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What to Expect from Micron’s Fiscal 3Q17 Earnings

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Micron’s revenue and DRAM prices

Micron Technology (MU) is among the very few pure-play memory manufacturers in the world. Its earnings depend largely on the demand-supply equation of the memory market, especially DRAM (dynamic random access memory).

After two years of DRAM oversupply, the supply-demand conditions improved, which sent DRAM prices soaring. That overturned Micron’s falling revenues to revenue growth beginning in fiscal 4Q16. The company has reported double-digit sequential growth in revenue over the past three quarters. That growth momentum is expected to continue over the next few quarters as long as DRAM prices remain stable or increase.

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Fiscal 3Q17 revenue estimates

For fiscal 3Q17, Micron expects its revenue to rise 16.0% sequentially to $5.4 billion at the midpoint, which is in line with the consensus estimate of $5.4 billion. That represents a YoY (year-over-year) rise of 86.0% since fiscal 3Q16 was the quarter when the company’s revenue bottomed out.

3D XPoint’s contribution to Micron’s future revenue

After including fiscal 3Q17 revenue, Micron’s revenue could reach $14.0 billion for the first three quarters. Assuming another $5.0 billion of quarterly revenue in fiscal 4Q17, the company’s fiscal 2017 revenue would cross $19.0 billion. Analysts expect Micron’s revenue to be more than $19.0 billion in fiscal 2017 and more than $21.0 billion in fiscal 2018.

At the Bank of America Merrill Lynch 2017 Global Technology Conference, Micron’s CFO (chief financial officer) Ernest Maddock revised the company’s revenue estimates for 3D XPoint, which it developed in collaboration with Intel (INTC). According to Micron’s earlier estimates, 3D XPoint could contribute 5.0% to the company’s revenue in fiscal 2018. The company estimates that its annual revenue will be $15.0 billion at that time. Under the revised estimates, 3D XPoint may contribute 3.0% to Micron’s fiscal 2018 revenue.

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The role of ASP in revenue growth

Micron’s revenues are more dependent on ASP (average selling price) than unit growth. In the past, Micron’s revenue fell even though DRAM unit sales increased. That was because DRAM and NAND ASPs fell faster than the cost. Memory is a commoditized market in which one company’s memory chip is easily replaceable with another company’s memory chip. So the chip maker with the lowest cost benefits the most. In this case, it’s Samsung (SSNLF).

How memory market is looking to mitigate the effect of market ASP on earnings

Industry dynamics, however, are changing as memory makers move away from commodity and toward customization by adopting a solution-based approach. For instance, Micron has divided its server offerings into graphics-related memory and very high-performance memory HMC (hybrid memory cube), which is used in Nvidia’s (NVDA) DGX-1 supercomputers. This diversification would help Micron improve its ASP and mitigate the impact of declining market ASP.

Next, we’ll see how rising ASPs could impact Micron’s profits.

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