On Tuesday afternoon, Micron reported November quarter (fiscal first quarter) revenue of $7.91 billion (up 15% annually) and non-GAAP EPS of $2.97 (up 21%). Revenue was below an $8 billion consensus; EPS, benefiting from $1.8 billion worth of stock buybacks, beat a $2.95 consensus.
More importantly, on its earnings call, the memory giant guided for February quarter revenue of $5.7 billion to $6.3 billion (down 18% annually at the midpoint) and EPS of $1.65 to $1.85, below a consensus of $7.26 billion and $2.39. The company also cut its fiscal 2019 (ends in Aug. 2019) capital spending budget to a range of $9 billion to $9.5 billion from one of $10.5 billion, plus or minus 5%.
Shares fell 9% in after-hours trading to $31.05, making new 52-week lows in the process. Chip equipment makers Applied Materials (AMAT - Get Report) and Lam Research (LRCX - Get Report) also sold off, as did hard drive/NAND flash memory giant Western Digital (WDC - Get Report) .
Here are some takeaways from Micron's earnings report and call.
1. Micron Is Offering Cautious Outlooks on 2019 DRAM and NAND Demand
On the call, CEO Sanjay Mehrotra said Micron now expects DRAM bit demand to grow about 16% in 2019, down from a prior outlook of about 20%, and that its own DRAM bit shipments would be flat to down annually this quarter. He added Micron now only expects to grow its DRAM bit shipments about 15% next year, but also said industry shipment growth is "tracking ahead" of demand growth for now.
Likewise, Micron now expects industry bit shipments of NAND flash memory, a market declared to be in oversupply, to grow about 35% next year. The company expects to grow its NAND bit shipments at a similar clip; in September, it forecast NAND industry bit shipments would rise 35% to 40% in 2019, with Micron's own shipment growth being "somewhat above" that level.
Given Micron's outlook, it wouldn't be surprising to see fellow memory giants Samsung and SK Hynix announce cuts to their own near-term capex plans when they report next month. That in turn could bring expected supply growth closer to expected demand growth.
2. The Company Sees Several Near-Term Issues Weighing on Sales
Echoing remarks made in September, Micron suggested its server DRAM sales are being affected by customer inventory adjustments, while adding that it expects this issue to "persist for a couple of quarters." And -- echoing comments from Micron client Nvidia (NVDA - Get Report) , which issued weak guidance last month -- Mehrotra says "higher than normal inventories in gaming [graphics] cards and [a] fall-off in crypto-related demand" are weighing on graphics DRAM sales.
Micron also joins several other mobile chip suppliers in stating weak high-end smartphone demand is a headwind. And it suggested Intel (INTC - Get Report) PC CPU shortages (also brought up in September) remain an issue.
The company also suggested its solid-state drive (SSD) share will be pressured in fiscal 2019 by an industry shift to NVMe-interface SSDs from SATA-interface SSDs. It expects SSD share gains to resume in fiscal 2020 with the help of new NVMe products.
3. Management Is Optimistic Demand Will Improve in the Second Half of 2019
[A]s we enter the second half of calendar 2019, we expect a healthier [DRAM] demand environment alongside an improved industry supply picture," said Mehrotra. Likewise, he forecast NAND demand would improve in the second half of the year (a seasonally stronger time for the memory market) as lower prices boost demand in a variety of end-markets.
Mehrotra also said Micron is still seeing healthy end-market DRAM consumption "in segments like industrial, cloud, enterprise and client compute." And management insisted long-term demand drivers, such as rising cloud capital spending and the inclusion of larger amounts of memory inside of the average phone and the average car, remain in place.
Though not giving any formal earnings guidance beyond this quarter, Micron says it's still "well-positioned to deliver healthy profitability" throughout 2019. That would represent a contrast to prior cyclical downturns, during which earnings typically turned negative.
4. Cost Reductions Will Prop Up Margins to an Extent
Micron says over half of its DRAM bit production now relies on its relatively new 1x manufacturing process, and expects to begin obtaining "meaningful" revenue from chips made using its next-gen 1y process during its May 2019 quarter. The company also began producing 96-layer 3D NAND flash chips last quarter, after having ramped production of 64-layer chips earlier in the year.
The 1y and 96-layer transitions should help drive meaningful reductions in Micron's DRAM and NAND cost per bit as calendar 2019 progresses. The company had a 59% non-GAAP gross margin (GM) last quarter, and (due to lower revenue and price pressure) expects a GM of 50% to 53% this quarter.
5. Buybacks Will Continue
"I would expect us to be continue to be good buyers of the stock so to speak through the next three quarters," said CFO Dave Zinser. He added Micron, which has pared its debt load considerably the last couple of years, won't be doing "a ton of deleveraging" during the rest of fiscal 2019.
Micron ended its November quarter with $7.2 billion in cash and $4.1 billion in debt. The company is seven months removed from unveiling a $10 billion stock buyback program, and reiterates it aims to return at least 50% of its free cash flow to shareholders.