Micron Earnings Preview: 2 Key Items

Micron (MU) reports quarterly earnings after-hours today. Analysts expect revenue of $2.96 billion and eps of -$.09. The revenue estimate implies flat growth sequentially. If the company can deliver on the top line it will be the first time in 18 months that revenue did not fall sequentially. At least one analyst - John Pitzer from Credit Suisse - is a believer.

Pitzer believes revenue will bottom out this quarter:

"We expect MU to roughly meet F3Q Rev/EPS guidance and expect F4Q guidance to confirm a F3Q bottom," he writes ...

He's modeling $2.94 billion in sales in May and a 9-cent loss per share, versus consensus for $2.96 billion and a 10-cent loss, pointing to some DRAM revenue growth and a "modest decline" in NAND revenue. He's basing that on pricing expectations, writing "our current estimates assume DRAM (~54% of total Rev) ASPs to decline 11% q/q and bits to increase 14% q/q, implying an increase in DRAM Rev of 1.5% q/q - and assume NAND (~37% of total Rev) ASPs to decline 5% q/q and bits to increase 5% q/q, implying a modest decline in NAND Rev of 0.3% q/q."

What will be different this quarter vis-a-vis the previous six remains to be seen. Here are a few items investors should focus on:

Declining Margins

Falling revenue is only one half of Micron's problems. The other half is falling margins. Micron's gross margins fell to 15% in FQ2, down from 21% in the prior quarter. Margins for DRAM (54% of revenue) were 20%, down from the upper 20% range in FQ1.

On a dollar basis, gross margin fell 32% Q/Q, outstripping the 12% decline in revenue. The company continues to invest for future growth that simply has not materialized. Until management cuts operating costs (SG&A and R&D) faster than the loss of revenue, I would not consider touching MU.

Iotera Deal Appears Up In The Air

After Micron lost the opportunity to acquire SanDisk (SNDK) late last year it later announce the acquisition of its remaining 67% stake in Taiwanese chipmaker Iotera. In addition to being accretive immediately the acquisition was expected to add scale in DRAM and potentially improve margins. Instead of closing in July the deal is now expected to close at the end of 2016. Management gave no explanation for the delayed closing.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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