No more inventory challenges, when will prices rise? (Micron 4QFY23 conference call)

Micron Technology (MU.O) released its fiscal fourth quarter earnings report (ending in August 2023) after the US stock market closed on September 28, 2023. The key points are as follows:

1. Revenue: $4.01 billion (YoY -39.6%), market consensus was $3.93 billion.

2. Gross Margin: GAAP gross margin -10.8%, market consensus was -11.5%.

3. Net Profit: GAAP net profit -$1.43 billion, market consensus was -$1.466 billion.

4. Segment Performance:

(1) DRAM: Revenue of $2.755 billion (YoY -42.7%), accounting for 68.7% of total revenue. Market consensus was $2.848 billion. Shipment volume (in bits) increased by around 15% QoQ, while prices declined by a high single-digit percentage.

(2) NAND: Revenue of $1.205 billion (YoY -28.6%), accounting for 30% of total revenue. Market consensus was $1.065 billion. Shipment volume (in bits) increased by approximately 40% QoQ, while prices declined by around 15%.

(3) Other: Revenue of $50 million (YoY -65.8%), accounting for 1.2% of total revenue. Market consensus was $80 million.

For more detailed financial information, please refer to Dolphin Research's analysis report titled "Micron Technology: Virtual Recovery, Real Downturn."

II. Micron Technology (MU.O) Conference Call Highlights

1.1 Market Conditions: Customers continue to reduce excess inventory of memory and storage. 1) Most customers in the PC and smartphone markets now have normal levels of memory and storage inventory; 2) Inventory levels for most customers in the automotive market are also normal; 3) Inventory for data center customers is improving and may return to normal in early 2024. 1.2 Shipment Expectations for the Next Quarter: It is expected that the DRAM bit shipments in Q1 of the fiscal year will reach a record high. As for NAND, the bit shipments in Q1 of the fiscal year are expected to decrease compared to the fourth quarter of the fiscal year, but still remain relatively strong.

1.3 Gross Margin Outlook for the Next Quarter: Due to the sale of more written-down inventory, it is expected that the gross margin for Q1 of the fiscal year will improve. We anticipate that approximately 60% of the remaining income from low-cost inventory will be cleared in the Q1 fiscal year.

II. Micron Tech.US Earnings Call Transcript

2.1 Management Overview

• In the fourth quarter of the fiscal year, Micron Technology's revenue and gross profit exceeded the midpoint of our guidance, and earnings per share exceeded the high end of the range.

• These results reflect our strong execution capabilities and our ability to significantly improve financial performance.

• Continued demand growth, normalization of customer inventory, and reduced industry-wide supply have laid the foundation for increased revenue and improved pricing and profitability in fiscal year 2024.

• We continue to expect the industry TAM to achieve a more normal level of profitability by 2025.

Highlights of Fiscal Year 2023

• Achieved record automotive revenue, set a record for NAND QLC bit shipments for the entire fiscal year, and reached record levels of data center and client SSD revenue share in the second quarter.

• Pioneered the introduction of 1-alpha DDR5 and LP5X DRAM products, and introduced HBM3E samples with industry-leading performance and energy efficiency.

• First to market with 232-layer NAND SSD products in the data center, client, and consumer markets.

• These achievements are attributed to our leading technology and continued strong progress in manufacturing execution.

• With our industry-leading 1-alpha DRAM and 232-layer NAND technologies, we achieved world-class mature yields in record time.

• Additionally, Micron has taken several cautious and timely measures to reduce our capital expenditures and supply to address market imbalances in fiscal year 2023.

Technology and Manufacturing

• The industry-leading technology roadmap is progressing smoothly.

• Majority of the leading-edge nodes in DRAM, including 1-alpha and 1-beta, as well as 176-layer and 232-layer in NAND.

• Good progress in the development of 1-gamma DRAM using EUV and expected to enter production in 2025. Development of Next-Generation NAND Node Progressing Smoothly

Overview of Terminal Market

• In the fourth quarter, customers continued to reduce excess inventory of memory and storage.

• The majority of customers in the personal computer and smartphone markets now have normal levels of memory and storage inventory, consistent with our previous forecasts.

