Micron beat and raised in Q3 as strong high-bandwidth memory (HBM) demand and price increases drove revenue growth of 81.5% in the quarter. Management reiterated their forecast for several hundred million in HBM revenue in fiscal 2024, with Q3 generating north of $100 million in HBM revenue in the quarter. Micron also offered its first look at fiscal 2025 for HBM, seeing “multiple billions” of HBM revenue next fiscal year, implying growth may come in more than ten-fold next year for this portion of its DRAM business.
CEO Sanjay Mehrotra said that Micron is “gaining share in high-margin products like High Bandwidth Memory, and our data center SSD revenue hit a record high.” He added that Micron is “excited about the expanding AI-driven opportunities ahead, and are well positioned to deliver a substantial revenue record in fiscal 2025.”
Micron also mentioned that HBM is sold out for calendar 2025 with pricing already contracted for. There are some drawbacks to this as the market may interpret it as a lack of potential for upside. That is being too hasty as the exact pricing is not disclosed, only that HBM is sold out. This will probably be the situation into the foreseeable future due to low yields from HBM.
Revenue and EPS
Micron’s revenue growth accelerated sharply in Q3, with the company reporting revenue growth of 81.5% YoY, a 2380 bp acceleration from 57.7% YoY growth last quarter. Micron’s Q4 guide was barely above the consensus estimate although revenue growth is still accelerating, with the midpoint of the guided range pointing to 89.5% YoY growth next quarter.
- Q3 revenue was $6.81 billion, an increase of 81.5% YoY and 16.9% QoQ.
- Fiscal Q4 revenue was guided at $7.6 billion, +/- $200 million, for YoY growth of 89.5% and QoQ growth of 11.6%. This marginally beat the consensus estimate of $7.58 billion, but fell short of Citi’s expectation for an $8 billion revenue guide.
- Q3 GAAP EPS was $0.30, in line with estimates. This was a strong increase from ($1.73) in the year ago quarter, but a sequential decline from $0.71 last quarter. The sequential decline was due to a ($377 million) income tax provision in Q3, whereas Q2 benefitted from a $622 million income tax benefit.
- Q3 adjusted EPS was $0.62, beating estimates for $0.53. This compares to adjusted EPS of ($1.43) in the year ago quarter and $0.42 last quarter.
- For Q4, Micron guided GAAP EPS to be $0.61, +/- $0.08 for QoQ growth of 103%, at the midpoint. Adjusted EPS was guided at $1.08, +/- $0.08, for QoQ growth of 74% at midpoint.
Margins
Micron’s Q3 report was a standout on margins, as increased prices drove significant expansion in Q3’s margins down the line and pointed to margin expansion continuing next quarter. Q4’s gross margin guide and implied operating margin levels were very strong.
Management stated the following in terms of how to model a higher product mix of HBM: “Keep in mind that higher mix of HBM will offset non-HBM DRAM cost reductions, but HBM will be at accretive gross margins.” In the long run, “portfolio mix will be an important contributor over time as HBM, high-capacity DIMMs, data center SSDs and other high-value products increase as a portion of our mix.”
Q3’s margins were strong across the board, coming in ahead of management’s guided ranges and reflecting strong QoQ and YoY expansion.
- GAAP gross margin was 26.9% in Q3, an 840 bp QoQ and 4470 bp YoY expansion up from from (-17.8%). This came ahead of management’s guide for 25.5%.
- Adjusted gross margin was 28.1%, an 810 bp QoQ and 4420 bp YoY expansion.
- GAAP operating margin was 10.6%, a 730 bp QoQ and 5750 bp YoY expansion up from (-46.90). This also was ahead of management’s implied guide for 8.7%.
- Adjusted operating margin was 13.8%, a 1030 bp QoQ and 5300 bp YoY expansion.
- GAAP net margin was 4.9%, down from 13.6% last quarter but up substantially from (50.5%) in the year ago quarter. The QoQ decline was due to the income tax provision.
