Micron will release its Q1 FY2025 results on Dec 18. Analysts expect revenue to grow 84.3% YoY to $8.71 billion. The adjusted EPS is expected to come in at $1.77, compared to (-$0.95) in the same period last year and a solid 50% sequential growth from $1.18 in FQ4.
The AI-related portion of its revenue will not only ramp in FY2025, but it’s also accretive to margins. Meanwhile, peer-related semiconductor stocks that provide custom silicon or AI servers will see the opposite effect, which is that a higher mix of AI products actually weighs on margins.
Management had guided margins to improve sequentially due to better pricing and portfolio mix. During the FQ4 earnings call, the CFO said, “Fiscal Q1 gross margin is projected to improve sequentially primarily due to better pricing and portfolio mix. Recall that, in fiscal Q4, HBM remained accretive to both DRAM and overall company gross margins. We project changes in our portfolio mix to continue to be an important and favorable contributor to gross margins over time.”
Last week, there was an important announcement that stated Samsung is unable to supply HBM3e to Nvidia in 2024. Per the report: “Daily Korea indicates that Samsung’s hopes of supplying HBM3E to NVIDIA in 2024 now appear almost impossible, though prospects for beginning supply in 2025 seem more promising.” This is a major positive for Micron, who along with SK Hynix, is a key supplier for HBM3e. With Samsung unable to supply HBM3e, this could help to increase Micron’s pricing power on what limited supply there is available. We expect the earnings call to focus on this news as analysts will want to figure out how to update their estimates based on the recent announcement that memory-behemoth Samsung is out of the picture for now.
Per our free newsletter last week, Micron has low exposure to China in the mid-teens compared to many AI semiconductor companies and equipment providers having 30% or higher exposure. Plus, with Micron being a United States memory fab, the company will continue to see a boost from the CHIPS Act as well as incremental strength compared to peers once tariffs are implemented.
Revenue
FQ1 revenue is expected to grow 84.3% YoY to a record $8.71 billion, led by strong AI data center demand. Strong growth is expected to continue, and analysts expect revenue to grow by 55.4% and 43% YoY in the subsequent two quarters.
- Last quarter revenue grew by 93.3% YoY to $7.75 billion and was the peak revenue growth quarter for the company.
- DRAM revenue increased 93% YoY and 14% QoQ to $5.3 billion in FQ4, representing 69% of total revenue. Bit shipments were flat sequentially and prices increased in the mid-teens percentage.
- NAND revenue increased 96% YoY and 15% QoQ to $2.4 billion, representing 31% of total revenue. Bit shipments and prices increased by a high single-digit percentage sequentially.
- Looking further out, analysts expect FY2025 revenue ending Aug to grow 52.2% YoY to $38.22 billion and 21.6% YoY growth to $46.46 billion in FY2026.
Margins
Margins have improved, helped by better pricing due to the favourable supply-demand environment, cost controls, and ramp of higher-value products.
- FQ4 gross margin was 35.3% compared to (-10.8%) in the same period last year. Management expects it to further improve to 38.5% in the next quarter. Adjusted gross margin also improved significantly to 36.5% from (-9.1%) in the same period last year, which was helped by higher pricing and a higher-margin product mix. The same positive attributes will help the adjusted gross margin to improve to 39.5% in FQ1.
- FQ4 operating margin improved to 19.6% compared to (-36.7%) in the same period last year. Management expects it to further improve to 24.6% in the next quarter. Adjusted operating margin improved 52.6 percentage points YoY to 22.5%, which was helped by higher gross margins and operating leverage. Management guide for FQ1 is 27%.
- FQ4 net income was $887 million or 11.4% of revenue compared to a net loss of (-$1.43 billion) or (-35.7%) of revenue in the same period last year. Adjusted net income was $1.34 billion or 17.3% of revenue compared to (-$1.18 billion) or (-29.4%) of revenue in the same period last year.
