Despite Improving Conditions, Micron Has Trouble Producing Profits

By Markets

Image source: Micron Technology.

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Memory chip manufacturer Micron Technology (NASDAQ: MU) reported its third quarterly loss in row on Oct. 4. The company managed to produce a non-GAAP profit for the full fiscal year, which ended Sept. 1, but just barely. Fiscal 2016 revenue tumbled 23%, driven down by weak memory chip prices. Management does expect industry conditions to improve going forward, but its guidance provided more questions than answers.

Another tough quarter

Micron reported fiscal fourth-quarter revenue of $3.22 billion, down 11% year over year but up 11% sequentially. The computer and networking segment produced $1.25 billion of revenue, up about 15% compared to the third quarter. Despite this revenue growth, the segment still produced a small operating loss. Micron saw a moderating pricing environment across all product categories in this segment, a good sign for fiscal 2017.

The mobile segment also posted strong revenue growth, with $671 million of revenue representing a 20% increase compared to the third quarter. Unfortunately, sales of early production products led to an operating loss of $45 million, down from a loss of just $17 million during the third quarter. A slowing market for smartphones will likely continue to put pressure on Micron's mobile business in the coming year.

The embedded segment was the star of the show. Revenue came in at $513 million, up 5% compared to the third quarter, and an operating margin of nearly 26% made the segment by far the most profitable part of Micron. Strong demand for automotive products, as well as consumer and connected home products, drove the segment's results.

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Lastly, the storage segment continued to struggle. Revenue was up 5% sequentially to $758 million, but the operating loss expanded to $69 million, worse than a loss of $62 million during the third quarter. Micron pointed to higher sales of enterprise and cloud solid-states drives as a positive, but the segment continues to eat away at profitability.

On a GAAP basis, Micron reported a net loss of $170 million, or $0.16 per share. That's down from a profit of $471 million, or $0.42 per share, during the same period last year. On a non-GAAP basis, the net loss was $56 million, or $0.05 per share, down from a profit of $399 million, or $0.37 per share, during the same period last year.

Overall, Micron's fourth quarter showed signs of progress. DRAM average selling price fell 6%, but Micron was able to cut per-bit costs by a larger 8%. Along with 20% bit growth, this led to higher revenue and improved profitability. The company still failed to produce a profit despite improving conditions, prompting Goldman Sachs to lower its price target on the stock to $16 per share.

Guidance with a catch

Micron expects to produce between $3.55 billion and $3.85 billion of revenue during the first fiscal quarter of 2017, up from $3.35 billion during the prior-year period. The return to revenue growth is important, but Micron's earnings guidance is a bit troubling. The company expects to produce non-GAAP EPS between $0.13 and $0.21, down a bit from non-GAAP EPS of $0.24 produced during the first quarter of last year. But some accounting changes muddle the comparison.

Beginning in the first quarter, Micron is making two significant accounting changes that investors need to know about. First, the company is extending the depreciable life of its DRAM capital equipment from five years to seven, reflecting longer intervals between technology transitions. This will reduce depreciation expense by about $100 million per quarter.

Second, Micron will begin backing out stock-based compensation and amortization of intangibles from its non-GAAP results. This will boost non-GAAP operating profit by about $50 million per quarter. Because of these changes, comparing Micron's guidance with its results from last year is like comparing apples and oranges. Without these changes, non-GAAP EPS guidance for the first quarter would have been between breakeven and $0.08, depending on taxes.

Despite expecting substantially higher revenue during the first quarter, earnings on a comparable basis are going to slump, raising questions about Micron's ability to translate improving market conditions into higher profitability. Investors have pushed up the stock quite a bit over the past few months in anticipation of a turnaround. What they end up with may be disappointment instead.

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Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.