- Adjusted net margin was 10.3%, up from 8.2% last quarter and (41.7%) in the year ago quarter.
Q4’s guided margins point to continued expansion, with the impacts of this margin strength increasingly evident when viewed in dollar terms.
- For Q4, management guided GAAP gross margin at 33.5%, +/- 1.0%, representing a 660 bp QoQ and 4430 bp YoY expansion (on pace with Q3’s YoY expansion). Last year, GAAP gross margin was (-10.80%).
- Q4’s adjusted gross margin was guided at 34.5%, up 640 bp QoQ and 4360 bp YoY.
- For Q4, based on management’s operating expenditure guides, GAAP operating margin is expected to be 17.8%, up 720 bp QoQ and 5450 bp YoY. Last year, GAAP operating margin was (-36.70%).
- Adjusted operating margin is expected to be 20.6%, up 680 bp QoQ and 5070 bp YoY, and reaching the highest level since Q4 2022.
Here’s what the expansion in margins looks like in dollar terms:
- Gross profits of $1.8 billion reported in Q3 will increase to $2.5 billion in Q4. This is following a loss of $668 million last year.
- Operating income of $700 million in Q3 will grow to $1.3 billion in Q4. This is following a loss of $1.7 billion in Q3 of last year.
Cash and Debt
Cash flows were particularly strong as well, with operating cash flow more than doubling QoQ and free cash flow returning to positive territory.
- Operating cash flow was $2.48 billion in Q4, more than double the $1.22 billion generated last quarter and a significant improvement from $24 million in the year ago quarter. OCF margin was 36.4%, compared to 20.9% last quarter and 0.6% in the year ago quarter.
- Adjusted free cash flow was $425 million, compared to ($29 million) last quarter and ($1.36 billion) in the year ago quarter. Adjusted FCF margin was 6.2%, versus (0.5%) last quarter and (36.1%) in the year ago quarter.
- Cash, investments and restricted cash totaled $9.22 billion, and debt totaled $13.26 billion.
Key Segments
- DRAM revenue increased 13% QoQ to $4.7 billion, with the sequential growth decelerating from 21% in Q2 and 24% in Q1. DRAM ASPs increased approx. 20% QoQ, accelerating from the high-teens last quarter.
- NAND revenue increased 32% QoQ to $2.1 billion, accelerating from 27% QoQ growth in Q2. NAND ASPs increased approx. 20% QoQ.
The following guidance was provided: “We expect DRAM bit shipments to be flattish and NAND shipments to be up slightly in fiscal Q4. We forecast shipment growth to strengthen modestly in the November quarter.” The market may have wanted more in terms of sequential growth given the strong QoQ growth seen in the prior two quarters.
- Compute and Networking (CNBU) revenue increased 18% QoQ and 85% YoY to $2.57 billion.
- Mobile (MBU) revenue decreased (1%) QoQ but increased 94% YoY to $1.59 billion.
- Embedded (EBU) revenue increased 16% QoQ and 42% YoY to $1.29 billion.
- Storage (SBU) revenue increased 50% QoQ and 116% YoY to $1.35 billion.
Management said that in the data center, “rapidly growing AI demand enabled us to grow our revenue by over 50% on a sequential basis, and we grew share in high margin AI-related product categories such as HBM, high-capacity DIMMs and data center SSDs.”
HBM Growth Strong, 2025 Outlook Sees Multiple Billions in Revenue
We had noted in our pre-earnings write-up that Micron’s updates on HBM3e were to be closely watched, and management finally unveiled its FY25 HBM revenue targets as well as HBM3e revenue for Q3.
Management had said last quarter that Micron was “on track to generate several hundred million dollars of revenue from HBM in fiscal 2024,” and left that target unchanged. However, management clarified that the “HBM shipment ramp began in FQ3, and we generated over $100M in HBM3E revenue in the quarter, at margins accretive to DRAM and overall company margins.” Micron has also “sampled our 12-high HBM3E product and expect to ramp it into high volume production in CY25, and increase in mix throughout 2025.”
