Micron delivered an exceptional fiscal Q2, with revenue rising nearly 58% as strong AI demand led to pricing power coupled with tight supply dynamics to accelerate its return to profitability this quarter. Q3 was guided 10% above consensus to $6.6 billion at midpoint, representing 76% YoY growth, pointing to an impressive rebound from declining growth just three quarters ago.

Margins were significantly ahead of expectations, driving a strong shift to profitability. Micron was initially expected to return to profitability next quarter, but reported a solid 13.6% GAAP net margin this quarter as operating margin expanded nearly 20 percentage points QoQ.

CEO Sanjay Mehrotra said Micron’s “preeminent product portfolio positions us well to deliver a strong fiscal second half of 2024,” as he believes the company “is one of the biggest beneficiaries in the semiconductor industry of the multi-year opportunity enabled by AI.”

There were many strong, bullish statements on the call: “AI server demand is driving rapid growth in HBM, DDR5 and data center SSDs, which is tightening leading-edge supply availability for DRAM and NAND. This is resulting in a positive ripple effect on pricing across all memory and storage end markets. We expect DRAM and NAND pricing levels to increase further throughout calendar year 2024 and expect record revenue and much improved profitability now in fiscal year 2025.”

For more information regarding the importance of HBM3 and HBM3e in Nvidia and AMD’s 2024 product road map for AI Accelerators, please reference our past analysis noted at the end of this analysis.

Revenue and EPS:

Revenue shows a clear and obvious rebound in the memory market and EPS was a blowout:

Revenue of $5.82 billion beat estimates by ~9%, and represented YoY growth of 58% and QoQ growth of 23%.
Fiscal Q3 revenue was guided at $6.6 billion, +/- $200 million, for YoY growth of 76% and QoQ growth of 13%.
GAAP EPS was $0.71, compared to estimates for ($0.38). This compares to GAAP EPS of ($1.12) in Q1 and ($2.12) in the year ago quarter.
Adjusted EPS was $0.42, compared to estimates for ($0.24). This compares to adjusted EPS of ($0.95) in Q1 and ($1.91) in the year ago quarter.
GAAP EPS was guided at $0.17 +/- $0.07, compared to estimates for $0.08.
Adjusted EPS was guided at $0.45 +/- $0.07, compared to estimates for $0.20.

Margins:

GAAP gross margin was 18.5%, an expansion of 5120bp YoY from (-32.7%) and 1920bp QoQ from (0.70%). Management had guided for a gross margin of 12%.
Adjusted gross margin was 20.0%. Gross margins “benefited from $382 million associated with selling the remainder of previously written-down inventories.”
GAAP operating margin was 3.3%, an expansion of 6570bp YoY from (-62.4%) and 2720bp QoQ from (-23.90%). Management had guided for (-8.2%). Adjusted operating margin was 3.5%.
GAAP net margin was 13.6%, an expansion of 7620bp YoY from (-62.5%) and 3970bp QoQ from (-26.1%). Adjusted net margin was 8.2%.

For Q3, GAAP gross margin was guided at 25.5% +/- 1.5%, an expansion of 700bp QoQ at midpoint. Adjusted gross margin was guided at 26.5% +/- 1.5%. Despite the rather large benefit in Q2 from selling written-down inventories, strong increases in DRAM and NAND pricing are driving this sequential expansion.
For Q3, GAAP operating margin is implied to be 8.7% at midpoint, an expansion of 540bp QoQ. Adjusted operating margin is implied to be 11.5%, an expansion of 800bp QoQ. Micron is forecasting continued operating income through the rest of FY24.

Management made it crystal clear that HBM3 is accretive to margins. This has been a concern since it’s 3X more expensive to manufacture. The strength in the 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.”

“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.”

“Answer
Mark Murphy (Executives)

Yes. Brian, it's Mark. We won't break it out specifically, but maybe just to give you a sense of the trajectory of gross margins. The increase from first quarter of 1% to 20% in the second quarter was dominantly price. And obviously, a lot of other things going on, but the dominant feature of that increase was price.

