Memory chip manufacturer Micron Technology (MU 5.27%) reported its fiscal-first-quarter results on Dec. 22. The company's numbers were mixed, with revenue lower than expected and earnings slightly higher than expected, but the real news was Micron's guidance. The company expects to post a loss during the second quarter, effectively killing the bull arguments made by some analysts that Micron's earnings would bottom out in positive territory.
I've warned about being overly optimistic regarding Micron on multiple occasions this year. The last time DRAM oversupply plagued the industry, back in 2012, Micron posted big losses, and it's now more likely than not that Micron will post big losses this time around as well. Here's what investors need to know about Micron's results and outlook.
A look at the numbers
Micron reported quarterly revenue of $3.35 billion, down 27% year-over-year and about $110 million shy of the average analyst estimate. Micron pointed to continued weakness in the PC DRAM market, as well as pricing pressure in the client SSD market, as drivers behind the revenue decline. Gross margin slumped to 25%, down from 36% during the same period last year. Average selling prices for DRAM declined by 13% sequentially, while Micron's cost per bit fell by 10%. Non-volatile memory selling prices fell 7%, while cost per bit fell by 6%.
The computer networking business unit, which includes products that go into PCs and servers, reported a 12.5% sequential decline in revenue. Operating margin in the segment was just 1.8%, down from 7.6% during the previous quarter. The mobile business unit suffered a 13% revenue decline, and its operating margin slumped eleven percentage points sequentially, falling to 16.3%.
Micron reported non-GAAP earnings of $0.24 per share, down 75% year-over-year, but a penny better than analysts expected. On a GAAP basis, Micron reported EPS of $0.19, down 77% year-over-year. Total GAAP operating costs increased by 11.5% year-over-year, driven by a 12% rise in research and development costs.
For the second quarter, Micron expects revenue to be between $2.9 billion and $3.2 billion, with a gross margin between 17.5% and 20%. Analysts expected revenue of $3.46 billion, and the midpoint of Micron's guidance represents a year-over-year decline of 27%. Micron expects to post a non-GAAP loss between $0.12 and $0.15 per share.
What it all means
At the end of the fourth quarter, Micron's management appeared optimistic that 2016 wouldn't be all that bad. In Micron's earnings presentation, the company made these two statements:
- We expect the demand environment to stabilize and improve as we move through calendar 2016.
- We expect industry supply and demand for both DRAM and NAND to be relatively balanced in 2016.
The language changed in the company's first-quarter earnings presentation:
- We are hopeful market conditions will improve in CY 2016 with stabilization in PC and continued strength in Mobile, Cloud and Embedded segments.
Expecting and hoping are two very different things, and it now seems that management's outlook is more in line with reality. Gartner predicted back in October that DRAM oversupply would worsen in 2016, spreading to both the mobile and server segments, and while the severity of the downturn is hard to predict, a very tough 2016 in the DRAM industry seems more likely than not.
During the first quarter, Micron's mobile segment began to deteriorate, with revenue slumping and margins contracting. Just as the company's PC and server segment has seen its profitability plummet this year due to weak demand, the mobile segment could continue to get worse throughout 2016. The smartphone market is growing far more slowly than it was a few years ago, and IDC expects smartphone unit growth to be in the single digits during 2016.
Micron offers a great lesson to investors: Peak earnings of a company in a cyclical industry should not be used to value the stock. Micron reported GAAP earnings of $2.47 per share in fiscal 2015, which ended in August, making the current stock price of around $14 per share look like a steal. Even Micron's 52-week high of about $35 per share doesn't look unreasonable based on peak earnings. But on average, Micron's earnings are far lower, just about $1 per share from fiscal 2011 through fiscal 2015.
Eventually, demand for DRAM and NAND will catch up with supply, but this appears unlikely to happen anytime soon. In the meantime, Micron's earnings will continue to deteriorate.