Micron's Earnings Reveal Cloud and SSD Demand Have Joined Rising Prices as Growth Engines

 | Mar 23, 2017 | 8:34 PM EDT
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Following the strong numbers the company posted in December, as well as many positive industry datapoints from trade publications and peers, it was widely assumed that Micron's (MU)  fiscal second-quarter results (ending in February) and third quarter guidance would point to strong DRAM and NAND flash memory pricing/margin environments.

While Micron's latest figures certainly did that, they also showed that booming demand from a pair of end-markets is also providing a sales boost. And -- against a backdrop of tight DRAM supplies and plummeting NAND manufacturing costs -- are contributing to some eye-popping margin growth.

Micron reported second quarter revenue of $4.65 billion (up 58% annually) and adjusted EPS of $0.90, topping consensus analyst estimates of $4.64 billion and $0.84. More importantly, the company guided in its earnings slides for third quarter revenue of $5.2 billion to $5.6 billion (up 86% at the midpoint) and EPS of $1.43 to $1.57, far above a consensus of $4.74 billion and $0.91.

Shares rose 10.3% in after-hours trading to $29.19, hitting their highest levels since early 2015. Hard drive/NAND giant Western Digital  (WDC) rose 3.1%, also after-hours, and Western rival/Micron SSD partner Seagate (STX) rose 1.2%. Micron flash manufacturing and R&D partner Intel (INTC) rose slightly after-hours.

Thanks to a 21% sequential increase in average selling price (ASP) and (in spite of season weakness) a 1% increase in bit growth, Micron's DRAM revenue (64% of total revenue) rose 64% annually. NAND revenue (30% of total revenue) rose 38%, with a big production ramp for cheap/dense 3D NAND chips leading bit shipments to rise 18% sequentially and ASPs to drop 6%.

Gross margin jumped to 38% from 26% in the November quarter and 20% a year ago, and easily beat guidance of 31% to 34%. Moreover, GM is expected to rise to a range of 44% to 48% in the third quarter.

ASP growth and a 6% decline in manufacturing cost per bit led DRAM GM to jump to 44% from 28% in the November quarter. NAND GM, boosted by higher shipments and (thanks to 3D NAND) a 15% drop in cost per bit, rose to 31% from 23%. On its earnings call, CEO Mark Durcan noted the pricing strength Micron was previously seeing in PC DRAM has now extended to other DRAM segments, and that the company was seeing tight supplies and higher ASPs for "all types of mobile memory."

Strong server DRAM demand allowed DRAM shipments to remain steady in a seasonally weak quarter: Servers accounted for a mid-20s percentage of DRAM revenue, up from a high-teens percentage in the November quarter. Cloud giants such as Alphabet's (GOOGL) Google, Facebook (FB) and Amazon (AMZN) are once more significantly upping their capital spending, and DRAM makers aren't being left out of the fun. Going forward, the pending launch of Intel's Skylake-EP (Purley) Xeon server CPUs could act as a fresh catalyst. Micron is guiding for DRAM bit shipments to be up 10% in the second half of fiscal 2017 (ends in August) relative to the first half.

On the NAND side, booming SSD sales within the PC and (especially) data center markets are a tailwind. 3D NAND is enabling cheaper SSDs, and more and more consumers and businesses are getting sold on the technology's performance, size, power and reliability benefits relative to hard drives. SSDs made up a mid-20s percentage of Micron's NAND revenue, up from just a mid-teens percentage in the November quarter. The company noted its 3D NAND-based 5100 cloud SSD line is seeing strong uptake.

Thanks partly to SSDs, NAND bit shipments are expected to be up a strong 30% in the second half of fiscal 2017. Micron also forecast 3D NAND will account for 75% of NAND output by the end of the fiscal year, and that it will see "meaningful" output for its 64-layer 3D NAND chips (denser/cheaper than its current 32-layer products) by that time. Micron and Intel have long argued their 3D NAND offerings require a smaller die size, and are thus cheaper to make, than comparable chips from the likes of Samsung, SK Hynix and SanDisk.

Auto and graphics memory sales were also strong points last quarter. The higher DRAM and flash needs of many newer cars is boosting the former business, while the latter benefits from strong gaming PC demand and shipments of high-speed GDDR5X chips for graphics cards based on Nvidia's (NVDA)  new GeForce 1080 Ti flagship GPU.

When asked by analysts on the call about how sustainable the memory industry's current boom is, Micron insisted it doesn't see any clouds on the horizon. It reiterated a DRAM industry consolidated around Micron, Samsung and SK Hynix is keeping a lid on supply growth, and that SSD and smartphone storage demand continue soaking up NAND supply. Micron also denies seeing any signs that OEMs are cutting back on their DRAM use in response to higher prices.

One shouldn't take all of this good news to mean that memory industry cycles are now a thing of the past. If PC and server DRAM demand starts slumping again, or if one of the top-3 manufacturers significantly ups production, the current boom could end. And looking at the 2018 to 2019 timeframe, a lot of new Asian 3D NAND capacity is set to come online.

But for yet another quarter, Micron made good on claims that DRAM industry conditions have changed for the better overall, and that NAND pricing remains solid when taking into account cost reductions. And it also just made a good case that near-term demand for both industries is better than many expected.

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