In addition, management now sees “multiple billions in revenue from HBM in FY25,” this will be up from several hundred million in FY24.
Notably, demand on HBM will outstrip supply for some time due to HBM consuming 3X more wafers than D5. The trade ratio will increase from HBM3 to HBM4, as increasing the die stack from 8 to 12 will exacerbate the issue of low HBM yields. The yields will be far less than the previous generation of DRAM, creating more supply pressure.
We’ve mentioned before, but doesn’t hurt repeating, that Micron expects to have a similar market share in HBM by 2025 as it has in overall DRAM – which translates to 38% market share.
HBM Sold Out; Pricing Already Contracted
The blemish in the report is the commentary that HBM is sold out for calendar 2024 and 2025, with “pricing already contracted for the overwhelming majority of our 2025 supply.”
While contracts on pricing protect Micron in the event that prices fall, we’ve seen prices rise so far through 2024 on a tight-supply environment, suggesting that Micron may be expecting the supply side to ease and pricing increases to fade through 2025. Should prices continue to rise through 2025, having a majority of supply contracted already may limit some incremental revenue and margin growth. This could imply there is no further upward surprises due to tight supply and higher ASPs.
There was a question about this issue from the call.
Christopher Danely (Analyst)
“So I think you mentioned you're signing up some customers to long-term contracts. Given your belief that the pricing is going to keep going up, why sign people up to long-term contracts and potentially miss out on some of the increased pricing? Or is there some potential for wiggle room on pricing with the contracts and it's more of a unit basis? Just curious there.”
Sanjay Mehrotra (Executives)
“The long-term contracts really help us and customers get closer, not only with respect to, let's say, supply or pricing discussions as may be relevant to our various customer contracts, but also with respect to the technology road map, the product road map, the timing of the supply. And they are very helpful factors in building a close relationship with the customers. And you can see that we are pointing to a substantial revenue record in 2025, of course, leveraging some of these contracts that we have put in place, and we have also pointed to a significant improvement in profitability. So I think we are well positioned in these contracts with respect to not only the supply and demand fundamentals, but also with respect to the financial aspects.”
What’s important to note is that even if management knows what fiscal year 2025 will see from HBM pricing, they have not guided yet for FY2025. In addition to this, although data center is the main story for now, Micron’s revenue is also determined by the timing of AI PCs and Mobile.
Capex To Rise Meaningfully in FY25
Amidst the strong growth forecast for HBM next year, Micron also unveiled its FY25 capex plan, which calls for meaningful YoY growth in capex from its $8 billion target in FY24.
Management is planning for FY25’s capex to be in the “mid-30s % range of revenue” to support HBM assembly and test equipment, fab and back -end facility construction as well as technology transition investment to support demand growth.”
Management add that FY25’s “record revenue and significantly improved profitability in FY25 will help support average quarterly capex in FY25 to be meaningfully above the FQ4 2024 level of $3B.”
Given that current analyst estimates call for ~$37 billion in revenue in FY25, management is implying FY25 capex to increase by more than 50% YoY to over $12 billion, with the $14 billion range (a ~75% YoY increase) more likely given the quarterly average comment. This supports stronger price action in companies like Lam Research, which supplies Micron.
The CHIPS Act helps to offset this increase in capex. During the past quarter, Micron signed a preliminary memorandum to receive $6.1 billion in grants.
Here is what the CFO stated on the call and how it’s expected that revenue growth outpaces capex spending growth.
