Memory-chip manufacturer Micron Technology (MU 0.80%) is set to report its fiscal-first-quarter results after the market close on Tuesday, Dec. 22. The company's stock has been tumbling all year, as oversupply in both the DRAM and NAND markets, driven in part by weak demand for PCs, has taken a toll on profits. Here's what to look for when Micron reports earnings.
What analysts are expecting
When Micron reported its fiscal-fourth-quarter results in October, the company's guidance left a lot to be desired. The company expects revenue to be between $3.35 billion and $3.6 billion for the first quarter, with non-GAAP EPS between $0.20 and $0.26. The average analyst estimates for both revenue and earnings fall in the midpoint of the company's guidance, with revenue of $3.47 billion, and non-GAAP EPS of $0.23 expected.
These estimates represent steep declines in both revenue and earnings. During the first quarter of the previous fiscal year, Micron recorded $4.57 billion of revenue, and if the company matches the average analyst estimate, revenue will tumble by 24% year over year. Earnings are set to fall by a far greater percentage, with the average analyst estimate 76% below earnings during the same period last year.
Both DRAM and NAND chips act like commodities, with supply and demand dictating selling prices. After a couple of years of record profits for Micron, oversupply is now pushing prices down faster than the company can cut costs.
The outlook is critical
Micron's results for the first quarter are important, but investors should pay close attention to the company's outlook for 2016. Last time oversupply led to steep price declines, in 2012, Micron turned unprofitable, posting a $1 billion loss in that year. The big question is this: Will Micron remain profitable throughout the cycle this time around, or will the company's earnings continue to deteriorate and eventually turn into losses?
DRAM, which accounts for about two-thirds of Micron's revenue, has become less competitive during the past few years. Other than Micron, Samsung and SK Hynix are the only other major suppliers following Micron's acquisition of Elpida in 2012, and the bull thesis for Micron revolves around this consolidation leading to less severe swings in prices. This hasn't stopped prices from falling hard this year, but if Micron's profits bottom out in positive territory, it would suggest that the economics of the industry have fundamentally changed.
The PC market has been weak all year, but slowing demand for smartphones could be an additional problem for Micron. IDC has predicted that the global smartphone market will grow by just 9.8% in 2015, and the company expects just 7.4% annual growth through 2019. Strong demand for smartphones has helped Micron's mobile segment partially counteract its PC segment so far this year, but growth may be harder to come by going forward.
One thing that could help Micron cut costs faster in 2016 is the company's recent acquisition of Inotera. Previously, Micron had been purchasing all of Inotera's DRAM output, and the move will eliminate the profit margin added to the cost of Inotera's chips. This could boost Micron's gross margin following the close of the deal, helping to offset any further declines in DRAM prices. The acquisition also prevents Inotera's intellectual property from going to a competitor. Investors should expect to hear more about the Inotera acquisition during Micron's earnings conference call.
Micron's guidance will be closely watched when the company reports earnings, and the company's outlook will provide insight into whether the economics of the industry have genuinely improved. Gartner expects DRAM oversupply to persist through 2016, spreading into the server and low-power portions of the market. If that prediction is right, Micron's results could get a whole lot worse before they start getting better.
