Micron reported surging data center growth up 400% YoY and 40% QoQ, with data center revenue mix surpassing 50% of Micron’s revenue for the first time. The Compute and Networking Business Unit reported revenue growth of 46% QoQ and was up 153% YoY for revenue of $4.4 billion.
An analyst did some digging around on the call and came up with the number of $800 million to $900 million coming from HBM: “You guys don't report HBM revenue [..] But based on everything you've said over the past couple of quarters, we're sort of estimating you did, I don't know, $800 million, $900 million in revenue in the quarter.”
Despite Micron’s data center revenue surging this quarter, the comments about the consumer recovery taking longer tanked the stock. Management is expecting these segments to resume around May of next year, which clearly wasn’t strong enough commentary to sustain the stock after hours.
We closed the bulk of the position because semis are breaking support across the board right now, and the broad market also broke critical support today following the FED meeting. An earnings call that focused on consumer weakness throws fuel on the fire.
The headline numbers are that Micron reported fiscal Q1 revenue nearly in line with consensus at $8.70 billion, yet it forecast Q2 revenue to decline nearly 10% sequentially to $7.9 billion, well below the $8.97 billion consensus estimate. The CEO acknowledged that consumer-facing markets and NAND were weaker in the near term and weighing on growth.
Micron also shared some positive details on the DRAM/HBM side, sharing that its HBM3E is shipping with Nvidia’s B200 and GB200s, with high volume shipments to its second large customer commencing this quarter and shipments to a third customer beginning in calendar Q1 2025. Management also elaborated on the long-term growth runway for HBM4 and HBM4e.
Revenue
Revenue of $8.71 billion increased 84.3% YoY and met consensus estimates. Management said that they “achieved new records in both total data center revenue and the revenue mix for data center in fiscal Q1,” with data center revenue rising 40% QoQ and 400% YoY.
For Q2, Micron guided far below consensus, seeing revenue of $7.9 billion, +/- $200 million, versus estimates for $8.97 billion. This corresponds to a sequential decline of (9.3%), whereas analysts had expected to see 3.1% sequential growth. The YoY growth is thus expected to decelerate to 35.7% in Q2, a much sharper deceleration than the expected 55.4% YoY growth next quarter.
Micron offered some commentary as to the unexpectedly weak guide:
“We had previously shared our expectation that customer inventory reductions in the consumer-oriented segments and seasonality would impact fiscal Q2 bit shipments. We are now seeing a more pronounced impact of customer inventory reductions; fiscal Q2 bit shipment outlook is weaker than we previously expected.”
Micron expects this transition period to be “relatively brief” with inventories getting healthier by the early part of 2025, setting up for stronger bit shipments in the second half of the fiscal year. Management also reiterated that they remain on track to hit HBM targets and deliver a “substantial” revenue record with “significantly improved profitability” this fiscal year, though the degree of that comes into question with the large guide lower.
Key Segments
DRAM is the AI-related high bandwidth memory (HBM) segment. DRAM revenue increased 20% QoQ and 88% YoY to $6.4 billion, decelerating slightly from 93% YoY growth last quarter. DRAM ASPs rose in the high single-digit % QoQ while bit shipments rose in the low double-digit % QoQ.
NAND revenue declined (5%) QoQ but increased 83% YoY to $2.2 billion. Both ASPs and bit shipments declined in the low single-digit % QoQ. NAND is where a majority of Micron’s issues are arising at the moment, with management saying they expect a “meaningful decline” in bit shipments in Q2 and growth resuming in the back half of the year. NAND conditions are impacting Q2’s gross margins to a degree, while management also expects underloading in NAND to continue to impact gross margins in Q3.
Here is what was stated regarding a mismatch between inventory and demand: “It’s more that they have built inventory and therefore, their purchases are less than their sell-through. And we saw that the inventories improved in CQ4 and we expect them to improve further in CQ1 time frame.”
Industry-wide NAND bit demand growth in 2024 and 2025 is now seen in the low double-digit percentage range, lower than management’s prior expectations, with Micron cutting back on NAND technology upgrades and cutting some supply to align with demand signals.
