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Micron's Results Suggest the DRAM Boom Remains in Full Swing
Source: RealMoney   Editor: Helan   Update Time :2018/3/23 16:10:51

With shares having risen about 50% since early February, Micron (MU) investors are in a profit-taking mood after the company beat estimates and issued solid guidance, but didn't blow away analyst expectations.

All the same, Micron's earnings report, slides and call were all packed with figures and commentary that make the optimism that has propelled shares higher look pretty justified -- particularly for Micron's core DRAM business.

Micron reported February quarter (fiscal second quarter) revenue of $7.35 billion (up 58% annually) and adjusted EPS of $2.82 (up 213%), topping consensus analyst estimates of $7.25 billion and $2.71. Free cash flow roughly tripled to $2.2 billion.

And within its earnings slides, the memory giant guided for May quarter revenue of $7.2 billion to $7.6 billion and adjusted EPS of $2.76 to $2.90, largely above consensus estimates of $7.29 billion and $2.64. New CFO David Zinser noted the sales guidance would be about 2% higher if not for a recent "supplier maintenance issue" that has temporarily disrupted the supply of nitrogen to one of its five DRAM fabs. It expects to return to full production at the fab "within the next week."

Also: Thanks in large part to DRAM margin growth, Micron reported a gross margin of 58% -- up from 55% in the prior quarter and 38% a year ago, and at the high end of its guidance range. And it forecast GM would be in a range of 57% to 60% this quarter.

Nonetheless, shares fell 4% in after-hours trading to $56.56. They continue trading for less than 6 times their fiscal 2018 (ends in August) consensus EPS estimate.

With the help of still-rising prices and strong demand from cloud server, graphics card and automotive clients, Micron's DRAM revenue (71% of total revenue) rose 14% sequentially and 76% annually, beating expectations. Average selling prices (ASPs) rose by a low-double digit percentage sequentially and a low-40s percentage annually. Shipments rose by a low-20s percentage annually.

Micron still expects DRAM industry bit shipments to be up around 20% this year (peers Samsung (SSNLF) and SK Hynix have issued similar outlooks), a level that should allow the industry's supply/demand balance to remain favorable given how strong data center and (to a lesser extent) graphics demand remains. And in spite of the recent production issue, Micron -- aided by a strong ramp for DRAM chips relying on its next-gen 1x manufacturing process -- now expects its own 2018 shipment growth to be in-line with industry growth. The company previously forecast its own growth would be slightly lower.

Micron's trade NAND flash memory sales (25% of revenue) weren't as strong: They were down 3% sequentially and up 28% annually, and a little below expectations. Sequentially, NAND shipments grew at a low-double digit clip, but ASPs fell by a mid-teens percentage. Micron partly blamed this on "a meaningful last-time purchase" of relatively costly multi-level cell (MLC) NAND chips that happened in the November quarter. However, ASPs were likely also affected by the fact that industry production ramps for cheap/high-density 3D NAND flash chips have begun affecting pricing.

Micron now expects NAND industry bit shipment growth to be "somewhat higher" than 45% this year. That's better than a prior forecast for near-50% growth, but still a little higher than Samsung and Hynix's forecast for about 40% growth. With the help of a production ramp for 64-layer (second-gen) 3D NAND chips that's progressing a little better than expected, Micron sees its own NAND output growth being "somewhat above" industry growth this year.

CEO Sanjay Mehrotra insisted, however, that growing solid-state drive adoption (SSD) would do much to soak up all this extra supply, as price cuts enabled by the 3D NAND ramp lift PC and data center penetration rates. Micron's SSD sales -- once a weak spot for the company -- grew 80% last quarter, with cloud/enterprise SSD sales more than tripling.

Micron's spending outlook might be worrying markets a little bit. In news likely to please chip equipment makers with strong memory exposure (e.g., Lam Research (LRCX) , KLA-Tencor (KLAC) , Axcelis (ACLS) ), Micron now expects its fiscal 2018 capital spending to be at the high end of a prior guidance range of $7.5 billion, plus or minus 5%. It also set a long-term forecast for capex to equal a low-30s percentage of revenue, which is slightly higher than its prior outlook, albeit roughly on par with its spending in recent years.

In addition, Micron forecast its adjusted operating expenses, which grew just 9% annually last quarter to $666 million, would rise to a range of $700 million to $750 million in the May quarter. This was largely attributed to rising R&D spend, including for fourth-gen 3D NAND products.

The capex guidance could be a sign that Micron feels a little more confident than before about upping its DRAM output without upsetting the industry's favorable supply/demand balance, thanks to how well demand has held up in the face of major price increases. And the opex guidance suggests the company is now comfortable reinvesting a larger portion of the massive profits it's generating in product development.

These aren't signs of a company worried that the good times will soon be coming to an end. And if the good times continue -- which is to say, if earnings simply stay around where they are right now -- Micron's current valuation will look pretty cheap in hindsight.

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