• Inventory levels for most customers in the automotive market are also normal.

• Inventory for data center customers is also improving and may return to normal by early 2024.

Remarks from the Executive Vice President and Chief Financial Officer on Financial Situation

In the fourth quarter of fiscal year 2023, Micron's revenue and gross margin were above the midpoint of the guidance range, and earnings per share were at the high end of the range. Due to various factors, including higher sales volume, changes in pricing environment, strong productivity, and continued capital discipline, our business improved by the end of this fiscal year.

Revenue

Total revenue for the fourth quarter was approximately $4 billion, a 7% increase YoY and a 40% decrease QoQ. Total revenue for fiscal year 2023 was $15.5 billion, a 49% decrease YoY.

Revenue by Business Segment

The Compute and Networking Business segment had revenue of $1.2 billion, a 14% decrease MoM. Data center revenue remained weak due to ongoing inventory adjustments by customers and the decision to reduce CAC. We expect data center revenue to continue growing in the first quarter of the fiscal year. The Mobile Business segment had revenue of $1.2 billion, a 48% increase YoY, driven by seasonal effects and shipment timing. The Embedded Business segment had revenue of $860 million, a 6% decrease MoM. Consumer revenue in the embedded segment increased MoM due to seasonal factors, while automotive and industrial revenue slightly declined. The Storage Business segment had revenue of $739 million, an 18% increase MoM, driven by increased shipment volume across most product portfolios. SBU bit shipments set records for the fourth quarter and the fiscal year.

Operating Performance Gross Margin

The overall gross margin for the fourth quarter was -9%, a 7 percentage point increase YoY. Gross profit was impacted by lower pricing and underutilized costs, while the sale of previously written-down inventory provided some uplift.

For this fiscal year, the overall gross margin was -8%, a 54 percentage point decrease YoY, due to price effects, inventory write-downs, and the burden of underutilization.

Operating Expenses

Operating expenses for the fourth quarter were $842 million, a $24 million decrease YoY, due to ongoing expense reduction plans and timing of certain research and development (R&D) project expenditures. For this fiscal year, operating expenses were $3.6 billion, a $209 million decrease YoY driven by expense reduction plans. We ultimately fell short of the targets we communicated in the September conference call a year ago for the fourth quarter and this year's operating expenses. As market conditions improve, we will continue to rigorously control all expenses, including operating expenses, focus R&D on the most critical projects, and leverage a more competitive and productive cost structure. Revenue

In the fourth quarter, the operating loss was approximately $1.2 billion, resulting in a negative operating margin of 30%, an improvement from the negative 39% in the previous quarter. The operating loss for the 2023 fiscal year was $4.8 billion, resulting in a negative operating margin of 31%.

Taxation

We achieved $14 million in tax revenue in the fourth quarter, exceeding expectations, mainly due to lower-than-expected foreign taxes related to currency effects. Total tax revenue for the 2023 fiscal year was $142 million.

Earnings per Share

The non-GAAP loss per share in the fourth quarter was $1.07, compared to a loss per share of $1.43 in the previous quarter and earnings per share of $1.45 in the same period last year. The non-GAAP EPS for this fiscal year was a loss of $4.45 per share.

Cash Flow

Regarding cash flow and capital expenditures, our operating cash flow in the fourth quarter of the 2014 fiscal year was approximately $250 million. In this fiscal year, our operations generated $1.6 billion in cash, accounting for 10% of revenue.

Capital expenditures for this quarter were $1 billion, and the total for the fiscal year was $7 billion. This is consistent with recent guidance and is at the lower end of the estimate range we provided during our earnings conference call in December 2022.

Free cash flow for this quarter was -$758 million.

Inventory

Inventory at the end of the fourth quarter of the fiscal year was $8.4 billion, or 170 days. As mentioned in the previous quarter, we hold approximately $1 billion in strategic inventory, which is related to pre-production products and is used to optimize costs and reduce risks. We have seen improvements in inventory levels in the first half of the fiscal year and will adjust based on this strategic inventory. It is expected that only a few weeks of inventory will be above target by the second half of the 2024 fiscal year. Inventory levels and profitability will continue to be the main factors in our decision-making regarding wafer starts and capacity planning.