Regarding what is driving the higher NAND inventories, the following was shared on a more granular level in terms of devices versus data center, plus the comment below provided clarity that high NAND inventories will cause margin compression as far out as Q3.
“First, as Sanjay mentioned, the NAND industry market conditions were weaker than we had expected and that consumer market, PC, smartphones demand is weaker and inventory adjustments are occurring. Secondly, NAND data center SSD volumes moderated. And so there’s this period of digestion. And that was, as we know, higher-margin NAND business. So those two things are the principal driver. Of course, with revenue down in the guide $800 million we see some negative leverage effects on ongoing period costs, but those costs do not include underload charges in the second quarter. So those charges will begin to affect us in the third quarter.”
Margins
Gross margins were reported in line with management’s guidance and are slowly expanding as AI-related HBM3 results in higher margins – which is rare as AI chips and some hardware weighs on other companies (outside of NVDA). Per the opening remarks: “In fiscal Q1, our HBM gross margins were significantly accretive to both DRAM and overall company gross margins.”
The operating margins were ahead of guidance due to tight cost control.
- GAAP gross margin was 38.4%, up 3.1 percentage points QoQ and more than 39 points YoY. Adjusted gross margin was 39.5%, up 3 percentage points QoQ and nearly 31 points YoY.
- For Q2, due to the aforementioned NAND weakness, gross margins are projected to decline ~1 percentage point QoQ, with GAAP gross margin seen at 37.5% and adjusted gross margin at 38.5%. Per the commentary on the call: “We expect fiscal Q2 gross margins to be impacted by NAND industry conditions, partly offset by continued growth in HBM and data center DRAM. In addition to these factors, we expect NAND under loading to affect fiscal Q3 gross margins.”
- GAAP operating margin was 25.0% (ahead of guidance for 24.6%), up 5.4 percentage points QoQ and nearly 49 points YoY. Adjusted operating margin was 27.5%, up 5 percentage points QoQ and nearly 48 points YoY.
- Due to the impacts from NAND, operating margins are forecast to contract in Q2, with GAAP operating margin declining 3.2 percentage points to 21.8% and adjusted operating margin declining 2.9 percentage points to 24.6%.
- GAAP net margin was 21.5%, up more than 47 percentage points YoY and 11.1 percentage points QoQ as net income more than doubled sequentially to $1.87 billion. Adjusted net margin was 23.4%, up more than 45 percentage points YoY and 6.1 points QoQ.
EPS
Profitability significantly improved in Q1, with GAAP net income rising 111% QoQ to $1.87 billion. GAAP EPS was $1.67, more than double the $0.79 from last quarter and a major improvement from the loss of ($1.10) in the year ago quarter.
Adjusted EPS of $1.79 was up more than 51% QoQ from $1.18, and also marked a major turnaround from a ($0.95) loss a year ago.
For Q2, given the margin contractions, both GAAP EPS and adjusted EPS are forecast to decline quite substantially. GAAP EPS was guided at $1.26, +/- $0.10, and adjusted EPS was guided at $1.43, +/- $0.10, well below the $1.96 expected by analysts.
Cash and Balance Sheet
Operating cash flow generation remained strong for a third quarter with OCF margin above 35%. Free cash flow generation was limited in the quarter due to $3.1 billion in capex. Micron noted that it expects FY25 capex to be $14 billion, +/- $500 million, primarily to support HBM.
- Operating cash flow of $3.24 billion rose more than 130% YoY. OCF margin was 37.3%, down slightly from 43.6% in Q4 but up from 29.6% in the year ago quarter.
- Adjusted FCF was $112 million, due to Micron’s capex spend in the quarter. Adjusted FCF margin was 1.3%, down from 4.2% in Q4 but improving from (7%) in the year ago quarter.
- Inventory totaled $8.71 billion.
- Cash and equivalents totaled $8.74 billion, while debt totaled $13.79 billion.
