Micron's Earnings Review: Bottom Rebound

Micron Technology is the fourth largest semiconductor company in the world and one of the largest memory chip companies in the world. The company's products are mainly DRAM and NAND Flash, forming a complete matrix of storage products, which are widely used in medical, automotive, consumer, industrial and other fields.

Micron is one of the leading companies in the global semiconductor industry with the most single product types. The DRAM and NAND businesses contribute more than 95% of Micron's revenue. Unlike Applied Materials, Texas Instruments, Samsung Electronics and other leading semiconductor companies with multi-category layout strategies and rich product lineages, Micron focuses on the memory chip market segment and continues to make efforts without too much expansion into other products and markets. Through Continuous mergers and acquisitions, technological innovation, and capacity adjustments have consolidated its competitive advantage in the storage industry.

Through the analysis, it can be found that, in addition to the high degree of fitting between the gross profit margin and the unit price of DRAM, it can be found that ① Micron’s stock price; ② Micron’s total revenue, Micron’s DRAM revenue, and global DRAM market revenue; ③ Micron’s comprehensive gross profit rate also has a high degree of Fitting relationship.

In FY23Q3, Micron’s revenue was US$3.8 billion, a sharp drop of 57% year-on-year, mainly due to the decline in both storage product shipments and prices, and the pressure on inventory impairment, but the performance still exceeded market expectations. The company's revenue growth rate turned positive month-on-month, with an increase of 2%, and sales revenue showed signs of bottoming out.

Inventory impairment decreased and gross profit margin picked up significantly. The company's gross profit margin was -17.8%, which was a sharp increase from the previous quarter (-31.4%), mainly because inventory impairment dropped sharply to US$400 million from the previous quarter (US$1.43 billion). The scale of inventory impairment has dropped significantly, reflecting that the company's inventory situation has improved significantly.

The adjusted operating profit was -$1.5 billion, and the net profit was -$1.4 billion, narrowing the year-on-year decline. Operating profit margin and net profit margin also rebounded quarter-on-quarter. Diluted EPS was -$1.43, a marked improvement from the prior quarter (-$1.91).

With the optimization of the supply and demand structure of memory chips, it is expected that the company's performance will bottom out in this quarter, and the subsequent quarters are expected to usher in growth.

From the perspective of product structure, DRAM (DRAM is a common type of random access memory (RAM) that is used in personal computers (PCs), workstations, and servers.) is the main product, accounting for 71% of the company's total revenue. DRAM Revenue decreased by 2% quarter-on-quarter, mainly due to a decrease in ASPs of about 10% quarter-on-quarter, but the decline in prices has narrowed significantly compared to the previous quarter (-10%). Sales volume increased by about 10% month-on-month.

NAND (NAND flash memory is a type of non-volatile storage technology that does not require power to retain data. MP3 players, digital cameras and USB flash drives use NAND technology.) accounted for 27% of the company's total revenue, and its revenue increased by 14% quarter-on-quarter , mainly due to a sharp increase in sales of more than 30% month-on-month. NAND prices fell by about 15% this quarter, but the decline has narrowed significantly compared to the previous quarter (-25%).

Judging from the spot prices of DRAM and NAND in the current market, the price of DRAM products is expected to stop falling and rise, and the price of NAND has begun to pick up. With the further optimization of the supply and demand pattern, the ASP of storage products has risen, which is expected to promote the growth of the company's sales revenue, thereby improving the company's profit margin.

The explosion of generative AI has driven up the demand for AI server storage. The DRAM capacity of AI servers is 6-8 times that of ordinary servers, and the NAND capacity is 3 times that of ordinary servers. Nvidia's DGX GH200 chip has a memory space of 144TB, a large part of which is realized by Micron's joint development project, and the differentiated LP DRAM innovation can reduce the power consumption of the data center.

The percentage of DDR5 product shipments with higher ASP to DRAM shipments has more than doubled, and the company expects that Micron's D5 shipments will surpass D4 around FY24Q1 and FY24H1.

Inventories at data center customers are also improving and are expected to return to normal around the end of 2023 or thereafter, depending on growth in traditional data center spending. FY23Q3 cloud and enterprise revenues both saw strong sequential growth.

Although downstream demand has yet to pick up, most customer inventories in the PC and smartphone segments are already close to normal levels. In terms of the PC market, it is expected that by the end of 2023, shipments in the global PC market will drop by double digits year-on-year, lower than the level before the epidemic in 2019. In terms of smartphones, it is expected that the sales volume of the smartphone market will decline by 5% year-on-year in 2023, and the overall demand will remain sluggish. However, the high-end of smartphones and the increase in the penetration rate of folding screen mobile phones still continue to promote the growth of mobile phone memory capacity.

The company believes that the current price of storage products is temporary and unsustainable, and downstream customers try to buy more products before the price increases. The management's thinking and a market news can basically confirm that the three major storage giants may increase product contract prices, with a target increase of 7%-8%.

In the graphics field, with the support of client and data center applications, it is expected that the market demand in the graphics field will gradually pick up. The demand in the second half of 2023 will be stronger than that in the first half of the year, and customer inventory will return to normal in FY23Q3.

In the automotive field, the revenue of automotive products increased by about 5-10% year-on-year. Automotive memory demand is expected to continue growing in the second half of 2023, driven by reduced memory supply, normalized customer levels, and increased memory capacity per vehicle.

In the industrial sector, the inventory situation at the client side has begun to stabilize, and we have seen signs of demand recovery. It is expected that the market demand will improve in the second half of this fiscal year.

Overall, the company's expectations for the growth of demand in the DRAM and NAND industries in 2023 have dropped to low-to-medium single digits and high single digits, respectively, far below the expected long-term compound annual growth rates of 15% for DRAM and 20% for NAND.

The company has further reduced its capital expenditure plan for fiscal year 2023, and the investment amount is expected to be approximately US$7 billion, a drop of more than 40% from last year, of which WFE fell by more than 50%. At present, the company has further reduced the operating rate of DRAM and NAND to close to 30%, and the decline in operating rate is expected to continue until 2024.

Due to the decline in capacity utilization and capital expenditure, the supply of the company's DRAM and NAND products is expected to decline year-on-year in 2023. The supply growth rate of DRAM and NAND is expected to be lower than the demand growth rate, which will help improve suppliers' inventory, and the market recovery may be accelerate.

In addition to Micron Technology, other storage giants have also announced the start of capital reduction, which is expected to further accelerate the clearance of the supply side of storage products.

In terms of performance guidance, the company expects FQ3-23 to achieve a median revenue of US$3.9 billion (US$3.9 billion ± US$200 million), exceeding market expectations of US$3.877 billion, with a median decrease of 41% year-on-year and a quarter-on-quarter decrease of 3.9%. The median gross margin was -21% (-21% ± 2.5%).

In addition, China's restrictions on Micron's products will still have a certain negative impact on the company, so we need to keep an eye on it. Revenue from China accounts for 25% of the company's total revenue. It is estimated that half of the Chinese customers will be at risk of being affected by the ban, which will probably cause a low double-digit percentage (about 10-15%) risk of revenue loss to the company.