Likewise, in the 20% second quarter actuals to the 26.5% guide, price remains the largest contributor. And offsetting part of that is, of course, what CJ mentioned on the benefit of those lower cost inventories fade away. So — but price is still the largest factor.”

Cash and Debt:

Cash and short-term investments totaled $9.0 billion.
Debt totaled $13.7 billion.
Operating cash flow was $1.22 billion, an increase of 256% YoY but a decrease of (13% QoQ). The sequential decrease may have been impacted by strong pre-payments in the prior quarter from customers aiming to secure supply. Management commented last quarter there were $600 million in prepays but declined to comment on prepays this quarter.
Adjusted free cash flow was ($29 million), compared to adjusted FCF of ($333 million) in Q1 and ($1.81 billion) in the year ago quarter. Micron is expecting to generate positive adjusted FCF in both Q3 and Q4.

Key Metrics:

DRAM revenue was $4.2 billion, an increase of 21% QoQ. DRAM pricing increased by the high-teens QoQ. DRAM had increased 24% QoQ in the previous quarter, so this was the second quarter of strong DRAM growth which we covered here.
NAND revenue was $1.6 billion, an increase of 27% QoQ. NAND pricing increased by more than 30% QoQ, offsetting a low single-digit QoQ decrease in bit shipments.
Compute and Networking (CNBU) revenue was $2.19 billion, representing an increase of 26% QoQ and 59% YoY. Per mgmt comments: “Data center revenue grew robustly, and cloud more than doubled sequentially.”
Mobile (MBU) revenue was $1.6 billion, representing an increase of 24% QoQ and 69% YoY. Per management comments: “an expected decline in volume was more than offset by improved pricing” and management confirmed mobile will recover this year: “Smartphone unit volumes in calendar 2024 remain on track to grow low to mid-single digits.”
Embedded (EBU) revenue was $1.1 billion, representing an increase of 7% QoQ and 28% YoY.
Storage (SBU) revenue was $905 million, representing an increase of 39% QoQ and 79% YoY. Per management comments: “Data center SSD revenue more than doubled from a year ago driven by share gains from Micron's products.”

Revenue Acceleration Strongly Underway

Fiscal Q2 reaffirmed that Micron’s revenue acceleration is strongly underway, as revenue and Q3’s guide came in well above expectations. Micron added that they are expecting to generate record revenue with “much improved” profitability in fiscal 2025.

Fiscal Q3’s guidance would mark the highest quarterly revenue in seven quarters, coming in above $6 billion for the first time since the fourth quarter of fiscal 2022. This is driving the fastest acceleration that we have seen for Micron since late 2017.

Q3 is expected to see ~76% YoY revenue growth at midpoint, a 18 percentage point acceleration from Q2 and a 61 percentage point acceleration from when revenue inflected back to positive growth in Q1. However, it’s important to note that these YoY growth rates are viewed against extremely weak comps – the real test for the strength and scale of this acceleration will be fiscal 2025’s growth rates; for example, how close each quarter can stay to the 60% expected revenue growth in fiscal Q1 2025.

An improved pricing environment driven by AI server demand is aiding the revenue growth story. Micron said it was able to drive “robust price increases as the supply-demand balance tightened.”

In particular, AI server demand was seen “driving rapid growth in HBM, DDR5 (D5) and data center SSDs, which is tightening leading-edge supply availability for DRAM and NAND.” Micron said this is causing “a positive ripple effect on pricing across all memory and storage end market.” As a result, Micron is expecting prices to continue to increase through 2024 and into 2025.

Management expressed how unusual the demand for HBM3 is: “And 2024 volume as well as pricing is all locked up. 2025, as I mentioned, the volumes are largely allocated. A vast majority of our production supply is allocated, and some of the pricing is already firmed up. Keep in mind, this has never happened before, right, that we are talking about 2025, and we are sitting in CQ1, and we already have so much discussion around supply and pricing for 2025 getting locked up here as we speak.”

Tight Supply:

Once semiconductor segments are aligned in terms of a rebound, the impact from AI will be more evident. Inventory helps to foreshadow the strength of the rebound.

