Micron Technology’s (MU) revenue is a product of ASPs (average selling price), unit growth, and product mix. However, its profitability is a product of ASPs, cost per unit, and product mix. Because the first element isn’t within Micron’s control, the company focuses on the other two elements to boost its earnings.
Micron is investing aggressively in advanced nodes to close the cost gap with Samsung (SSNLF) and SK Hynix. A shift to advanced node reduces the cost per unit. As Micron can’t control ASP, it reduces its costs to maintain its profit margins.
At the Citi 2018 Global Technology Conference, Micron’s CFO, Dave Zinsner, stated the company is expected to achieve bit crossover on 1X DRAM by the end of 2018, bringing the cost benefit to 20.0%.
On the NAND front, the company achieved bit crossover on 64-layer 3D NAND in May and is expected to reduce its cost by 30.0% by the end of 2018. Bit crossover is achieved when the total capacity from the new node surpasses the total capacity from the previous generation node.
Micron has accelerated its node transition with the help of machine learning and factory automation. It has yet to close the cost gap with Samsung, which has started mass production on 1Y DRAM.
This accelerated node transition helped Micron more than double its non-GAAP gross margin from 26.0% in the fiscal first quarter of 2017 to 61.0% in the fiscal third quarter of 2018. The company expects to report a gross margin of 62.0% in the fiscal fourth quarter.
However, Baird analyst Tristan Gerra believes that Micron’s gross margin would peak in the fiscal fourth quarter, which means it would take a downward path in fiscal 2019 as memory prices begin to fall. In Micron’s fiscal fourth-quarter earnings, investors should look for the company’s gross margin guidance to understand the impact of memory price declines on the chip maker’s profitability.
Next, we’ll look at Micron’s operating leverage.
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