Micron will release its results on June 26th. The company reported a 42% acceleration to 57.7% revenue growth in the last quarter. Management expects revenue to accelerate 18.2% to 75.9% growth in Q3 FY2024.
The strength of the bottom line was the outlier in the report. The company achieved its goal of a positive adjusted operating margin a quarter ahead of expectation, primarily helped by the recovery in the DRAM and NAND pricing. Management is confident this trend will continue and expects positive free cash flow in the second half of the year and record revenue in FY2025.
The company is riding the Artificial Intelligence wave. Its HBM (High-Bandwidth Memory) is sold out for the calendar year 2024 and most of 2025 supply is being allocated. As a result of strong AI demand, the prices of HBM are expected to increase, which should help to drive higher revenues and profitability.
Revenue
The analysts expect revenue to grow 77.8% YoY to $6.67 billion and accelerate to 88.4% in Q4 FY2024. It is slightly higher than the management guide of 75.9% for Q3 FY2024. The company’s Q2 FY2024 revenue grew by 57.7% YoY to $5.82 billion, a 42% acceleration from Q1.
- Q2 DRAM revenue grew by 21% sequentially to $4.2 billion, primarily helped by the increase in bit shipments in the low-single-digit percentage and price increasing by high teens. DRAM accounted for 71% of Q2 revenue.
- Q2 NAND revenue grew by 27% sequentially to $1.6 billion, primarily helped by the increase in price of over 30% and offset by the decrease in bit shipments. NAND accounted for 27% of Q2 revenue.
The company provided an update during the J.P. Morgan conference on the company’s efficient handling of the disruption caused by the Taiwan earthquake. “We did have — and we put out the statement that up to about mid-single-digit percent of 1 quarter's DRAM output loss through a combination of some wafers that had to be scrapped, some lost production as we were restarting equipment, and then some slightly lower yields on product that was already in process. But all in all, I think the Micron teams responded extremely well. And as you note, we haven't had to make any further comments since then. And as Mark noted, no further comments relative to our guidance either.”
Margins
Margins have experienced a steep cyclical low and now appear to have bottomed out. The company achieved its goal of positive adjusted operating margin a quarter ahead of expectation, primarily helped by the recovery in the DRAM and NAND pricing.
Other factors include lower utilization charges, which management expects to be lower in the future. CFO Mark Murphy replied to an analyst question on the margins in the earnings call, “On the underutilization charges, Chris, they went from, I think it was $165 million in the first quarter down to under $50 million in the second quarter. We believe they'll stay at low levels well below 50 for the foreseeable future. So we'll no longer comment on those.”
- Gross margin improved by 51.2 percentage points YoY and by 19.2 points sequentially to 18.5%. It was primarily helped by higher prices, selling the remainder of written-down inventories, and lower utilization charges. The management guide for the next quarter is 25.5%. Similarly, the adjusted gross margin improved 51.4 points YoY to 20%. The management guide for the next quarter is 26.5% and sequential improvement is helped by “robust price increases across both DRAM and NAND.”
- Operating margin improved 65.7 percentage points YoY and up 27.2 points sequentially to 3.3%. The management guide for the next quarter is 8.7%. The adjusted operating margin improved 59.7 percentage points YoY and up 23.7 points sequentially to 3.5%, primarily helped by the factors discussed above and partly offset by higher variable compensation expense due to the improved 2024 outlook. Management adjusted operating margin guide for the next quarter is 11.5% after accounting for a $30 million sequential increase in operating expenses due to increased R&D expenses.
- Net income was $793 million or 13.6% of revenue compared to a net loss of (-$2.3 billion) or (-62.6%) of revenue. The adjusted net income was $476 million or 8.2% of revenue compared to a net loss of (-$2.081 billion) or (-56.3%) of revenue. GAAP EPS came at $0.71 and beat estimates by 285.4% and adjusted EPS came at $0.42 and beat estimates by 273.7%.
- The management GAAP EPS guide is $0.17 +/- $0.07 and adjusted EPS guide is $0.45 +/- $0.07 for Q3. The analysts expect the company to report adjusted EPS of $0.52.
Management made it crystal clear that HBM is accretive to margins and the strength in margin is due to pricing power. “So with respect to the accretive nature of HBM, look, HBM carries a higher cost, but it also carries a significantly higher pricing because it brings such great value in the applications in terms of its performance and power. And we are executing well. Our yield ramp is going well as well according to plan.”accretive nature of HBM, look, HBM carries a higher cost, but it also carries a significantly higher pricing because it brings such great value in the applications in terms of its performance and power. And we are executing well. Our yield ramp is going well as well according to plan.”
“And therefore, we are pleased that in this quarter, when we have begun our production shipments, we will be having it accretive to our gross margins in the quarter. And of course, this momentum will continue to build in the quarters ahead.”we will be having it accretive to our gross margins in the quarter. And of course, this momentum will continue to build in the quarters ahead.”
Cash and Balance Sheet
Q2 FY2024 operating cash flow was $1.22 billion or 20.9% of revenue compared to $343 million or 9.3% of revenue in the same period last year. Adjusted free cash outflow was (-$29 million) or (-0.50%) of revenue compared to adjusted free cash outflow of (-$1.81 billion) in the same period last year.
Due to the increase in investments in AI chips, the company slightly raised the capex last month by removing the lower range of the capex outlook for FY2024 of $7.5 billion to $8 billion to the current $8 billion. Management has reiterated positive free cash flow in the next two quarters.
The company had cash and investments of $9.7 billion and debt of $13.7 billion compared to $9.8 billion and $13.5 billion in the November quarter. In FQ2, the company refinanced $1 billion in debt, thereby extending the maturity and lowering the near-term borrowing costs. The company paid $127 million in dividends.