EPS
Micron has officially bottomed on EPS and is firmly returning to positive growth. Adjusted EPS was $1.18, up 90% QoQ from $0.62 in Q3 and significantly improved from (-$1.07) in the year-ago quarter, helped by better pricing, cost controls, and higher-value products.
- FQ1 EPS guide is $1.54 and adjusted EPS guide is $1.74. Analysts expect adjusted EPS to come at $1.77, compared to (-$0.95) in the same period last year and a solid 50% sequential growth.
- Analysts expect strong EPS growth to continue in the coming quarters as they expect FQ2 adjusted EPS to grow 366.3% YoY to $1.96 and 272.7% YoY to $2.31 in FQ3.
- Looking further out, analysts expect FY2025 ending Aug adjusted EPS to grow 579% YoY to $8.83 and 47% YoY to $12.98 in FY2026.
Cash Flow and Balance Sheet
The operating cash flows have improved with higher revenue and profitability.
- FQ4 operating cash flow was $3.41 billion or 43.9% of revenue compared to $249 million or 6.2% of revenue in the same period last year.
- Adjusted free cash flow was lower at $323 million or 4.2% of revenue compared to (-$758 million) or (-18.9%) of revenue in the same period last year, as Micron spent $3.1 billion in capex. Management expects capex to increase sequentially to $3.5 billion in FQ1.
- Management stated that capex would be meaningfully higher in fiscal 2025 in the mid-30s percentage range to support “growth in both greenfield fab construction and HBM” investments as Micron works to build out its fabs in New York and Idaho. Capex totaled $8.1 billion in FY24; management expects capex to rise around 35% of FY2025 revenue, i.e., it comes to about $13 billion, and the company is able to support it due to higher profitability.
- The company stated wafer capacity is below peak levels, partly due to an increasing mix of HBM that is reducing DRAM supply for traditional products. The capex spending is needed to continue to supply HBM. There is also a low-capex environment for NAND at the moment, and it was stated this would ultimately lead to healthy NAND supply-demand dynamics.
- The U.S. Department of Commerce also recently finalized the $6.1 billion funding to Micron under the Chips Act. The Department will disburse the funds based on Micron’s completion of project milestones.
- Inventory was $8.9 billion, or 158 days, and Micron expects to draw down this inventory to support revenue growth in FY25.
- The company had cash and investments of $9.16 billion and debt of $13.4 billion compared to $9.22 billion and $13.3 billion at the end of FQ3.
- The company repurchased shares worth $300 million and paid $129 million in dividends in FQ4.
Business Units
Compute and Networking (CNBU) revenue was $3.02 billion, up 17% QoQ and 152% YoY. This was a significant growth acceleration, up from 85% YoY in Q3 and 59% YoY in Q2.
Management said that “data center server DRAM achieved a quarterly revenue record in fiscal Q4, driven by strong demand for high-capacity solutions as well as our continued ramp of HBM.” ‘
The company expects HBM TAM to grow from $4 billion in CY23 to over $25 billion in CY25. Micron reiterated it will be able to capture a similar market share of HBM as it has in DRAM sometime in CY2025, which was 21.5% of market share in early 2024.
Mobile (MBU) revenue increased 18% QoQ to $1.88 billion, though YoY growth of 55% decelerated from 94% YoY in FQ3. Management said seasonal product launches drove the sequential growth.
Micron hinted when investors can expect AI PC growth, which looks to be H2 2025: “PC unit volumes remain on track to grow in the low single-digit range for calendar 2024. We expect unit growth to continue in 2025 and accelerate into the second half of calendar 2025 as the PC replacement cycle gathers momentum with the rollout of next-gen AI PCs, end of support for Windows 10 and the launch of Windows 12.”
The demand for DRAM is increasing due to the rise of AI-powered devices. On average, PCs required 12GB of DRAM last year, while AI PCs will need a minimum of 16GB and up to 32 to 64GB of DRAM for the mid and premium segments. Similarly, mobile devices required 8GB of DRAM, whereas AI-powered mobile devices will come with 12GB to 16GB of DRAM.
