It has been about a month since the last earnings report for Micron (MU). Shares have added about 6.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Micron due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Micron Q1 Earnings Top Estimates, Revenues Disappoint
Micron reported first-quarter fiscal 2019 non-GAAP earnings per share of $2.97, beating the Zacks Consensus Estimate of $2.93 and also came in above the year-ago quarter’s figure of $2.45.
The upside can be attributed to Micron’s focus on improvement in cost structure and increasing the mix of high-value solutions in its portfolio.
Although Micron’s revenues in the quarter under review grew around 16% on a year-over-year basis to $7.9 billion, the metric missed the Zacks Consensus Estimate of $8.03 billion. The company had earlier projected revenues in the range of $7.9-$8.3 billion. However, at a recent conference, management had mentioned that it expects revenues to be near the lower end of the prior outlook as market demand softened through the quarter.
We note that albeit solid growth in mobile, automotive and industrial market drove revenues for the company, CPU shortages and inventory adjustments with several key customers in the cloud, graphics and enterprise market remained overhangs on the stock.
Notably, given the weaker demand environment, Micron issued a tepid guidance for the fiscal second quarter, which makes us apprehensive about its near-term performance.
Revenue Details
Revenues from DRAM products, which accounted for 68% of total revenues during the quarter under discussion, were up 18% year over year but declined 9% sequentially. The company recorded flat shipment quantities sequentially while average selling price (ASP) dropped in the high-single-digit percentage range. However, strong demand for the company’s 1Y nanometer 12-gigabit low power DRAM owing to the market’s shift toward higher densities is a positive.
Trade NAND revenues, representing 28% of the total top line, increased 18% on a year-over-year basis. However, the same slipped 2% quarter over quarter. While NAND ASP decreased in the low-to-mid-teens percentage band, shipment quantities grew in the low-to mid-teens range.
Management sounded optimistic regarding the company’s QLC product offerings. Moreover, the introduction of both consumer QLC and VME SSDs as well as enterprise QLC SATA SSDs seems a tailwind.
Business unit wise, revenues of the computing and networking business (CNBU) unit rose 12% from the year-ago quarter to $3.6 billion. Sequentially, it marked a 17% fall. Inventory adjustments at some of the customers in the graphics, enterprise and cloud markets remained a headwind.
Revenues from the Mobile Business Unit (MBU) reached a record level of $2.21 billion, registering a year-over-year jump of 62% and a sequential increase of 17% on the back of consistent strength in the company’s low-power DRAM offerings and share gains in mobile managed NAND business with several leading customers.
The Embedded business unit logged revenues of $933 million, up 12% from the year-ago quarter and 1% from the previous quarter, backed by industrial and automotive markets, which spurred strong demand for DRAM and NOR products.
Revenues from the Storage Business Unit (SBU), comprising SSD NAND components and 3D XPoint, summed $1.14 billion, down 17% on a year-over-year basis and 8% sequentially, owing to low pricing and the ongoing transition from SATA to NVMe SSDs. Moreover, the company’s strategy to move bits from SBU components to high-value solutions in mobile adversely impacted revenues.
Margins
Micron’s non-GAAP gross profit registered a 23.9% rise from the prior-year period and totaled $4.67 billion. Non-GAAP gross margin advanced from 55.4% to 59%.
The impressive year-over-year improvement in gross margin was chiefly driven by a better mix of high-value products and efficient cost management. Notably, the strength of the company’s high-value solutions, driven by managed NAND products, helped it maintain overall NAND gross margins above 45%, despite oversupply in the industry. However, U.S. tariffs on Chinese goods had a half percentage point impact on its gross margins.
Micron’s non-GAAP operating income grew 23% to $3.89 billion. Non-GAAP operating margin inched up to 49.1% from 46.4% in the year-earlier period.
Balance Sheet and Cash Flow
The company exited the quarter with cash and short-term investments of $5.563 billion compared with $6.802 billion at the end of the preceding quarter.
Micron’s long-term debt reduced to $3.73 billion from $3.78 billion in the prior quarter.
The company generated operating cash flow of $4.81 billion compared with $5.16 billion in the previous quarter. Adjusted free cash flow during the reported quarter was $2.3 billion, down from $3.1 billion in the past quarter.
During the quarter under consideration, the company repurchased shares worth $1.80 billion under the authorized buyback program.
Outlook
Micron anticipates CPU shortages in the client compute market and inventory adjustments with some customers to impact the upcoming results. Moreover, the company expects revenues in the graphics and datacenter market to be continuously impacted in a couple of more quarters by higher than normal inventories in gaming cards and the decline in cryptocurrency-related demand.
Taking all these factors into consideration, Micron projected revenues for second-quarter fiscal 2019 in the range of $5.7-$6.3 billion.
Non-GAAP gross margin is predicted between 50% and 53%. Operating expenses on a non-GAAP basis are likely to be $800 million (+/- $25 million). The company envisions non-GAAP earnings per share to be roughly $1.75 (+/- 10 cents).
The company plans to manage operating expenses by implementing controls on headcount, slowdown in holiday work schedule and discretionary spending reduction.
Micron now forecasts DRAM bit demand in 2019 to grow around 16%, down from the prior outlook of 20%. Moreover, Micron assumes DRAM bit shipments for the fiscal second quarter to decline sequentially and be flat to down on a year-over-year basis. Micron expects DRAM bit shipment to rise about 15% in 2019, down from the prior expectation of around 20% bit growth.
Taking into account client compute CPU shortages and waning high end smartphone unit demand, Micron now anticipates industry’s NAND bit growth to be around 35% in 2019, down from the earlier estimate of 35-45%. For 2019, the company’s own bit shipments might be in line with the industry’s tally.
The company has lowered its expectation for NAND bit growth and reduced capital expenditure on NAND as it expects NAND industry supply growth to exceed the industry demand in 2019.
All these led to the company announcing a cut in its capital expenditure budget for fiscal 2019 from $10.5 billion (+/-5%) to a range of $9-$9.5 billion.
However, management anticipates demand to improve during the second half of 2019. The company believes that growing demand for new camera and digital features and the increasing application of artificial intelligence will drive DRAM and NAND content in mobile devices. Robust demand for higher density DRAM products across the data center market is a boon. 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 -25.82% due to these changes.
VGM Scores
At this time, Micron has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
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 #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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