After the bell on Monday, Micron reported May quarter (fiscal third quarter) revenue of $5.44 billion (up 14% annually), GAAP EPS of $0.71 and non-GAAP EPS of $0.82. Those numbers respectively topped FactSet consensus estimates of $5.27 billion, $0.64 and $0.75.
For the July quarter, Micron guided for revenue of $5.75 billion to $6.25 billion (up 18% to 28%), GAAP EPS of $0.78 to $0.98 and non-GAAP EPS of $0.95 to $1.15. Those guidance ranges are respectively above consensus estimates of $5.46 billion, $0.71 and $0.79.
On Tuesday morning, Micron’s stock was up 5.3% to $51.71. Thanks to Micron’s numbers and a sales guidance hike from Xilinx (XLNX) - Get Xilinx Inc. Report, a number of other chip stocks also moved higher on Tuesday, leading The Philadelphia Semiconductor Index to rise about 2%.
Here are some notable takeaways from Micron’s earnings report and call, as well as from a brief talk with Manish Bhatia, Micron’s EVP of Global Operations, that followed the earnings call.
1. Strong Demand from Cloud Clients Remains a Major Tailwind
Much like Intel, AMD, Nvidia and a host of other chip suppliers with decent cloud exposure, Micron continues seeing strong demand from Internet/cloud giants, as a capex upswing that started in late 2018 gets a boost from investments made to support the traffic spikes that have followed COVID-19 lockdowns.
Cloud DRAM sales were said to be up “significantly” on a sequential basis, and cloud SSD sales, which are also benefiting from Micron’s recent efforts to flesh out its data center SSD portfolio, more than doubled sequentially.
When asked about how cloud and enterprise data center demand are respectively trending, Bhatia noted cloud demand has been the biggest data center growth driver for Micron. He added that enterprise demand has been strong for some products, such as SSDs, and softer for others.
2. 5G Phones and Next-Gen Game Consoles Are Expected to Act as Demand Tailwinds
Though COVID-19 has taken a toll on global smartphone sales, Micron says it saw “healthy” sequential and annual growth for its mobile memory sales last quarter. The company also reiterated that 5G phone adoption is driving DRAM and NAND flash content increases for mass-market phones, while adding that the increases are most pronounced in the low-end to mid-range portion of the smartphone market.
Micron sees both content increases and seasonal phone launches boosting its mobile sales during the back half of the year, while also suggesting that pent-up demand from consumers who were unable to visit retail stores during lockdowns could provide a lift. And not surprisingly, the company forecasts that Microsoft (MSFT) - Get Microsoft Corporation Report and Sony’s undefined next-gen console launches, which are due by this holiday season, will boost its graphics DRAM sales.
3. Cautious Remarks Were Shared About PC and Automotive Memory Demand
Though notebook demand has risen in recent months due to purchases made to support remote workers and learners, Micron expects total PC unit shipments to be down in 2020 due to lower sales of desktops, which have been pressured by softer corporate demand as offices remain closed.
And in line with the comments of many other automotive chip suppliers, Micron says its automotive revenue fell significantly last quarter amid auto plant shutdowns. But the company did add that content gains related to the adoption of ADAS/autonomous driving platforms remain a tailwind, and that it expects automotive sales to return to growth as vehicle production rates improve.
4. Some Customers Are Building Up Inventories
When asked on the call about customer inventory levels, CEO Sanjay Mehrotra said that the inventory levels of cloud clients “are in a healthy place.” However, he also suggested mobile clients have built up inventories due to a mixture of expected demand growth, COVID-related supply chain considerations and -- in comments that are likely a reference to the actions of Chinese clients following the placing of new export restrictions on Huawei -- “some geopolitical considerations.”
Bhatia indicated that automotive is another end-market where inventories are currently elevated, while adding that Micron has adjusted its automotive memory production due to the demand environment.
5. ASPs and Margins Are Rising
Micron’s average selling price (ASP) for DRAM, which accounted for 66% of May quarter revenue, rose by a mid-single digit percentage sequentially, after being flat in the February quarter. Its ASP for NAND, which accounted for 31% of revenue, rose by a high-single digit percentage for the second quarter in a row.
Higher ASPs helped Micron’s non-GAAP gross margin (GM) come in at 33.2% -- down from 39.3% in the year-ago period, but up from 29.1% in the May quarter and above guidance of 29.5% to 32.5%. In addition, Micron has set an August quarter GM guidance range of 34% to 37%.
More favorably industry supply/demand balances -- the result of major capex cuts from Micron and its peers -- are a clear ASP tailwind. And with Micron stating that industry supply growth might now be lower in the second half of the year than previously expected, this tailwind might remain in place in the coming months, in spite of COVID-related weakness in some end-markets.
Bhatia was also keen to stress the role played by a mix shift towards higher-ASP products, such as DRAM and SSDs going into cloud servers. Micron asserts that “high-value” NAND products account for over 75% of its NAND bit shipments.
6. Mixed Capex Guidance and Commentary Were Shared
Micron now expects to spend $8 billion on capex in fiscal 2020 (ends in August) -- down from a fiscal 2019 level of $9.1 billion, but at the high end of a prior guidance range of $7 billion to $8 billion. The company still expects capex related to front-end (chip production) equipment to be down over 40% annually, but expects capex related to buildings and back-end (assembly/testing) capacity to be up.
Also -- in comments that matter for chip equipment makers such as Applied Materials (AMAT) - Get Applied Materials Inc. Report, KLA (KLAC) - Get KLA Corporation Report and Lam Research (LRCX) - Get Lam Research Corporation Report -- Micron says that it still expects capex to rise in fiscal 2021, but now expects it to be “meaningfully lower than our pre-COVID-19 plan.” Bhatia said that Micron plans to increase both its DRAM and NAND capex in fiscal 2021, and that the spending will skew towards investments in cutting-edge manufacturing processes.
7. A Small Amount of Stock Was Repurchased
$40 million was spent to repurchase 929,000 shares, at an average price of $43.54.
Micron, which has said it plans to spend half its annual free cash flow (FCF) on buybacks, has spent $134 million on buybacks over the first nine months of fiscal 2020. This compares with FCF of $250 million.