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Understanding Micron’s Expense Structure

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Micron’s expenses at a glance

So far in this series, we saw that Micron Technology (MU) operates in the capital-intensive industry of semiconductors. Samsung Electronics (SSNLF) is a strong competitor in technology innovation. Let’s now look at how Micron’s expense structure impacts its profit margins.

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COGS

COGS (cost of goods sold) includes labor and material costs, product and technology costs, and other costs a company incurs in the manufacture of its products. These expenses, in turn, determine the company’s profitability and market strength. Micron invests in R&D (research and development) in order to lower the COGS and improve gross margins. The company has maintained its COGS in the range of 64%–69% that has fetched it gross margins in the range of 31%–36%.

On the other hand, SanDisk (SNDK) has maintained its COGS is in the range of 50%–60% and has fetched it gross margins in the range of 39%–49%.

R&D expense

In the memory space, the average R&D expense is somewhere around 11% of a company’s revenue, according to a PwC report. Micron’s R&D expense as a percentage of sales increased from 9% in 2Q15 to 11% in 3Q15. R&D expenses depend on the number of development wafers processed, the cost of advanced equipment used to develop a new product, and personnel costs. This expense can vary significantly, depending on the timing of product qualification, as any cost incurred in production prior to product qualification is charged as an R&D expense.

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However, Micron controls its R&D costs by entering into cost-sharing arrangements with joint venture partners like Intel Corporation (INTC). Thus, the cost of research is divided between the two parties, wherein partners reimburse some portion of the amount spent on R&D, and this reimbursed amount is reduced from Micron’s R&D expense. Reimbursements from Intel reduced Micron’s overall R&D expenses by $58 million in 3Q15.

SG&A expense

A company’s SG&A (selling, general, and administrative) expenses consist of payroll costs, legal costs, and any other selling and administrative costs. This category forms a small portion of the company’s expenses and is mostly stable in normal circumstances. However, in fiscal 2014, Micron’s SG&A expenses increased by 24% year-over-year, as the Elpida acquisition required reinstated payroll plan and increased the overall payroll cost.

To get exposure in Micron Technology, you can invest in the PowerShares QQQ Trust, Series 1 (QQQ), which has 0.34% exposure in the company.

Read the next part of this series for more on the organizational and technological risks that Micron faces.

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