Micron Technology Inc. (MU) reported second quarter fiscal 2013 loss per share of 28 cents, wider than the Zacks Consensus Estimate of 20 cents loss per share. The straight seventh quarter of loss was mostly due to lower average selling price (ASP), lackluster PC demand and macro uncertainty, slightly offset by higher sales volume.
Despite the loss, management provided an upbeat view for the overall DRAM and NAND markets, which influenced investors. Following the earnings release, shares dropped 24 cents (2.6%) but shot up 31 cents (3.4%) in the after-hours.
Revenues
Micron reported revenues of $2.08 billion, up 3.4% year over year and 13.3% sequentially. The quarter’s revenues came well above the Zacks Consensus Estimate of $1.91 billion. The improvement was mainly due to higher DRAM and NAND shipments.
DRAM revenues grew 24.0% from the prior quarter aided by a 38.0% hike in sales volume, partially offset by 10.0% drop in ASP. NAND sales grew 8.0% sequentially due to 13.0% growth in sales volume and flat ASP. NOR flash registered a decline on lower volume sales and ASP.
According to management, DRAM sales were affected by a better supply balance matching the demand trend. Slowing PC sales and continued macro uncertainty had a deterrent effect on DRAM sales. NAND sales were influenced by higher demand.
Operating Results
The company's gross margin for the second quarter was 17.6%, up from 10.5% in the year-ago quarter. The margin expansion was primarily due to higher volume sales of NAND flash and DRAM chips as well as lower cost of production.
Selling, general and administrative (SG&A) expenses decreased 29.3% year over year to $123.0 million. The decline was mainly attributable to lower legal and personnel costs. Research and development (R&D) expenses declined 3.6% year over year to $214.0 million. Operating margin was (1.1%) versus (10.2%) in the year-ago quarter. Operating margin loss moderated from the preceding quarter due to higher revenues and lower costs.
Micron suffered a net loss of $284.0 million or 28 cents per share compared with a loss of $282.0 million or 29 cents in the year-ago quarter. The reported results include hedging loss from currency fluctuation in relation to the acquisitions of Elpida and Rexchip Electronics Corporation and a loss from the discontinuation of Micron’s 200 millimeter wafer fabrication facility in Avezzano, Italy, expected to close in the first half of calendar 2013.
Balance Sheet & Cash Flow
Micron ended the second quarter with cash and short-term investments of $2.23 billion, down from $2.27 billion in the previous quarter. Receivables were $1.23 billion, up from $1.14 billion in the previous quarter. Inventories decreased 6.0% from the prior quarter to $1.72 billion.
The company had $3.65 billion in long-term debt, up from $3.44 billion in the prior quarter. Cash generated from operations was $236.0 million, flat sequentially.
Guidance
Micron did not provide any specific guidance for revenues or earnings. But it mentioned its optimism for the end markets such as mobile, server, networking enterprise and embedded based on strong demand for its memory chips. Micron is also confident of witnessing supply/demand balance for DRAM and NAND memory chips in 2013 and 2014. The chip maker expects industry-wide DRAM wafer capacity to get reduced, which will bring down the supply, ultimately boosting ASP. For NAND, Micron is confident about growing demand due to increasing use of solid state drives in smartphones.
Micron also stated that it is focusing more in the mobile DRAM space and it has already designed low power DDR2 chips for two of the top five smartphone makers.
For the third quarter of 2013, management expects DRAM and NAND supply/demand to be favorable. Bit costs are expected to be down mid-single digits while bit production is expected to be up mid to high single digits. Management also expects SG&A expense between $135.0 million and $145.0 million. Research and development expense is expected between $225.0 million and $235.0 million.
Our Take
Micron’s second-quarter results were disappointing as net loss per share was wider than the Zacks Consensus Estimate. However, the quarter’s revenues were impressive despite PC market overhang, macro backdrop, soft DRAM and NOR prices and flat NAND prices. Management’s upbeat view on the DRAM and NAND market fundamentals was the key driver for the quarter.
We believe that tight expense control, manufacturing efficiency and secular shift toward mobile DRAM will benefit Micron’s fundamentals in the coming quarters.
The much awaited closure of Elpida’s acquisition is likely to boost Micron’s market share in the memory market. However, it may not be easy for Micron to capture share from SanDisk Corp. (SNDK), a key player in the NAND zone. However, with support from Apple Inc. (AAPL) and Intel Corp. (INTC), its prime NAND customers, the situation could be in Micron’s favor going forward.
Currently, Micron has a Zacks Rank #3 (Hold).
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