Micron Earnings: What Happened

MU gross margin fell below analyst expectations

Key Takeaways

  • Adjusted EPS was $1.08 vs. the $0.95 analysts expected.
  • Revenue exceeded analyst expectations.
  • Gross margin was slightly lower than analysts estimated.
  • Micron posted strong DRAM sales in cloud, PC, and gaming consoles.

What Happened

Micron's fiscal Q4 earnings and revenue were both higher than analysts forecasted. Both metrics also grew substantially compared to the year-ago quarter. Gross margin, however, was slightly below what analysts estimated, but still up YOY. Results were driven by strong DRAM sales and significant increases in QLC NAND shipments.

"Micron delivered solid fiscal fourth quarter revenue and EPS resulting from strong DRAM sales in cloud, PC and gaming consoles and an extraordinary increase in QLC NAND shipments," said CEO Sanjay Mehrotra.

(Below is Investopedia's original earnings preview, published September 29, 2020.)

What to Look For

Micron Technology Inc. (MU), one of the leading manufactures of DRAM and NAND memory chips, is experiencing a return to growth amid the COVID-19-induced rise of the remote-work economy. Social-distancing measures have forced many employees to work from home, driving demand for memory chips. This is a welcome development for chip manufacturers like Micron after a glut of supply weighed on prices, revenue, and earnings for much of 2019.

Investors will be watching to see whether the positive effects of the pandemic will continue to outweigh its negative effects when Micron reports earnings on September 29, 2020 for Q4 FY 2020. Micron's FY 2020 ended in August. Analysts expect both adjusted earnings per share (EPS) and revenue to rise sharply.

One key metric investors will focus on is gross margin, an indicator of operating efficiency at Micron as well as other memory chip manufacturers. Analysts expect the company's gross margin to rise compared to the same three-month period a year ago.

Shares of Micron have kept pace with the broader market for most of the past year, but they have lagged dramatically since the company's last earnings report at the end of June. Micron's stock has provided investors with a total return of -0.7% over the past 12 months, well below the S&P 500's total return of 10.5%.

One Year Total Return for S&P 500 and Micron
Source: TradingView.

The stock received a quick boost after reporting Q3 FY 2020 earnings announced on June 29 that surpassed analysts' expectations. Despite the earnings beat, adjusted EPS was still 21.9% lower than it was in the year-ago quarter, marking the sixth consecutive quarter of year-over-year (YOY) declines. Revenue rose 13.6%, the first YOY increase in six quarters.

The earnings beat and revenue growth, however, were not enough to maintain upward momentum in Micron's share price. The stock traded sideways for the next month before experiencing a significant pullback during the first half of August as optimism over continued demand for memory chips waned. Its shares have rebounded since the third week of August but are still underperforming.

Analysts expect adjusted EPS to rise 69.2% in Q4 FY 2020, which would mark the first earnings growth since Q1 FY 2019. Revenue is expected to rise 21.2% compared to the year-ago quarter. For the full FY 2020, analysts forecast annual adjusted EPS to fall 57.2% and annual revenue to decline 9.1%. It would mark the second consecutive annual declines in both metrics.

Micron Key Metrics
  Estimate for Q4 2020 (FY) Q4 2019 (FY) Q4 2018 (FY)
Adjusted Earnings Per Share $0.95 $0.56 $3.53
Revenue (in billions) $5.9 $4.9 $8.4
Gross Margin 34.8% 28.6% 61.0%

Source: Visible Alpha

The decline in memory chip prices due to the supply glut last year weighed on Micron's gross profit margin, also called gross margin in the industry. This key metric reflects gross profit, which is sales minus cost of goods sold, as a percentage of total sales. A company can increase its gross margin by either increasing sales or cutting costs, or a combination of both. Memory chips are essentially commodity goods, with little quality differentiation between chips manufactured by different companies. This means that manufacturers have little pricing power, so the primary way to boost margins is by keeping costs low, especially in periods of weak sales.

Micron's gross margin has fallen drastically - by more than half - from its recent peak of 61.0% in Q4 FY 2018 to 26.6% in Q1 FY 2020. However, this key metric has risen in recent quarters, to 28.3% in Q2 FY 2020, and to 32.4% in Q3 FY 2020. Analysts expect Micron's gross margin to continue to improve, rising to 34.8% for Q4 FY 2020, which would be about six percentage points higher than it was in the year-ago quarter. Analysts expect the company's earnings and revenue growth to improve significantly in fiscal 2021, which suggests that Micron's margins have further room to improve in the next year. But even if that happens, it's unlikely that margins will return soon to their recent peak levels of FY 2018 and early 2019.

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Article Sources
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  1. Micron Technology Inc. "Micron Technology, Inc. Reports Results for the Fourth Quarter and Full Year of Fiscal 2020."

  2. Micron Technology Inc. "Micron Technology to Report Fiscal Fourth Quarter Results Sept. 29, 2020."

  3. Visible Alpha. "Financial Data."

  4. Yahoo! Finance. "Micron Technology, Inc. (MU)."

  5. BNN Bloomberg. "Micron Falls After CFO Says Outlook Worse for Memory Chip Demand."

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