Micron Rebounds to Profits in Fiscal 1Q17

In the previous part of this series, we saw that rising prices for DRAM (dynamic random access memory) and NAND (negative-AND) are driving Micron Technology’s (MU) revenue in fiscal 2017. Micron is the third-largest memory maker after Samsung (SSNLF) and SK Hynix and has been investing in advanced technology to reduce its cost per bit. However, DRAM and NAND prices fell more than the cost in 2015 and 2016.

Because of DRAM oversupply in 2015 and 2016, Samsung and SK Hynix operated at wafer-thin margins, and Micron went into losses. For the first time in two years, DRAM prices rose 5.0% in fiscal 1Q17, whereas Micron’s DRAM cost fell 5.0%. NAND prices remained unchanged, but its cost fell 8.0%. That increased the company’s revenue and gross margins.

In fiscal 1Q17, Micron’s non-GAAP (generally accepted accounting principles) gross margin was 25.0%, a rise of seven percentage points from fiscal 4Q16. The margins also include profit earned from the shipment of 3D (three-dimensional) NAND.

The company is slowly reaching its 2014 earnings level. It expects its gross margin to rise one to two percentage points due to the integration of Taiwan’s (EWT) Inotera. The effect of this integration would be visible in fiscal 2Q17 when Micron expects to report a gross margin of 31.0%–34.0%. The last time the company reported a gross margin above 30.0% was in fiscal 3Q15. Micron reports a gross margin in the low 30s when it’s at its peak.

Micron’s non-GAAP operating margin rose from 1.0% in fiscal 4Q16 to 11.0% in fiscal 1Q17, driven by cost savings from restructuring and increasing memory prices. The company is increasing its spending on R&D (research and development), which could see its operating expenses rise from $594.0 million in fiscal 1Q17 to $615.0 million in fiscal 2Q17. However, that would not reduce its operating margin since the integration of Inotera would bring in $150.0 million in savings.

Micron expects its non-GAAP operating income to double in fiscal 2Q17, resulting in an operating margin of around 19.0%. The company reports operating margin above 20.0% when it’s at its peak. The last time it reported an operating margin above 20.0% was in fiscal 3Q15.

Micron reported positive non-GAAP EPS (earnings per share) in fiscal 1Q17 after reporting four quarters of losses. The company’s EPS for the quarter was $0.32, beating analysts’ estimate of $0.28. The company expects its EPS to almost double to $0.63 in fiscal 2Q17, which is higher than analysts’ estimate of $0.39. The company’s fiscal 2Q17 guidance includes the impact of the Inotera integration.

Next, we’ll look at the company’s two main memory products—DRAM and NAND—and how they impacted the company’s earnings.