Micron will release its results on March 20th. The company reported 15.7% revenue growth in the last quarter, breaking the string of five quarters of negative growth. Management expects revenue to grow 43.5% YoY to $5.3 billion.
Higher prices and better utilization rates are also expected to improve the company’s margin profile in 2024, along with contribution from higher margin high-bandwidth memory (HBM).
The company will be in focus as HBM3e emerges as a significant enabler of generative AI applications and a significant growth driver over the next few years. Micron has recently started volume production of HBM3e, and more details will likely be revealed during the earnings call.
Revenue
Micron reported 15.7% YoY growth to $4.73 billion in the recent quarter after five quarters of negative growth.
- DRAM revenue grew by 24% QoQ to $3.4 billion, primarily helped by increased bit-shipments in the low 20% and improved prices by a low single-digit percentage. DRAM revenue constituted 73% of total revenue.
- NAND revenue grew by 2% QoQ to $1.2 billion, primarily helped by 20% price growth.
Revenue guidance for the next quarter is $5.3 billion at the midpoint, representing YoY growth of 43.5%. The company’s CFO, Mark Murphy, said in the earnings call, “Now turning to our outlook for the fiscal second quarter. While we remain mindful of macroeconomic risks, the memory and storage market environment is improving. We expect supply-demand balance to tighten in both DRAM and NAND throughout 2024. Our leading-edge DRAM and NAND nodes are oversubscribed for the full year. Consequently, we expect prices to increase through calendar 2024, driving improvements in our financial performance.”Our leading-edge DRAM and NAND nodes are oversubscribed for the full year. Consequently, we expect prices to increase through calendar 2024, driving improvements in our financial performance.”
The analysts expect revenue to grow 44.6% YoY to $5.34 billion in the next quarter and accelerate to 59.5% in Q3 and 70.6% in Q4.
Margins
Margins have gone through a steep cyclical low and have been showing signs of improvement. The GAAP gross margin was (0.7%) in Q1, compared to 21.9% in the year ago quarter. It marked a 1010 bps QoQ improvement from (10.8%) in Q4. The decline in gross margin compared to the previous year was due to the lower average selling price for DRAM and NAND and $165 million of underutilization costs in Q1.
The sequential rise in gross margin was due to improved prices and higher DRAM revenue mix, and it benefitted from $600 million from the sale of inventory written down in the prior periods. Mgmt expects around $400 million from a similar inventory benefit in the next quarter. The management guide for the next quarter is 12% at the mid-point. The adjusted gross margin was 0.8% compared to 22.9% in the same period last year. The management guide for the next quarter is 13%, helped primarily due to the improvement in prices, lower utilization charges, and the benefit from the sale of inventory.
The operating margin was (23.9%) compared to (5.1%) in the same period last year. The management guide for the next quarter is (8.2%). The adjusted operating margin was (20.2%) compared to (1.6%) in the same period last year. The lower operating margin was due to the factors discussed in the earlier paragraphs, higher R&D expenses, and the reinstatement of certain compensation programs that were suspended in the prior fiscal year. Management expects operating expenses to be lower in the next quarter due to lower R&D expenses and an asset sale previously anticipated in Q1. The management guide for Q2 is (4.9%) and expects to return to positive adjusted operating income in the third quarter.
Due to the various factors discussed above, the company reported EPS of ($1.12) in the recent quarter compared to ($0.18) in the same period last year. The adjusted EPS came at ($0.95) compared to ($0.04) in the same period last year.
The management guide for the GAAP EPS is ($0.45) at the mid-point for Q2 and adjusted EPS of ($0.28) at the mid-point. The analysts expect adjusted EPS of ($0.26) in the next quarter and a return of profitability in Q3 with adjusted EPS of $0.19.
Cash Flow and Balance Sheet
The operating cash flow grew by 48.6% YoY to $1.4 billion. The operating cash flow in Q1 benefitted from $600 million of customer prepayment “to secure supply for leading-edge memory products.” The operating cash flow margin was 29.6% compared to 23.1% in the same period last year. The adjusted free cash flow came in at negative ($333 million) and included capital expenditures of $1.7 billion compared to capital expenditures of $2.5 billion in the same period last year. The adjusted free cash flow margin was (7%) compared to (37.4%) in the same period last year. The company’s CFO said in the earnings call, “We see operating cash flows improving substantially in the second-half of the fiscal year and are now forecasting positive free cash flow in the fiscal fourth quarter.”positive free cash flow in the fiscal fourth quarter.”
The company had cash and investments of $9.8 billion and debt of $13.5 billion in Q1 compared to $10.5 billion and $13.3 billion in Q4. The short-term debt is $908 million and the weighted average maturity of the company’s debt is 2030.
Key Metrics from Business Units
Compute and Networking Business Unit (CNBU) revenue declined by (1%) YoY and is up 45% sequentially to $1.74 billion, as data center and client shipments strengthened in Q1 primarily helped by AI demand and normalized inventory at client customers. We want to see more recovery in compute and networking, as the segment was as high as $3.8B in Q4 of FY2021 and $3.9B in Q3 of FY2022.