Earlier this month, Micron finalized an agreement with the U.S. Department of Commerce for an award of up to $6.1 billion under the CHIPS and Science Act to support advanced DRAM manufacturing fabs in Idaho and New York. The company also plans to expand its fab in Virginia and Singapore.
Business Segments
Compute and Networking (CNBU)Compute and Networking (CNBU)
Compute and Networking revenue rose more than 153% YoY and 46% QoQ to a record $4.4 billion, comprising more than 50% of Micron’s sales for the first time. Management said the unit’s strength was “driven by cloud server DRAM demand, as well as HBM revenues, which more than doubled sequentially in the quarter.”
Micron was quite optimistic of the opportunity in HBM, both in the near future and the longer-term. Management said that its HBM revenue more than doubled QoQ on solid execution on yield and capacity ramps, with multiple billions in HBM revenue still expected in fiscal 2025. HBM remained “significantly accretive to both DRAM and overall company gross margins” in the quarter.
Additionally, management also increased their HBM TAM forecast for calendar 2025, now seeing the opportunity at $30 billion, a 20% increase from their previous view from $25 billion. In the longer-term, management expects HBM’s TAM to reach $64 billion by 2028 and $100 billion by 2030, or larger than the entire DRAM industry (incl. HBM) in 2023.
Mobile (MBU)Mobile (MBU)
Mobile revenue declined (19%) QoQ but rose approximately 16% YoY to $1.5 billion, with inventory optimization in Micron’s mobile customers a key theme of the quarter. Micron said that due to the inventory management from customers, it pivoted supply to meet data center demand. Smartphone customer shipments are expected to be weighted to the second half of the fiscal year.
Embedded (EBU)Embedded (EBU)
Embedded revenue declined (10%) QoQ and up in the single digits YoY, as automotive, industrial and consumer customers continued with inventory management.
Storage (SBU)Storage (SBU)
Storage revenue rose 3% QoQ but accelerated to 160% YoY to $1.7 billion, a new quarterly record, driven by data center SSDs. Micron said its 9550 PCIe Gen5 data center SSDs were qualified for the recommended vendor list for Nvidia’s GB200 NVL72 system, offering 34% higher throughput and over 80% lower energy per terabyte of data transfer versus competing products.
Management added that they expect “to generate multiple billions of dollars in data center SSD revenue in fiscal 2025 and to grow our market share once again in calendar 2025.” However, they did provide a hint of caution to not expect triple-digit growth to continue the entire year, saying they see “temporary moderation in near-term data center SSD purchases by customers after several quarters of very rapid growth.”
Earnings Call Q&A Notes:
The AI-related segments had bullish commentary while the consumer commentary was bearish. As stated in the introduction, the combination of catching the market off guard following a negative surprise from the FED was not ideal. The tone around the two customer end markets of data center versus consumer were sharply bifurcated.
Bullish HBM3e Commentary and HBM4:
Management pointed out they are raising their view of server unit percentage growth for the current year and they “anticipate server unit growth to continue in 2025.” The CEO also stated that HBM has exceeded their plans due to “solid execution on yield and capacity ramps.”
The company also stated “We are proud to share that Micron’s HBM3E 8H is designed into NVIDIA’s Blackwell B200 and GB200 platforms. Micron’s HBM3E operates at full speed while maintaining leadership in power efficiency”
They also stated there are more customers on the way: “This month, we commenced high-volume shipments to our second large HBM customer and will start high-volume shipments to our third large customer in CQ1, expanding our HBM customer base. We continue to receive positive feedback from our leading customers for Micron’s HBM3E 12H best-in-class power consumption, which is 20% lower than the competition’s HBM3E 8H, even as the Micron product delivers 50% higher memory capacity and industry-leading performance.”
Regarding the next catalyst, which is HBM4, Micron stated this should be available in calendar year 2026:
“Leveraging the strong foundation and continued investments in proven 1-beta process technology, we expect Micron’s HBM4 will maintain time to market and power efficiency leadership while boosting performance by over 50% over HBM3E. We expect HBM4 to ramp in high volume for the industry in calendar 2026.”
