Micron: Determining The Bottom – Micron Technology, Inc. (NASDAQ:MU)

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Micron (NASDAQ:MU) reported earnings last week. Their verbal commentary at face value was positive. Everything’s improving, right? But the numbers keep getting worse. Pricing didn’t get much better. Margins got worse and earnings got worse. Where’s the bottom?

All That Matters Is Pricing

Calendar 2018 2018 2019 2019 2019 2019
Fiscal 2018 2019 2019 2019 2019 2020
Quarter Q4 Q1 Q2 Q3 Q4 Q1
Month Aug Nov Feb May Aug Nov
CY: 21.5%
DRAM Bit Growth (QTQ) 7.00% 0.00% -11.00% 0.00% 30.00% 5.00%
ASP (QTQ) DRAM 0.0% -9.0% -22.0% -20.0% -20.0% -20.0%
4 Quarters Volume 16.8% 12.4% -4.8% -4.8% 15.7% 21.5%
4 Quarters Price 25.8% 9.1% -24.1% -43.2% -54.6% -60.1%
DRAM YOY Rev Growth 42.7% 21.4% -28.8% -48.0% -38.9% -38.6%
CY: 30.9%
NAND Bit Growth (QTQ) 30.0% 14.0% 7.0% -5.0% 14.0% 13.00%
ASP (QTQ) NAND -15.0% -14.0% -27.0% -15.0% -9.0% -10.0%
4 Quarters Volume 54.4% 64.5% 58.6% 50.6% 32.1% 30.9%
4 Quarters Price -24.2% -33.5% -42.9% -54.6% -51.4% -49.2%
NAND YOY Rev Growth 30.2% 31.0% 15.7% -4.0% -19.3% -18.2%

Source: Elazar Advisors models with data pulled from Micron earnings

DRAM pricing (Page 12 and 13) was again down 20%. NAND pricing was down high single digits.

NAND was certainly better. You also had several industry supply disruptions that helped this quarter.

DRAM was not better and also had some supply concerns with a feud between Japan and South Korea. Given the supply concerns and a supposed bottom, pricing should have improved from previous quarters. That it didn’t tells me demand didn’t improve so much either.

You also may have had a shorter-term benefit of customers buying ahead of trade war events to ensure they get supply.

Enough was out there to support pricing, yet pricing didn’t get much support. That tells us demand is not there.

And Costs Not Dropping Fast Enough

Gross margins were the big concern of the quarter, namely the guide.

Calendar 2018 2018 2019 2019 2019 2019
Fiscal 2018 2019 2019 2019 2019 2020
Quarter Q4 Q1 Q2 Q3 Q4 Q1
Month Aug Nov Feb May Aug Nov
A E
COGS 3289.0 3243.0 2907.0 2904.0 3379.0 3675.0
10.0% 6.9% -4.8% -4.7% 2.7% 13.3%
2907 0.95155
Gross Margins 5179.0 4670.0 2928.0 1884.0 1491.0 1325.0
Margins 61.4% 59.0% 50.2% 39.3% 30.6% 26.5%
Gross Margins bp change 10.1% 3.6% -8.3% -21.6% -30.7% -32.5%

Source: Elazar Advisors models with data pulled from Micron earnings

Look at Gross Margins bp (basis point) change in the grid above. The year-over-year margin change is getting worse, +3.6%, then -8.3%, then -21.6%, then this quarter -30.7%.

And the guide of 26.5% gross margins means the gross margin year-over-year change is going to get worse again. That’s a critical number.

Again, where’s the bottom?

They gave many reasons for this key metric, but I’m going to review what I think are the two keys; pricing and costs.

You may know I’ve said the most important metric for Micron is pricing. Pricing is not improving, be careful.

And what they said on costs should be more worrisome. All that will get reflected in this gross margin number which is the key for profits. That’s Micron’s earnings swing factor, gross margins.

If pricing was improving, they’d have zero problem with this key metric; gross margins.

But since pricing has not improved, they are having difficulty.

And I ask you, we troughed right? We bottomed right? So demand should be sopping up supply, yes? So pricing should be better and manageable. It’s not.

Here’s what the company said on the earnings call:

“Obviously pricing is a factor in the expectations around gross margins for the first fiscal quarter.”

When asked about gross margins, pricing was their first answer, as it should be. Even though they don’t guide to price, they implied their weak gross margin guide is due to expecting continued pricing pressure. You see why it’s so critical to follow the price trends, because that tells you more-or-less where earnings are going.

Look at the other key reason they gave for weak gross margins and a weak guide:

“But the second piece is cost. And as Sanjay mentioned, our cost declines for fiscal 2020 in total will be kind of high-single digits that’s lower than the cost declines we got in fiscal 2019 versus fiscal 2018.”

“Lower cost declines” is key when you have pricing down 10-20%. They are not dropping costs fast enough to match the industry price cuts.

Plus, they expect that trend to continue. It’s not getting better anytime soon; i.e., no bottom.

Let’s look at this simply in cost of goods sold; COGS.

Calendar 2018 2018 2019 2019 2019 2019
Fiscal 2018 2019 2019 2019 2019 2020
Quarter Q4 Q1 Q2 Q3 Q4 Q1
Month Aug Nov Feb May Aug Nov
A E
COGS 3289.0 3243.0 2907.0 2904.0 3379.0 3675.0
YOY Growth 10.0% 6.9% -4.8% -4.7% 2.7% 13.3%

Source: Elazar Advisors models with data pulled from Micron earnings

Above is year-over-year growth of cost of goods sold. While the company is saying cost declines are lessening, I see cost declines turning into cost increases. That’s absolute dollar cost increases when revenue growth worsened. It needs to be said, this is worrisome when revenues are dropping.

Here’s revenues going the other way. Costs up, revenues down.

Calendar 2018 2018 2019 2019 2019 2019
Fiscal 2018 2019 2019 2019 2019 2020
Quarter Q4 Q1 Q2 Q3 Q4 Q1
Month Aug Nov Feb May Aug Nov
A E
8200 1.51852 0.43872 Capex 10500 1.28049
Net Sales 8440.0 7913.0 5835.0 4788.0 4870.0 5000.0
Growth 37.5% 16.3% -20.6% -38.6% -42.3% -36.8%

Source: Elazar Advisors models with data pulled from Micron earnings

You can scroll up and down to get that clear picture; costs moving up, revenues moving down.

While COGS have turned from dropping to increasing, you see just above revenue growth has only been dropping at a faster rate year-over-year.

That’s margin squeeze 101.

Again, where’s the bottom?

I see revenue growth rates worsening, cost increases worsening, pricing still weak.

Semi & Tech Consequences

Memory is in everything. And pricing is so key to determine (like any industry) supply and demand. For sure, the demand is not there to match supply.

We’re going into Q3 earnings season. Semis are up at their highs.

This data point will have to hold the Street over for a little while. This data point will mean to tech investors that the fundamental dynamics are not quite as rosy as the verbal commentary suggests.

I think semis will trend down on this. This Micron earnings report will likely fuel selling.

Conclusion

Inventories are still up big. Revenue growth was down and worse. Margin change year-over-year, which is as key a metric as there is, keeps getting worse. I heard the company talk many times this year they see a bottom. Where’s the bottom? Bit growth may have bottomed, but that’s by far not the full story. Margins lead to profits. Profits give you valuations.

I model based on trends. These trends have my earnings (paywall) well below the Street once again.

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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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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