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Micron Sees Market Conditions Improving

By Timothy Green – Sep 15, 2016 at 8:05AM

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The memory-chip maker will likely post a loss during the fourth quarter, but it sees conditions improving going into fiscal 2017.

Image source: Micron Technology.

During Micron Technology's (MU -2.93%) third-quarter conference call in June, the company's outlook was guarded. Micron recognized that spot prices for its memory chips had started to improve, but it didn't want to count its chickens before they hatched. Those higher spot prices hadn't flowed through to contract prices at that time.

At the Citi Global Technology Conference earlier this month, Micron appeared more optimistic. The company announced that it expects its revenue and gross margin to be at or near the upper end of its guidance for the fourth quarter, driven by average selling price (ASP) improvements in the spot market and select contract markets. Here's what investors need to know about Micron's new outlook.

A favorable business environment

Micron had guided for fourth-quarter revenue between $2.9 billion and $3.2 billion, compared to $3.6 billion during the fourth quarter of last year. Even at the high end of that guidance, revenue will still decline by about 11% year over year.

Gross margin guidance was a range of 15.5% to 18%, far below the 27% reported during the fourth quarter of last year. While prices have started to improve, it won't be enough to push Micron back into the black during the fourth quarter. Even at the high end of guidance for revenue and gross margin and the low-end of guidance for operating expenses, Micron will post a sizable non-GAAP net loss during the fourth quarter.

For the full year, Micron expects to remain profitable on a non-GAAP basis, with a profitable first quarter offsetting losses in other quarters. Micron expects conditions to continue to improve during the fiscal first quarter of 2017.

Micron sees a few factors working in its favor. Key mobile customer qualifications are now complete, removing a barrier that knocked down revenue in the company's mobile segment in previous quarters. During the third quarter, the mobile segment produced just $561 million of revenue, down 40% year over year. The segment also produced a non-GAAP operating loss, down from operating income of nearly $300 million during the prior-year period.

Overall demand for Micron's memory chips continues to be strong, with the main problem being depressed prices. Micron expects industry supply growth to slow going forward, potentially helping prices to recover. Micron also pointed out that inventory levels among OEM and channel customers are currently low, meaning that sales declines are now unlikely to be driven by customers cutting down on inventory.

Micron expects fiscal 2017 to bring substantial growth in the number of bits the company sells. DRAM bit shipments are expected to be 20% to 30% higher in fiscal 2017 compared to fiscal 2015, while NAND bit shipments are set to rise by 30% to 40%. Per-bit prices generally fall over time, and Micron is profitable during periods when it can cut per-bits costs at a faster rate. Thanks to investments in new manufacturing technology, Micron expects its average cost per bit to decline by 20% to 25% for both DRAM and NAND in fiscal 2017.

As long as per-bit prices decline at a slower rate, Micron's profitability should begin improve going forward. If Micron's optimistic outlook proves correct, fiscal 2016 may mark the bottom in profitability for Micron, with this downturn being less severe than the previous one in 2011-2012 that led the company to post major losses. If, however, the momentum that Micron is seeing dissipates, that may not be the case.

Micron is set to report its fiscal fourth-quarter results after market close on Oct. 4. The stock has surged this year on optimism that the worst is finally over. Micron's results and guidance will provide some data to help determine whether that's truly the case.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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