The Mobile Business Unit shows signs of recovery, growing by 7% QoQ and by 97% YoY to $1.29 billion. The company’s CFO, Mark Murphy, said in the earnings call, “Mobile revenue continued to show strength as customer inventories normalized and smartphone units and average memory and storage capacity growth at customers drove demand.” We would also like see the recovery continue, as the mobile segment was at $1.89 billion in Q4 of FY2021 and $1.97 billion in Q3 of FY2022.
Embedded Business Unit (EBU) grew by 21% sequentially and by 4% YoY to $1.04 billion helped by growth in most of the end markets.
Storage Business Unit (SBU) revenue declined by (4%) YoY and (12%) sequentially to $653 million due to lower consumer component sales and partially offset by strong growth in SSD revenue.
Other noteworthy points to watch
- In the earnings call, CEO Sanjay Mehrotra talked about the AI tailwinds, “We expect 2024 to be a year of recovery and can see the path towards a healthy supply-demand environment along with strong growth in critical new technologies like HBM3E. From the data center to the edge, AI has emerged as a significant secular driver that will further bolster the industry towards record revenue TAM in 2025 and drive growth for years to come. Micron's broad and growing suite of leading-edge products positions us well to capitalize on the immense opportunities ahead.” strong growth in critical new technologies like HBM3E. From the data center to the edge, AI has emerged as a significant secular driver that will further bolster the industry towards record revenue TAM in 2025 and drive growth for years to come. Micron's broad and growing suite of leading-edge products positions us well to capitalize on the immense opportunities ahead.” Any key insights on the 2024 trends are to be watched.
- Management comments on HBM3E are to be closely watched in the upcoming earnings. The company’s CEO Sanjay Mehrotra said in the last earnings call. “Micron is addressing these exciting opportunities brought on by the proliferation of AI with an industry-leading portfolio of data center solutions, including HBM3E, D5, several types of high-capacity server memory modules, LPDRAM, and data center SSDs. We have received very positive customer feedback on our HBM3E, which has approximately 10% better performance and about 30% lower power consumption compared to competitive offerings of HBM3E.”We have received very positive customer feedback on our HBM3E, which has approximately 10% better performance and about 30% lower power consumption compared to competitive offerings of HBM3E.”
In fiscal Q1, we shipped samples of HBM3E to a number of key partners and are making good progress in our qualifications. Micron is in the final stages of qualifying our industry-leading HBM3E to be used in NVIDIA's next-generation Grace Hopper GH200 and H200 platforms. In addition, our LP5x is being used for the Grace CPU, driving a new use case for LP memory in the data center for accelerated computing.
We are on track to begin our HBM3E volume production ramp in early calendar 2024 and to generate several hundred millions of dollars of HBM revenue in fiscal 2024. We expect continued HBM revenue growth in 2025, and we continue to expect that our HBM market share will match our overall DRAM bit share some time in calendar 2025.”The company has confirmed recently that they have begun volume production of HBM3E. TD Cowen Analyst Krish Sankar pointed out that they expect Micron to increase its market share in the HBM market significantly to over 25% in the next year from the current 10-15%.
Here is press coverage on Micron and Nvidia.
- Margin improvement and management comments on the margins are key items to watch in the earnings call. The company’s CFO answered the analyst’s question on gross margin improvement. “We are seeing some cost declines occurring with the increase of leading node production, and then again with the lower wafer starts and the higher utilization. What we've talked about before, we start to see idle charges dropping, as we've discussed. So again, principally price in the second quarter, but then beginning to see some cost benefits, even though we're losing the benefit of that lower cost inventory.We are seeing some cost declines occurring with the increase of leading node production, and then again with the lower wafer starts and the higher utilization. What we've talked about before, we start to see idle charges dropping, as we've discussed. So again, principally price in the second quarter, but then beginning to see some cost benefits, even though we're losing the benefit of that lower cost inventory.
We will see price appreciation through the year. We're going to — we don't expect there to be volume growth in the third quarter either, but good price appreciation, which will drive gross margins up. And then in the fourth quarter, we would expect to see volume and price, and again some lower utilization charges. So again, we would expect to see margin expansion second quarter to third quarter, and then again third quarter to fourth quarter.”
We will see price appreciation through the year. We're going to — we don't expect there to be volume growth in the third quarter either, but good price appreciation, which will drive gross margins up. And then in the fourth quarter, we would expect to see volume and price, and again some lower utilization charges. So again, we would expect to see margin expansion second quarter to third quarter, and then again third quarter to fourth quarter.”
Conclusion
The company’s Q1 FY2024 results showed that Micron’s recovery is underway. We would like to see this positive trend continue in Q2 with margin expansion in the coming quarters and a commitment to positive free cash flow by the end of the fiscal year 2024.
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