Micron (MU) Surpasses Q3 Earnings Estimates, Guides Well

Micron Technology, Inc. (NASDAQ:MU) reported impressive results for the third quarter of fiscal 2018. The company registered year-over-year growth in both earnings and revenues and surpassed the Zacks Consensus Estimate as well.

Non-GAAP earnings per share came in at $3.15, beating the Zacks Consensus Estimate of $3.14 and higher than the guided range of $2.83 (+/- 7 cents). Earnings were also much higher than the year-ago quarter’s figure of $1.62 per share.

The stellar results were primarily attributable to strong demand across all business and product segments. This, along with proper execution by management, backed the solid performance.

Revenue Details

Micron’s revenues in the reported quarter climbed around 40.1% on a year-over-year basis to $7.797 billion. Reported revenues were up 6.1% on a quarter-over-quarter basis. The strong demand environment from data centers and cloud computing led to growth in the sales of DRAM and NAND solutions.

Quarterly revenues also came ahead of the company’s guided range of $7.2-$7.6 billion and surpassed the Zacks Consensus Estimate of $7.697 billion.

Sales from DRAM products, which accounted for 71% of total revenues during the quarter, were up a 56%, on a year-over-year basis, and 6% on a sequential basis. The company recorded mid to upper single-digit percentage rise in average selling price (ASP), driven by a higher mix of server and graphics DRAM demand.

Sales from NAND products, which accounted for 25% of total revenues, marked 14% year-over-year and 8% sequential growth. The company witnessed increase in ASP in mid to upper single-digit percentage, driven by higher value solutions in the portfolio.

Business unit wise, revenues of the computing and networking business (CMBU) unit surged 67% from the year-ago quarter and reached $4 billion. Sequentially, it marked 8% growth. The company’s cloud server and graphics memory product sales more than doubled year over year.

Revenues from the Mobile Business Unit (MBU) reached a record level of $1.8 billion, registering year-over-year jump of 55%. A surge in demand for the company’s low power DRAM products as well as its managed NAND products backed the commendable year-over-year improvement.

Revenues for the Storage Business Unit (SBU), which comprises SSD NAND components and 3D XPoint, sales came in at $1.1 billion. Notably, the company has joined forces with Intel (NASDAQ:INTC) for the development of 3D XPoint technology. However, the ongoing shift in NAND supply and lower 3D XPoint sales resulted in a 9% sequential decline in the segment.

The Embedded business unit reported revenues of $897 million, up 28% from the year-ago quarter and 8% from the previous quarter. The growth was backed by industrial and consumer applications including the likes of industrial drones and factor automation among others.

Income and Margins

Micron’s non-GAAP gross profit registered 77.8% increase from the prior-year period and came in at $4.75 billion. Non-GAAP gross margin advanced from 48% to 60.9%.

Micron’s non-GAAP operating income came in at $4.017 billion compared with just $2.071 billion reported in the prior-year quarter. Non-GAAP operating margin improved to 51.5% from 37.2% reported in third-quarter fiscal 2017.

The impressive year-over-year improvement in gross margin was chiefly driven by better mix of high-value products and efficient cost management.

On a non-GAAP basis, the company reported net income of $3.898 billion compared with $1.896 billion witnessed in the comparable quarter last fiscal.

Balance Sheet and Cash Flow

The company exited the fiscal third quarter with cash and short-term investments of $7.07 billion compared with $8.04 billion at the end of the fiscal second quarter. Receivables were $4.91 billion compared with $4.44 billion recorded in the previous quarter. Micron’s long-term debt declined to $5.89 billion from $7.80 billion in the prior quarter.

The company generated operating cash flow of $4.26 billion and adjusted free cash flow of $2.16 billion during the reported quarter. Capital expenditure totaled $2.1 billion in the fiscal third quarter.

Outlook

The company provided outlook for fourth-quarter fiscal 2018. Micron projects revenues in the range of $8-$8.4 billion. The Zacks Consensus Estimate is pegged at $7.93 billion.

Non-GAAP gross margin is projected between 59% and 62%. Operating expenses on a non-GAAP basis are likely to be $750 million (+/- $25 million).

The company expects non-GAAP earnings per share to be roughly $3.30 (+/- 7 cents). The Zacks Consensus Estimate is pegged at $3.11.

Furthermore, Micron expects its capital expenditure in fiscal 2018 to remain around $8 billion.

Conclusion

Micron’s impressive fiscal third-quarter results and fourth-quarter guidance reflect a robust demand environment. The company’s improved operational efficiency coupled with strengthened relationships with major customers will keep driving its financials northward.

Management is positive about its ongoing development in different advanced technologies including 96 layer 3D NAND, which are expected to be in production by the second half of 2018. Additionally, management is also optimistic about creating “a new tier of memory and storage between DRAM and NAND flash” with the help of 3D XPoint technology, expected to be introduced in the back half of 2019.

The company is also banking on capital expenditure by the cloud service providers, which is expected to be around $50 billion in 2018 and $108 billion by 2021. Micron is anticipated to gain from the projected investments.

Currently, Micron sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some other top-ranked semiconductor stocks are NVIDIA Corp. (NASDAQ:NVDA) and Western Digital (NASDAQ:WDC) , both sporting a Zacks Rank #1.

NVIDIA and Western Digital have long-term expected EPS growth rates of 10.3% and 19%, respectively.

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