Cash/Debt Ratio

At the end of the year, we held $10.5 billion in cash and investments, as well as $13 billion in liquidity, including unused credit facilities. We ended the year with a total debt of $13.3 billion, with a weighted average maturity of 2030 and a low net leverage.

Opinion

As customer inventory levels continue to normalize and long-term growth drivers remain unchanged, demand is improving. We expect record DRAM bit shipments in the first quarter of the fiscal year. For NAND, we expect bit shipments in the first quarter of the fiscal year to decline compared to the fourth quarter, but still remain relatively strong. In China, the decision of CAC continues to impact our revenue opportunities, and the related headwinds are reflected in our guidance.

Due to more dynamic random-access memory and more sales of written-down inventory, we expect gross margin to improve in the first quarter. We expect that approximately 60% of the residual income from low-cost inventory will be cleared in the first quarter of the fiscal year. 2.2 Q&A Analyst Questions and Answers

Q1: Can you provide an overview of the development trajectory of the main business and share your thoughts on whether the company's development trajectory will continue to decline into the next quarter?

A: Compared to what we previously mentioned, we have seen particularly strong demand. There is an overall trend in consumer goods, including smartphones and BC, which is also evident in the UK, where elasticity is driving the growth of average capacity. Our global customers will not be affected by the CSE decision. We are mitigating the loss in revenue from China, and so far, there has been an increase in demand from multiple global terminal markets. It is important to remember that our goal is still to maintain our global market share. Although there may be some short-term funding constraints, our aim is to maintain our global market share. Especially in the second half of our fiscal year, we will see continued improvement in prices.

Q2: There is a question about gross profit. While you have benefited from inventory write-downs, what are your thoughts on pricing? And do you have any ideas for cost reduction? I hope you can provide some directional guidance.

A: As you know, we expect interest rates to increase by approximately 500 basis points, and it is indeed gradually improving. We will achieve positive gross margin in the fourth quarter of fiscal year 24. We also believe that our gross margin will be positive throughout fiscal year 24. Therefore, you can see that the trend of positive gross margin will continue, as it is related to our first quarter situation. We expect some relief in the first half of this transitional period, followed by a rebound in the second half, but the momentum will not significantly strengthen.

Follow-up question: Three months ago, you mentioned or at least implied that you may generate several billion dollars in revenue in fiscal year 24. Is that target still valid?

A: First of all, we are excited about the development of our HBM product, which is our industry-leading product. As mentioned, this product is currently in the customer validation stage.

We expect to achieve profitability starting in 2024, and we are still on track to achieve the goal of generating several billion dollars in revenue. So please continue to follow our progress, as this is an exciting opportunity for the memory industry, and Micron is well-positioned to capture the market opportunities for our HBM 3E memory that is in demand.

Of course, with our progress in this fiscal year, we expect to gain market share in the important high-growth segment of the memory market.

Q3: I still want to clarify the question about gross margin. In your previous remarks, you mentioned that the gross margin in the second half of this fiscal year will be positive, but in the previous question, your guidance for 24 Q1 was negative. Does this mean that the gross margin will turn positive in Q2?

A: It is possible, depending on the specific circumstances. We will continue to improve productivity and assess whether these profit levels are mixed together and whether other factors are significant. We have benefited from the increase in DRAM compared to NAND in the first half of the year, which has helped our performance. Of course, pricing momentum is definitely positive. This is just one example of the transitional period we are in. As you know, we had to fulfill market demand with some special transactions in the fourth quarter, and these impacts will continue into the first quarter. In the first half of the year, we will definitely see new details becoming stricter at higher prices, and we expect this trend to continue in the second half.

The decline in NAND prices in the third quarter is consistent with what we have observed. What I want to say is that the pace of price decline has slowed down, and prices and the market are steadily rising. However, customers are aware that this is a period of market stabilization.

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December 29, 2022: Semiconductor Industry Review: "Semiconductor Avalanche? True Resilience Comes After the Most Brutal Decline" Semiconductor Industry Review on June 24, 2022: "Cancellations, Cancellations, Cancellations, Is the Semiconductor Industry Really Going to Change?"

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