Storage (SBU) revenue rose 24% QoQ and 127% YoY to $1.68 billion, with the YoY growth rate accelerating from 116% in Q3. Management said the growth was “led by data center SSD, which reached a quarterly revenue record,” while NAND storage reached a record for the full year.
Embedded (EBU) was the only segment to record a sequential decline in Q4, with growth down (-9%) QoQ but rising 36% YoY to $1.17 billion. Management added that the “automotive segment achieved a new fiscal year revenue record for the fourth consecutive year.”
Management expects automotive growth in the second half of the FY2025. “The automotive industry continues to adjust the mix of EV, hybrid and traditional vehicles to meet evolving customer demand. As auto customer inventories adjust to this new mix, we expect a resumption in our automotive growth in the second half of fiscal 2025.”
Other noteworthy points to watch
HBM Revenue
Micron started shipments of HBM3e 12 high 36-gigabyte units in FQ4. These units provide up to 20% lower power consumption and 50% higher DRAM capacity than its competitors’ 8 high, 24-gigabyte solutions. They expect the ramp of HBM3E 12-high in early CY2025 and an increase in the 12-high mix in the shipments throughout 2025.
Management also said that in CY2025 and 2026, they have a diversified HBM revenue base since they have won business with a broader range of customers for the HBM3E. They expect robust demand for the D5 and LP5 solutions.
Management mentioned that they expect multiple billions of HBM revenues in FY2025. “We delivered several hundred million dollars of revenue in fiscal year '24 and we look forward to delivering multiple billions of dollars of revenue of HBM in fiscal year '25.” The other key point is that the HBM business will continue to be accretive to margins in FY2025.
DRAM/NAND Commentary
The management stated during the FQ4 earnings call that they are upgrading their expectation for calendar 2024 industry DRAM bit demand growth to be in the high-teens percentage range. It was further stated: “In calendar 2025, we expect both DRAM and NAND industry bit demand growth to be around the mid-teens percentage range.”
The management also stated: “We see increasing DRAM and NAND content both in traditional as well as AI servers” and that “our mix of data center revenue reached a record level in fiscal 2024 and we expect will grow significantly from here in fiscal 2025.”
There is a slight slowdown in management’s guide for DRAM for next year, as it’s being stated that growth in the high teens is expected for 2024, while growth in the mid-teens is expected for 2025. As we noted in our previous analysis, the slowdown is coming from AI PCs and smartphones.
“At 2024, we have increased the outlook to high teens based on the strength in the data center. And 2025, as we look at it, just keep, in fact — mind two factors: one is we are now comparing it to the higher base of 2024, which has gone to high teens. So that, of course, impacts the percentage of the '25. And second piece is that, as we have noted, that smartphone and PC, which at the end market level are continuing to do fine.
But given for the 3 factors that we have mentioned in our earnings call script that the customers built some inventory. The sell-in is somewhat less than their sellout in terms of memory, and we have said that by spring of 2025, we expect in PCs customer inventory levels to get to healthier levels versus now, and these will continue to improve.”
Another factor is that HBM3E is leading to wafer capacity constraints. It has a 3:1 trade ratio, which means it takes 3X more wafers to produce HBM3e.
Valuation
The company is trading at a P/S ratio of 4.9 and a forward P/S ratio of 3.2. It is trading at a P/E ratio of 160.4 and an attractive forward P/E ratio of 12.5, helped by the strong top-line and bottom-line growth.
Conclusion
Wall Street has doubted the company for most of the year yet the last earnings report for FQ4 was quite strong. Some of the weakness may be coming from Samsung’s entry into the space, which now looks decidedly delayed. The company has strong top-line and bottom-line growth. Along with this, the HBM revenue will ramp up in FY2025 and continue to be accretive to margins, which will be a key catalyst.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
Recommended Reading: