Memory supplier Micron Technology (NASDAQ:MU) continues to do well. Following a year of both top and bottom-line growth, Micron reported EPS of $0.79 for its fiscal third quarter, soundly beating analyst estimates of $0.70. In spite of the extended period of good results, investors shouldn't believe that Micron is about to reach a ceiling, as there are still some significant areas where Micron can improve.
The gross margin
In the memory business, supply is carefully controlled across all remaining players in the market to prevent steep decreases in selling prices. As a result, gross margin management becomes key.
Micron's gross margin for the third quarter was 34%, flat from the second quarter, as decreases in average selling prices were offset by decreases in production costs. This is a big improvement from the same time last year, when Micron's gross margin was stuck at a worrying 24%. However, Micron's current gross margin still trails competitors such as SanDisk (NASDAQ:SNDK), whose latest reported gross margin stood at 51%.
How can Micron improve this situation? DRAM, one of the company's two main products, is older technology and has gross margins in the high 30% range, close to the 40%-45% range that the company believes is possible. The company's other main product, NAND flash, is newer and has much lower gross margins in the high 20% range, but that's about to get better.
Moving to SSDs
Micron's CEO, Mark Durcan, has said that the future for memory suppliers is in providing higher-margin customized solutions, rather than commoditized components. Micron is moving along this path with its NAND business, and in particular, it is ramping up production of solid-state drives, or SSDs.
The SSD market has been exploding in the past several years, but so far, Micron has had a small presence there, particularly in the enterprise segment. However, in the third quarter, Micron's sales of both client and enterprise SSDs increased over 50% from the previous quarter. The share of NAND chips that Micron was using for SSDs also increased significantly in the same period, up from 12% to 20%.
Predictably, competition in such a growing market is also intensifying. In particular, SanDisk has been focusing on SSDs as well, and in 2013, it saw 65% growth in its SSD business, which now makes up 21% of the company's total revenue. In addition, SanDisk has further shored up its position in enterprise SSDs with the acquisition of flash-product provider Fusion-io (NYSE:FIO) earlier this month. Micron is also moving in the right direction with its SSD business, but it will have its work cut out for it.
Triple level cell
The other component of improving NAND margins involves the underlying technology. So far, Micron has produced only small amounts of a type of NAND called triple level cell, or TLC, which offers lower performance, but is also about 20% cheaper to make.
Durcan has admitted that not focusing on TLC was a mistake, as many customers don't care about the performance difference and are willing to pay as much for TLC NAND as for more expensive versions. Micron is now working aggressively to fix this misstep; it expects to sample 16-nanometer TLC NAND by the end of this year and to include it in client SSDs by spring of 2015.
Cash for investors
Another significant place where Micron can improve is in its returns to investors. So far, Micron has focused on dilution management related to convertible debt and has bought back roughly 80 million shares over the past 9 months. Management has called this "low-hanging fruit," as such convertible notes contribute both to share count and are recorded as debt on the balance sheet.
However, as Micron's performance has improved over the last year, the company is increasingly facing questions about introducing a dividend program to match peers such as SanDisk. Management has stated that its immediate goal is to become net-cash positive, after which it will evaluate the next step.
Building on a year of remarkable growth, Micron continues to do well in the third quarter. Investors can expect even better performance down the line, thanks to Micron's move into SSDs and its focus on TLC technology. In addition, there is reason to hope that Micron will introduce a dividend program as its financial picture continues to improve.
Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.