This is what management stated: “Inventories for memory and storage have improved significantly in the data center, and we continue to expect normalization in the first half of calendar 2024. In PC and smartphone, there were some strategic purchases in calendar Q4 in anticipation of a return to unit growth. Inventories remain near normal levels for auto, industrial and other markets.”

The words “tight supply” were repeated 7 times, which tends to translate to strong pricing power. Here are a few of the comments, which are important to note as the tone of the call was that this pricing power should only increase:

“We anticipate strong HBM demand due to AI, combined with increasing silicon intensity of the HBM road map, to contribute to tight supply conditions for DRAM across all end markets.”

“The trade ratio of 3:1, increasing demand in HBM, increased profitability of HBM is putting a non-HBM part of the memory in tight supply. This is why we say that leading-edge nodes are in very tight supply. And as a result, we would fully expect that D5 as well as other DDR products will improve in their profitability picture as well, given they're very much tight supply there.”

“And so, I mean, this overall tight supply environment bodes well for our ability to manage the pricing increases as well as keep an eye on demand-supply balance and remain extremely disciplined in driving the growth of our business in revenue and profits while continuing to execute our strategy of maintaining stable bit share.”

Note on HBM3e Progress

Micron’s HBM3e was a core part of our multi-faceted AI-driven growth thesis in December, and the company has provided positive updates on HBM3e development and revenue generation.

Management 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 is expecting 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 this implies that HBM pricing power provided a tailwind to margins. 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 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.”

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.”

Nvidia’s H200 win is 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.”

Market leader SK Hynix, who had shipped HBM for Nvidia’s H100, is investing at least $1 billion this year to improve stacking and yields for HBM3/3e, while Nvidia just confirmed that it is qualifying Samsung’s HBM for next-gen GPUs.

While it is not certain that Samsung will pass the qualification stage, it raises questions whether this qualification is for the B200 or another upcoming GPU, or whether Nvidia is seeking to qualify HBM products from all three manufacturers in order to secure ample supply in 2025 and 2026 (given that Micron’s capacity is nearly booked and SK Hynix just commenced HBM3e mass production).

Per Micron, the following sets them apart: “Customers continue to give strong feedback that our HBM3E solution has a 30% lower power consumption compared to competitors' solutions. This benefit is contributing to strong demand.”

Though it is rumored that SK Hynix is shipping to Nvidia’s Blackwell lineup, Micron raises a critical point: the architecture “provides a 33% increase in HBM3E content, continuing a trend of steadily increasing HBM content per GPU.” This trend for higher memory content to support larger and faster GPUs is likely to continue especially as chipmakers such as AMD work quickly to encroach on Nvidia’s share with comparable or faster GPUs.

Additional Growth Opportunities

HBM3e is stealing the spotlight but it’s worth mentioning a few additional growth opportunities for Micron:

The company is releasing a 128-gigabyte server DRAM module that will provide high bandwidth D5 capability and greater than 20% energy efficiency with 15% better latency compared to Samsung’s 3D TSV solutions. This product has “strong customer pull” with “several hundred million dollars of revenue in the second half of fiscal 2024.”
Micron reported record revenue share in the data center SSD market last year. In the current quarter, MU grew revenue by 50% QoQ for the 232-layer based 6500 30 terabyte SSDs. These are used for AI data lake applications.
Edge AI – PCs will be a growth market for Micron. As stated above, mgmt 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.
Edge AI – AI phones will require 50% to 100% more DRAM content than non-AI phones.

Conclusion:

A company that is supplying Nvidia (and likely AMD, perhaps Broadcom) on critical memory components for GPUs this year, HBM3E, plus will afford us an early entry for Edge AI with spring-loaded margins and strong pricing power that is expected to increase? Yes, please.

I’m quite positive you will see a new buy alert on Micron tomorrow and we are also looking at entering Lam Research (see below for LRCX analysis).

The report tonight has many implications for a thesis we have been carefully building on a memory rebound, which with some careful risk management, should have a long runway with Edge AI up to bat next (2025).

A special thank you to my team of analysts – Damien, Royston and Knox — who have worked diligently to identify this thesis. Go team go.

Resources:

Micron Q2: Memory Rebound in Full Force with HBM3e