“Toshiya Hari (Analyst)
Okay. Got it. That's helpful. And then as my follow-up, maybe one for Mark on CapEx. So you're guiding fiscal year '25 up materially. Given some of the hints that you've provided, maybe you're looking at a mid-teens $1 billion number for fiscal '25. I know more than half of that or half of that is coming from the greenfield investments in the U.S. But how should we be thinking about your bit supply growth in fiscal '25 or calendar '25? Should we expect you guys to grow more or less in line with the demand CAGR you have for DRAM and NAND, mid-teens and high teens respectively? Or do you expect to undership relative to those ranges in fiscal '25?
Answer
Mark Murphy (Executives)
Yes, we — good questions, Toshiya. And your view on CapEx, we've given enough that — we don't want to guide revenue for '25 because we'll do that at a future date by quarter. But we do expect a material increase year-over-year. For the quarter sequentially, we'll see a meaningful step up. And we were — we're at $3 billion — we increased from $2.1 billion to $3 billion third quarter to fourth quarter guide. I would characterize that both on a dollar and percent basis is more than meaningful. So it would be less than that sequentially. But we are spending more.
To your question on, we are very constrained on bits. — bit production. And so we will — as I mentioned in my earlier comments, we will certainly see inventory levels come down. In fact, we expect to be approaching target inventory levels by the end of 2025.
Note on HBM and NAND CAGRs
HBM’s CAGR is expected to remain strong and be above 50% for the next few years.
“Well, as we have said before, that we see the CAGR for HBM growth — in terms of bit growth CAGR to be well above 50% over the next few years. So certainly, HBM is a strong growth driver. And again, as we increase our mix of HBM going forward, it will, of course, be continuing to be accretive to our financial performance, including margins. And we are pleased that with the strong performance that we have we are sold out for '25 as well with overwhelming part of our output already committed in terms of pricing.”
During the Q&A, it was pointed out that the forecast for NAND CAGR growth was lowered from “the low 20s” to a new forecast of “growth in the high teens.” Management’s response was the following:
“And I'll also tell you that we basically revise the base here for the CAGR that we used. So this time, the CAGR that we used, we use the base year of 2023. And in 2023, as you know, we had bit demand growth in NAND that was higher, meaningfully higher than the CAGR. So that, of course, the larger base of 2023, just somewhat changed our outlook on the overall CAGR.”
This is important to note should we see headlines tomorrow that NAND growth will be lower than expected, that it’s instead a different baseline year.
Comments on AI PCs & Mobile
Per management, AI PCs are expected to accelerate in Q4 and throughout 2025 due to the Windows 12 replacement cycle. Micron will benefit as management explained: “we expect these devices will have 40% to 80% more DRAM content than today’s average PC.”
Micron’s management sees smartphones growing in the “low-to-mid single-digit percentage range.” Micron’s DRAM is seeing a 50% to 100% increase in Tier 1 Android phones from the mid-range Android phone having 6GB or 8GB to AI-enabled smartphones requiring 12GB and 16GB. Per the opening remarks: “In calendar Q1, we received recognition for being #1 in quality by five of the world’s leading smartphone OEMs.”
Conclusion:
There was a quote from management in the opening remarks that checks a lot of boxes.
“As we look ahead to 2025, demand for AI PCs and AI smartphones and continued growth of AI in the data center create a favorable setup that gives us confidence that we can deliver a substantial revenue record in fiscal 2025, with significantly improved profitability underpinned by our ongoing portfolio shift to higher-margin products.”
You can’t complain about “a substantial revenue record” on the horizon plus improved profitability and a mix of higher-margin products. It would be hasty to assume the 2025 contracted pricing can’t deliver a beat or upward surprise, which grew 20% QoQ, and rather, we will want to watch DRAM QoQ growth more closely as it’s decelerated from the 20% QoQ range, down to 13% and now down to flat QoQ growth expected for next quarter.
With Micron at 73% YTD compared to QQQ at 20% YTD, the stock certainly has performed well. There are many paths for Micron to continue to perform well that we will be monitoring closely.
Damien Robbins and Beth Kindig contributed to this analysis
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