Micron Boosts Guidance Amid DRAM Strength
Memory chip manufacturer Micron Technology (NASDAQ: MU) beat analyst expectations when it reported its fourth-quarter results in October. The DRAM market, which has been plagued with oversupply for multiple quarters, is strengthening, and the subsequent recovery in pricing is expected to drive Micron's revenue higher. But the company's earnings guidance was disappointing, calling for a significant year-over-year decline even after a few favorable accounting changes.
Micron now appears more confident in its outlook. During the company's recent presentation at the Credit Suisse Technology Conference, Micron significantly boosted its guidance for the first quarter. Here are the details.
Image source: Micron Technology.
A return to earnings growth, sort of
The main theme of Micron's original guidance was the lack of earnings growth despite substantially higher revenue guidance. The company originally called for year-over-year revenue growth as high as 15%, but a non-GAAP EPS range of just $0.13 to $0.21. That compares to $0.24 during the prior-year period, representing an 29% decline at the midpoint.
Micron's management turned out to be overly conservative with that guidance. Driven by improving market conditions, the company substantially raised its first-quarter outlook across the board. Here's how the old and new guidance compare:
|
Metric |
Old Q1 Guidance |
New Q1 Guidance |
|---|---|---|
|
Revenue |
$3.55 billion to $3.85 billion |
$3.975 billion +/- $50 million |
|
Non-GAAP gross margin |
23% to 25.5% |
25.5% +/- 0.5% |
|
Non-GAAP EPS |
$0.13 to $0.21 |
$0.28 +/- a few cents |
Data source: Micron earnings presentation and Credit Suisse Technology Conference presentation.
The new revenue guidance represents year-over-year growth of 18.7%, driven primarily by improving DRAM prices. Micron sees this momentum continuing into the second fiscal quarter, aided by slowing supply growth.
On the EPS front, new guidance of $0.28 represents 16.7% growth compared to the first quarter of last year. However, Micron's guidance isn't quite comparable to the prior-year results because of some accounting changes the company has made. Beginning in the first quarter, Micron will begin backing out stock-based compensation and the amortization of acquisition-related intangibles from its calculation of non-GAAP earnings. This move will reduce expenses by $50 million per quarter.
Another $100 million per quarter in costs will be removed by extending the depreciable lifetime of DRAM capital equipment from five years to seven years. The net result is that non-GAAP expenses will be reduced by about $150 million each quarter purely due to accounting maneuvers.
On a comparable basis, adjusting for these accounting changes, non-GAAP EPS for the first quarter would be roughly $0.14, based on the new guidance and depending on the tax rate. That still represents a significant decline compared to the first quarter of last year. Even with a boost to guidance, Micron's outlook for earnings is still disappointing.
An update on Inotera
In addition to announcing an increase in guidance, Micron used the conference to update investors on its acquisition of Inotera. The deal was announced late last year, with an expected closing date of July 2016. That date was later pushed back to the end of 2016, with Micron concluding that completing the transaction wasn't possible in the original time frame.
Micron now plans to close the transaction on Dec. 6, putting an end to the yearlong saga. Immediately upon close, Micron expects the acquisition to be accretive to DRAM gross margins, EPS, and free cash flow. The recent improvement in DRAM pricing is certainly helping; DRAM market conditions six months ago were much weaker.
Micron will report its first-quarter results on Dec. 21. Investors should expect to hear more about the company's expectations for the Inotera acquisition, which should by that time be complete. Micron's guidance for the second quarter will be closely watched, as it will give investors a good idea of the momentum the company is seeing in the DRAM market. The accounting changes will provide a boost to earnings for all of fiscal 2017, so investors should make sure to adjust the numbers to get a better sense of Micron's true performance.
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