Bearish Consumer Commentary:
Regarding the more bearish consumer commentary, one question in the Q&A really drove at the heart of what is on the Street’s mind right now, which is why the sudden negative surprise in guidance? The exchange was long, and normally I would abbreviate it, but the stock is down considerably right now and this Q&A excerpt summarizes what is driving the negative price reaction:
Chris Caso
Yes. Hi. I guess the first question is, maybe just some clarity on what may have precipitated some of the cautious — some of the incremental caution here and what might have changed over the last couple of months? I know that is kind of back and forth a little bit, there were some cautious signs kind of back in August and they kind of received in the last earnings call. Was it — I guess the question is, is it a function of the customer inventories turned out to be a bit more than we had expected or do you think it was a function of demand?
Sumit Sadana
Yeah. Let me try to maybe address what changed. So, if you think about over the course of CQ4, we have seen a pushout of the PC refresh cycle that our customers had been anticipating, we had been anticipating. And it's not like the refresh cycle won't happen. It will happen in 2025. It just been a little bit delayed. There are numerous drivers which we mentioned in our prepared remarks as to why we believe and our customers believe that the refresh cycle will happen […]
But the delay in that upgrade cycle means that our calendar '24 PC shipment forecast at the unit level for PCs at our end customers has been reduced and is now very flattish year-over-year in calendar '24, so that has been one driver. The other is that definitely the inventories that we had highlighted in the last earnings call, that we expected by spring would become healthier at our customers, that inventory and inventory reduction as well as the seasonality of CQ1, those are continuing impacts. Some impact coming from the moderation.
You mentioned — previous discussion we just had a short while ago about lumpiness of demand on the data center SSD side. So some moderation in data center SSD into CQ1 after significant bout of buying over several quarters in calendar '24. So those are the things that have impacted the near-term outlook. But I just wanted to mention that most of the impact is limited to consumer-oriented segments, and the trajectory of demand in the data center continues to be very robust. Our own data center segment view of the overall revenue trajectory through fiscal '25, calendar '25 remains in a very solid trajectory.
You have seen our F Q1 results as well that we highlighted. So it's mainly the consumer-oriented segments and some very temporary moderation of the data center SSD, which we expect will pick up again in a couple of months. And so if you think about just these consumer-oriented segments, we do expect that by spring time, the inventories will be much healthier. And then we are back to shipment growth because right now, we are shipping to these customers at a rate that is lower than their ship out because they are consuming DRAM and NAND at a faster rate than they're purchasing from us and from the industry.
So that's the effect of the inventory that we expect will be in a much healthier place by spring and then a resumption of shipments and growth in shipments for the second half of the fiscal year and then things will be much better. And overall, DRAM will be continuing to be in a much healthier place. The supply is tight. HBM continues to pressure non-HBM availability of supply. So a large part of the issue is NAND related, and we have outlined the actions we are taking on the supply there to decisively bring our supply and balance with the demand.”
Conclusion:
It’s quite clear something important is going on with this stock given the surging data center revenue (the highest AI/DC-related growth percentage we saw from any company this quarter – if you strip out MU’s data center’s 400% YoY growth and 40% QoQ growth, it even beat high-flier ALAB on growth percentages), yet the market will not be forgiving to a company that is guiding for nearly 6-months of a soft consumer in its NAND segment on the very day the FED disappointed by announcing fewer rate cuts next year. Had Micron warned the market appropriately, the stock might be doing better right now. The market greatly dislikes surprises, and Micron provided a negative surprise about the consumer in a fairly pronounced manner this evening.
We saw critical support break in the S&P 500, of which are Members have been aptly warned about for months with non-stop coverage in Knox’s weekly webinars with the exact level that needs to hold. We have a plan for when the market goes up, and we have a plan for when the market goes down. For now, it’s the latter that is in play until the broad market says otherwise. There are other consumer-facing semis we may need to trim should the selloff sustain, please keep an eye out on your trade alerts.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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