Micron Strengthens, Estimates Up – Analyst Blog

Micron Technology (MU), one of the largest memory companies, reported second quarter of fiscal year 2010 earnings that beat the Zacks Consensus Estimate by 14 cents. Revenue beat the Consensus by 7.7%.

 

Shares advanced 2.89% in response to the positive news, beating the S&P 500 − which fell 0.33% − and the Nasdaq, which fell 0.53%.

 

 

Total revenue was $1.96 billion, up 12.7% sequentially and 97.5% year over year. The company saw broad-based strength across all served end markets, with computing growing 34% sequentially, servers 22%, and networking & storage 24%. Favorable pricing and stronger demand in all these markets were responsible for the strength.

 

We estimate that memory products generated 96% of revenue in the last quarter, growing 15.1% sequentially and 106.4% year over year.

 

The DRAM memory segment was the primary driver of growth, with revenues increasing 24% sequentially due to a strengthening demand for higher density products (both DDR2 and DDR3). Total bit shipments were up 17% sequentially, while the average selling price (ASP) was up 7%. The increase in ASP came from a 10% increase in core DRAM product ASPs and a 13% increase in specialty DRAM ASPs.

 

NAND revenue was flat sequentially (due to lower retail sales), although it was up 32% from the year-ago quarter. Prices were slightly down on a sequential basis.

 

Revenue from Royalty and Fees was down 2.9% sequentially to around $34 million.

 

We estimate that the imaging business had another weak quarter, with revenue declining 23.1% sequentially (flattish compared to the year-ago quarter).

 

 

The pro forma gross profit margin for the quarter was 32.7% up 728 basis points (bps) from the gross margin of 25.5% in the previous quarter. It was significantly better than the gross loss of 26.9% reported in the year-ago quarter. The stronger gross margin was the combined effect of higher ASPs, stronger volumes and lower cost of production. While DRAM ASPs increased 7% sequentially, the cost of production declined 17%. Although NAND ASPs were not as strong, cost of production of NAND products also declined in what appears to be an ongoing trend.

 

The operating expenses of $239 million were lower than the previous quarter’s $243 million. The operating profit margin was 20.6%, up 906 bps sequentially from 11.5%. Although all expenses declined sequentially, COGS was the major contributor of margin expansion, declining 728 bps (as a percentage of sales). R&D and SG&A declined 33 bps and 48 bps, respectively as a percentage of sales.

 

On a pro forma basis, MU generated a net profit of $367 million, or an 18.7% net profit margin, compared to a profit of $201 million, or 11.6% in the previous quarter, and a loss of $651 million, or 65.6% of sales in the same quarter last year.

 

The fully diluted pro forma earnings per share (EPS) were 37 cents, compared to 20 cents in the November 2009 quarter and a loss of 84 cents in the February 2009 quarter. Our pro forma estimate excludes restructuring charges/receipts and a receipt from the U.S. government in connection with anti-dumping tariffs. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

 

On a fully diluted GAAP basis, the company recorded a net profit of $365 million (36 cents per share) compared to $204 million (20 cents per share) in the previous quarter and a loss of $763 million (99 cents per share) in the year-ago quarter.

 

 

Inventories increased 3.7% in the quarter to $1.07 billion, with inventory turns at around 4.9X. DSOs were flat at 57. The cash and investments balance at quarter-end was $1.87 billion, up $305 million during the quarter. Cash generated from operations was $804 million, compared to $326 million generated in the first quarter.

 

With capex spend at $200 million, the free cash flow came to $600 million, compared to $264 million in the first quarter. At quarter-end, Micron had $1.99 billion in long-term debt, amounting to a net debt balance of $124 million. However, the debt-cap ratio was still low at 26.3%.

 

 

With the DRAM market picking up strongly and prices for memory products also strengthening, a number of analysts are getting increasingly positive about Micron shares. Consequently the sentiment on the stock started rising even before the company reported a very strong second quarter.

 

We note that of the 20 analysts following the stock, 7 have raised estimates for the upcoming quarter, 6 have raised for the following quarter, 5 have raised estimates for the current fiscal year and 7 for fiscal 2011. One analyst lowered estimates for fiscal 2011. Nearly half the estimate revisions have taken place over the last seven days, reflecting very strong agreement among analysts regarding Micron’s improving prospects.

 

As a result of all the positive revisions, the Zacks Consensus Estimate has moved up for the next two quarters, as well as the next two years. However, since the company has a history of beating estimates, a positive surprise average of 61.38% in the four preceding quarters, another surprise in the upcoming quarter cannot be totally ruled out.

 

We currently have a Neutral rating on the stock, although we believe that further momentum could raise the recommendation.