That is that what happens if demand growth lags supply growth and the high prices reverse? We have seen with NAND how prices can plunge and with that profits. There lies the risk with expansion, here clearly Micron and others were overestimating demand.

The other supply overhang is Samsung adding to supply with their new production space, the risk is taking advantage of higher demand by Micron and supply pushing down prices dramatically. The hope for the tech giants is the demand for DRAM chips can can ahead ahead of supply with new technology and markets.

That is the risk and the price losses ahead of this report.

Source: Micron, Alphastreet

From The TradersCommunity Research Desk

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