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Micron Technology, Inc. Shares Fall on Q3 Earnings & Revenue Miss 

Shares of Micron Technology, Inc. (NASDAQ:MU) went down more than 11% in afterhours trading yesterday, after the company reported lower-than-expected third-quarter of fiscal 2015 results. Also, a tepid fourth-quarter revenue guidance impacted the share price.

The company reported adjusted earnings (excluding the impact of the Micron Memory Japan, Inc. acquisition and other one-time items) of 54 cents, which lagged the Zacks Consensus Estimate of 57 cents. Also, adjusted earnings decreased from 79 cents reported in the year-ago quarter.

Quarter Details

Micron’s revenues in the quarter not only decreased 3.2% on a year-over-year basis to $3.85 billion but also missed the Zacks Consensus Estimate of $3.94 billion. The year-year-over decrease in revenues was primarily due to weakness in the PC segment.

NAND Flash products represented 32% of total revenue during the quarter. Trade NAND bit sales volume was down 2% sequentially, where as NAND ASP was up 6% and bit costs were up 3% quarter over quarter.

DRAM products accounted for 61% of total revenue during the quarter. Trade DRAM bit sales volume and DRAM ASP was down 2% and 6% sequentially, respectively. Also, total bit costs were down 6% quarter over quarter.

Coming to the Storage Business Unit (SBU), revenues came in at $901 million during the quarter, down 6% on a sequential basis.

Revenues from the Mobile Business Unit (MBU) came in at $938 million during the quarter, up 10% sequentially, primarily aided by better-than-expected demand in mobile.

The computing and networking business saw weak demand with revenues of $1.5 billion during the quarter, primarily due to an unfavorable pricing environment and lower-than-expected demand in the PC segment. Networking DRAM pricing remained stable, primarily due to LTE deployment in China and emerging markets.

Revenues from embedded business came in at $483 million, primarily attributed to growth in the automotive segment.

It is worth mentioning that Micron has developed a new consumer-class flash storage device based on Triple-Level-Cell (TLC) NAND technology during the quarter. The new flash storage device is built on the company’s 16-nanometer (nm) process and thus, named — 16-nm TLC NAND.

Micron’s gross profit was down 12.1% on a year-over-year basis and came in at $1.20 billion. Gross margin came in at 31.2% versus 34.4% a year ago, primarily due to lower revenue base and higher cost of sales.

Selling, general and administrative (SG&A) expenses decreased 2.9% year over year to $169 million. Research and development (R&D) expenses came in at $406 million, 16.3% higher than the year-ago quarter.

Micron reported operating income of $631 million, which decreased from $839 million reported in the year-ago quarter, primarily due to higher operating expenses. Operating expenses, as a percentage of revenues, increased 154 basis points on a year-over-year basis.

Micron recorded non-GAAP net income (excluding the impact of the Micron Memory Japan, Inc. acquisition and other one-time items) of $620 million or 54 cents during the quarter compared with $913 million or 79 cents reported in the year-ago quarter.

On a GAAP basis, net income came in at $491 million compared with $806 million reported in the year-ago quarter.

The company exited the third quarter with cash and short-term investments of $4.86 billion compared with $4.48 billion in the previous quarter. Receivables were $2.53 billion compared with $2.76 billion in the previous quarter.  Micron’s long-term debt increased to $6.40 billion from $5.52 billion in the previous quarter.

Cash generated from operations was $1.34 billion compared with $1.25 billion in the previous quarter. Free cash flow came in at $600 million. Capital expenditure was $730 million compared with $853 million in the previous quarter.

During the quarter, the company repurchased shares of worth $782 million.

Guidance

For the fourth quarter of fiscal 2015, Micron expects revenues in the range of $3.45 billion to $3.7 billion. The Zacks Consensus Estimate is pegged higher at $4.19 billion.

Micron expects DRAM ASPs to be down in mid to high single digits in the forthcoming quarter. Projected bit cost is expected to be up in low single digits, whereas bit growth is expected to be flat to up low-single digits, all sequentially. The main factors impacting the DRAM guidance for the upcoming quarter are weak PC DRAM sales and cloud server ASPs.

NAND ASP is expected to be flat sequentially. Bit costs are also expected to be flat, whereas prediction bit growth is expected to be down in low single digits. The main factors impacting the NAND guidance for the upcoming quarter are an unfavorable pricing environment, partially offset by stable NAND and client SSD market conditions and a favorable mix in mobile segment and managed NAND products.

Management expects SG&A expenses to be in the range of $175 million to $185 million in the fourth quarter of fiscal 2015. R&D expenses are expected to be in the range of $395 million to $405 million.

Our Take

Micron reported lower-than-expected third-quarter fiscal 2015 results. Also, year-over-year comparisons on both counts were unfavorable. The results were primarily impacted by weakness in the PC segment as well as a dismal operating performance. The company also provided a tepid fourth-quarter revenue guidance, primarily due to weak PC DRAM sales and unfavorable pricing environment.

However, the acquisitions of Elpida and Rexchip (now known as Micron Memory Japan, Inc. and Micron Memory Taiwan Co., Ltd., respectively) will benefit Micron’s share in the memory market.

Micron is positive about its product launches and growing demand for its products, particularly SSD products. Micron has been constantly innovating in memory technologies, spanning DRAM, NAND and NOR Flash memory solutions, which are being widely used in the latest mobile computing devices as well as in consumer, networking and embedded products.

Additionally, we believe that the acquisition of Elpida will help Micron’s share in the memory market. The acquisition also brought Apple Inc. on to the customer roster, which is a positive for future growth.

However, it may not be easy for Micron to capture share from SanDisk Corp, a key player in the NAND space.

Micron has a Zacks Rank #5 (Strong Sell).

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