Micron (MU +4.04%) managed to beat analyst estimates for both revenue and earnings when it reported its fiscal 2015 fourth quarter results on Oct. 1, but it was an ugly quarter for the DRAM/NAND manufacturer. Revenue declined, profits were more than cut in half year-over-year, and weak demand for PCs continued to plague the company. Here's what investors need to know about Micron's results.
Source: Micron
A look at the numbers
Micron reported quarterly revenue of $3.6 billion, about $40 million higher than the average analyst estimate. While this result was better than expected, revenue still declined 15% year-over-year and 7% compared to the third quarter.
GAAP earnings per share came in at $0.42, flat sequentially and down 56% year-over-year. On a non-GAAP basis, earnings of $0.37 per share was $0.04 better than analysts were expecting. While flat GAAP earnings compared to the third quarter seems like a positive, it was purely the result of a tax benefit during the fourth quarter. GAAP operating income slumped 32% sequentially and 48% year-over-year.
Gross margin was 27%, down from 31.2% during the third quarter and 32.8% last year. Bit growth was negative for both DRAM and NAND compared to the third quarter, with DRAM bits declining 1%, and NAND bits declining 6%. Average sales prices also fell, with DRAM ASP down 7%, and NAND ASP down 1%.
The compute networking business unit, which contains DRAM that goes into PCs and servers, was hit hard, once again. Revenue slumped 14% compared to the third quarter, and operating income declined 63%. The segment operating margin of just 7.6% is down 10 percentage points from the third quarter.
The storage business unit, which contains NAND products, suffered a sales decline of 6%, along with an operating loss of $46 million, worse than a $33 million operating from the previous quarter. The embedded business unit was a bright spot for the company, despite a slight revenue decline, with operating margin improving slightly to 21.9%.
The mobile business unit, which has been an area of strength, posted 2% sequential revenue growth, but operating income fell by 11.5% as operating margin contracted from 31.6% to 27.3%.
While there's almost nothing good about Micron's numbers, management provided an optimistic outlook. The company expects industry supply and demand for both DRAM and NAND to be relatively balanced during 2016. This outlook is in contrast to that of Gartner, which expects DRAM oversupply to persist through 2017.
Key takeaways
One thing to remember is that analyst estimates for Micron have been declining during the past few months, so the company's earnings beat isn't all that meaningful. It was an ugly quarter for Micron, no matter how you slice it. Margins in the PC business are collapsing, and PC sales will need to strongly rebound for things to improve.
In the mobile business, a decline in the operating margin is a potential red flag. Smartphone sales are slowing compared to the rapid growth of the past few years, and there's a risk that DRAM or NAND oversupply could develop in the mobile market. For now, Micron's mobile segment is still extremely profitable, but it's something that investors should keep an eye on.
Micron expects revenue between $3.35 billion and $3.6 billion during the first quarter, with a gross margin between 24.5% and 27%. Non-GAAP earnings is expected to be between $0.20 and $0.26 per share, down significantly from the $0.97 Micron reported during the first quarter of 2015.
One thing is safe to say at this point: Micron's earnings in 2016 are likely to be far lower compared to 2015. The roughly 75% year-over-year decline in non-GAAP earnings per share expected during the first quarter is not a good way to start off the year; if that's what balance between supply and demand looks like, investors better hope that Micron's outlook is more accurate than Gartner's.
Micron's guidance suggests that things are going to get worse before they get better. Micron is a great example of why investors shouldn't blindly base their valuations on trailing earnings or even analyst estimates; the latter can change, and the former aren't indicative of future earnings, especially for a cyclical company like Micron.
Though the stock traded up over 7% following the release, neither the company's results nor its guidance are anything to celebrate.
