Memory chip giant Micron Technology (NASDAQ: MU) reported first-quarter results Tuesday night, and it was a doozy. Micron smashed analyst targets across the board, and share prices jumped as much as 6.4% higher on Wednesday.
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Revenues rose 71% year over year, landing at $6.8 billion; the analyst consensus only called for $6.4 billion. On the bottom line, adjusted earnings rose more than sixfold to $2.45 per diluted share. Here, your average analyst would have settled for $2.19 per share. Looking ahead, Micron's management also issued second-quarter guidance targets far ahead of current analyst views.
That's Micron's first quarter of fiscal year 2018 by the numbers. To get a deeper understanding of how the business is developing, let's take a dive into management's earnings call with analysts.
1. Street prices
Average selling prices for Micron's memory chips are obviously of critical importance to the company's business. In the past, boom times have always been followed by brutal price wars. Micron's revenues, profits, and share prices followed suit by crashing in lockstep with the market conditions.
But the industry has been reshaped by consolidation and a newfound fiscal discipline among the three largest memory-chip makers, one of which is Micron. Things actually look different this time. Chip prices are declining again after several quarters of stability, but that's a slow fall, while production costs are dropping much faster:
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So if we're framing the scenario in the future as we continue to see sort of marginally declining pricing environment, a couple of points per quarter or so, I think there's ample room for gross margin expansion, both as a result of our cost reduction as well as the ongoing transition to high-value solutions, which would include redirecting -- continuing to redirect component sales into higher value-added solutions, as well as some of our partner contracts wind[ing] down over the course of our fiscal '18 and into 2019.
-- Ernie Maddock, Micron CFO
In this pricing environment, Maddock sees "reasonable room for gross margin expansion."
2. Supply and demand
Here's what the supply-and-demand equation looks like at the moment. In short, demand for DRAM chips is healthy and surging, while order volumes for NAND flash memory are skyrocketing:
Our supply and demand projections remain consistent with what we shared last quarter. DRAM industry supply bit growth is expected to be about 20% in calendar 2018, and we expect a healthy market environment driven by the ongoing enterprise data center, cloud, and mobile trends, as we just discussed.
We expect the industry bit growth for NAND to approach 50% in calendar 2018 as the industry continues to ramp 64-layer designs into volume production. [SSD] adoption in client computing and data center applications continues to increase, and will expand further as more supply becomes available over time.
-- Sanjay Mehrotra, Micron CEO
In this healthy market environment, Micron has the rare luxury of picking its battles. The company is shifting its production lines to make higher volumes of very profitable product lines while limiting the supply of lower-value commodity chips. That includes a generous dose of fresh innovation:
We improved our mix of high-value solutions, delivering record SSD revenues and further increasing our SSD share. More recently, we began shipping our first 64-layer NAND consumer SSD.
We also introduced the industry's fastest high-density 32-gigabyte NVDIMM-N, which combines Micron's DRAM and NAND to deliver a persistent memory solution that addresses intense data-analytics workloads. We have garnered solid interest from enterprise and cloud customers, and customer qualifications are underway.
As an interesting side effect of the shifting market winds, seasonal sales patterns are fading away:
Sanjay mentioned earlier the diversification of the DRAM demand stream. And certainly, that is also true on the NAND side. And in the context of that diversified demand stream, for example, automobile tends to be far less seasonal than client PCs. And if you look at data center deployments among all of the key players, there's certainly a specific pattern per customers.
But when you put them all together, there is no macro seasonality pattern that emerges when you look at that. So as we've transitioned to these diversify demand drivers, the concept of seasonality, I think, has been redefined and is perhaps less impactive on a quarter-by-quarter basis than it may have been in the past.
5. What's next
Micron's CEO closed his prepared remarks on this optimistic note:
As we close out calendar 2017 and look to 2018, we see increasing opportunities for Micron to play a larger role in the technology trends shaping modern life. Memory and flash storage are strategic assets that put Micron at the intersection of the biggest growth trends in technology, and we cannot be more excited about our future.
Our customers increasingly view us as an essential partner in early design discussions due to the differentiation our solutions can provide.
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