Key Metrics from Business Units
Compute and Networking Business Unit (CNBU) revenue showed a solid acceleration to 59% YoY and 26% QoQ growth to $2.185 billion from a decline of (-1%) YoY in the previous quarter. It was led by strong growth in data center revenue and cloud doubled sequentially.
Mobile Business Unit (MBU) revenue grew by 69% YoY and 24% sequentially to $1.598 billion. It was primarily helped by the increase in price and offset by the decrease in volume.
Embedded Business Unit (EBU) revenue grew by 28% YoY and 7% sequentially to $1.11 billion, it was led by strong demand for leading-edge products in the industrial market.
Storage Business Unit (SBU) revenue grew by 79% YoY and up 39% sequentially to $905 million. The company reported a strong acceleration from a (-4%) decline in the previous quarter. The company witnessed strong growth in all the end markets and Datacenter SSD revenue doubled on a YoY basis, driven by share gains for the company’s products.
Other noteworthy points to watch
HBM3e
Management updates on the HBM3e are to be closely watched. In December, Micron’s HBM3e was a core part of our multi-faceted AI-driven growth thesis. The company provided positive updates on HBM3e development and revenue generation in the last earnings call.
CEO Sanjay Mehrotra said “We commenced volume production and recognized our first revenue from HBM3E in fiscal Q2 and now have begun high-volume shipments of our HBM3E product.” The company is “on track to generate several hundred million dollars of revenue from HBM in fiscal 2024.”
Micron expects these HBM revenues “to be accretive to our DRAM and overall gross margins starting in the fiscal third quarter.” This is an important quote – Micron has already driven tremendous improvement in gross and operating margins in Q2, and the HBM pricing power will further provide a tailwind to margins going forward. Moving beyond fiscal Q3 and Q4 and into fiscal 2025, margins are expected to continue to expand at a fairly strong rate as HBM revenues ramp up significantly.
Micron shed light on customers and capacity, noting that while its HBM3e will be a part of Nvidia’s H200 Tensor Core GPU, it is “making progress on additional platform qualifications with multiple customers.”
Recently, Samsung failed Nvidia’s tests due to the heat and power consumption issues. Wells Fargo said that the Micron is likely to benefit from the Samsung HBM issues.
Micron’s upcoming 12-high HBM3e has been sampling to customers, and Micron said it will begin ramping the cube in high volume production throughout 2025: “Earlier this month, we sampled our 12-high HBM3E product, which provides 50% increased capacity of DRAM per cube to 36 gigabytes. This increase in capacity allows our customers to pack more memory per GPU, enabling more powerful AI training and inference solutions. We expect 12-high HBM3E will start ramping in high-volume production and increase in mix throughout 2025.”We expect 12-high HBM3E will start ramping in high-volume production and increase in mix throughout 2025.”
Nvidia’s H200 win is a major win for Micron, as competition in the HBM landscape remains stiff. Per management: “NVIDIA announced its next-generation Blackwell GPU architecture-based AI systems, which provides a 33% increase in HBM3E content, continuing a trend of steadily increasing HBM content per GPU. Micron's industry-leading high-bandwidth memory HBM3E solution provides more than 20x the memory bandwidth compared to standard D5-based DIMM-server module.”which provides a 33% increase in HBM3E content, continuing a trend of steadily increasing HBM content per GPU. Micron's industry-leading high-bandwidth memory HBM3E solution provides more than 20x the memory bandwidth compared to standard D5-based DIMM-server module.”
Edge AI – Smartphone and PCs
Smartphone recovery is another tailwind for the company. Also, AI smartphones have a substantial increase in DRAM content compared to non-AI phones. The company’s DRAM and NAND solutions are already included in leading smartphones like Samsung Galaxy S24 and Honor Magic 6 Pro.
“Smartphone unit volumes in calendar 2024 remain on track to grow low to mid-single digits. Smartphones offer tremendous potential for personalized AI capabilities that offer greater security and responsiveness when executed on device. Enabling these on-device AI capabilities is driving increased memory and storage capacity needs and increasing demand for new value-add solutions. For example, we expect AI phones to carry 50% to 100% greater DRAM content compared to non-AI flagship phones today.we expect AI phones to carry 50% to 100% greater DRAM content compared to non-AI flagship phones today.
Micron's leading mobile solutions provide the critical high performance and power efficiency needed to unlock an unprecedented level of AI capability. In DRAM, we are now sampling our second-generation, 1-beta LPDRAM LP5X product, which delivers the industry's highest performance at improved power for flagship smartphones.”which delivers the industry's highest performance at improved power for flagship smartphones.”
PCs are expected to be another growth market for Micron. Management expects PCs to return to growth in CY2024 in the “low single-digit range.” The neural processing units (NPU) chipsets that AI PCs require will see 40% to 80% more DRAM content than non-AI PCs.
Valuation
The company trades at a P/S ratio of 8.4 and a forward P/S ratio of 6.2. The stock is trading significantly higher than the 5-year P/S ratio of 3.4 as the company is one of the key beneficiaries of the AI trend.
Conclusion
We entered a position with Micron in December last year for a thesis we have carefully built on a memory rebound. Micron’s HBM3e was a core part of our multifaceted AI-driven growth. We further believe we should have a long run away with Edge AI to be the next growth driver, potentially in 2025.
Recommended Readings:
- Micron: AI Offers a Multifaceted Secular Growth Tailwind
- Micron Q2: Memory Rebound in Full Force with HBM3e
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.