Memory-chip manufacturer Micron (MU 4.37%) reported its fiscal-first-quarter results in December, complete with massive declines in both revenue and profitability. The DRAM market is currently suffering from oversupply, in part driven by a weak PC market, and Micron's performance has deteriorated significantly as a result.
However, the numbers don't tell the whole story, and Micron's management provided important details for investors during the company's earnings conference call. Here are five things that Micron wants investors to know.
New technology will help cut costs
Per-bit prices of DRAM and NAND generally fall over time, allowing devices to have increasing amounts of both memories without raising costs for consumers. Recently, both DRAM and NAND prices have fallen rapidly, creating a situation where Micron's cost-per-bit isn't falling fast enough to prevent slumping profitability. This year, CEO Mark Durcan expects the ramping up of new technology to begin boosting Micron's efficiency:
Micron has focused on the deployment of advanced technology to drive manufacturing efficiency and enable innovative new products. Specifically in 2016, this focus is on three key areas: ramping 20-nanometer DRAM and enabling 1X DRAM in manufacturing, ramping 3D NAND and enabling second generation 3D NAND in manufacturing, and finally accelerating the development of advanced controllers to enable growth in SSDs and other system-level solutions.
Of course, all DRAM and NAND manufacturers are in a constant state of raising efficiency through technological innovation, and any advantage obtained will likely be short-lived. The wild card is pricing, and regardless of how much Micron is able to cut per-bit costs in 2016, there's always a chance that prices fall faster.
Look to the second half of 2016 for growth
Micron expects to gain DRAM market share in 2016, with its DRAM business growing faster than the market, but Durcan explains that much of this growth will come during the second half of the year:
In terms of bit growth, for DRAM, we still expect Micron to be above the market for calendar year 2016, based on a market growth assumption in the low-20% range. The majority of Micron's growth will occur in the latter half of fiscal 2016, with continued progress in fiscal year 2017. For trade NAND, we expect our bit growth to be below the market in calendar 2016, as we proceed with 3D conversions which will limit output in the first half of the year. Our Fab 10X expansion and 3D conversions position us to significantly outgrow the NAND market in fiscal 2017.
This will be another tough year for Micron's NAND business, as the company works through converting output to 3D NAND. A new NAND fab is currently being built, and by fiscal 2017, Micron expects to be in a position to grow its NAND business faster than the market. With NAND pricing currently weak due to oversupply, and with Goldman Sachs predicting that oversupply will continue throughout 2016, it may be quite a while before NAND pricing recovers.
Inotera should boost cash flows
In December, Micron announced that it was acquiring Inotera Memories, a DRAM manufacturer that supplies Micron with 100% of its output. Micron already owned about one-third of the company, and Micron is paying $3.2 billion, net of cash and debt, for the remaining portion.
Because the previous deal between Micron and Inotera involved a profit-sharing scheme, bringing Inotera in-house should boost Micron's cash flow. Micron CFO Ernie Maddock explains:
First, we expect the acquisition to be immediately accretive at closing. Second, and equally important, we expect to generate significant incremental operating cash flow. As a point of reference, under the margin sharing structure which commences at the beginning of calendar 2016, we would expect to realize approximately 25% of the total operating cash flow associated with the output from Inotera. After closing, we will receive the full benefit of this cash flow. Over the last 12 months this would have generated an approximate $1.4 billion of incremental operating cash flow for the company.
Things will get worse before they get better
Despite all of the efforts Micron is making to lower costs, the reality is that DRAM prices have fallen faster than costs over the past six months or so. Micron's guidance for its fiscal second quarter suggests that the situation will continue to deteriorate: "[O]perating income ranging between a loss of $60 million and income of $20 million and an EPS range between a loss of $0.12 per share and a loss of $0.05 per share based on 1.30 billion diluted shares."
Micron will post a loss during the second quarter, a far cry from the record profits that the company managed during fiscal 2014 and fiscal 2015. Gartner expects the DRAM oversupply situation that is currently affecting the PC portion of the market to spread in 2016, hitting the server and mobile segments, and if that ends up being the case, Micron's results could get a whole lot worse before they start to get better.
3D XPoint won't save Micron this year
One of the biggest announcements of 2015 in the world of memory was the unveiling of 3D XPoint memory by Micron and Intel. 3D XPoint is a new class of memory, non-volatile like NAND but about 1,000 times faster. DRAM will still offer higher performance and more durability, but 3D XPoint could find a place between DRAM and NAND, particularly for data-center applications.
However, Durcan doesn't expect 3D XPoint to contribute to Micron's revenue until 2017 at the earliest: "We're really more in an enablement mode as opposed to a significant production ramp today, but we think the revenue does become significant out in 2017 and more so in 2018."
It's difficult to estimate the size of the 3D XPoint opportunity for Micron, but the story won't truly begin to play out until sometime next year.