Micron: Gross margin will continue to improve in the second half of the year (3QFY24 conference call)
Micron Technology (MU.O) released its third-quarter financial report for the 2024 fiscal year (ending in May 2024) in the early hours of June 27, 2024, after the U.S. stock market closed. The key points of the conference call are as follows:
For an analysis of the financial report, please refer to " Micron: Rising Prices Can't Sustain Thick Expectations 》
I. $ Micron Tech(MU.US) Financial Report Highlights:
II. Detailed Content of Micron Technology Conference Call
2.1. Management's Key Points:
- Operational Highlights:
① Data Center Business:
a. Revenue in the third quarter increased by over 50% compared to the previous quarter, reaching a historical high. Growth was mainly driven by strong demand for AI.
b. Increased market share of high-margin AI-related product categories such as HBM, high-capacity DIMM, and data center SSD.
c. Data center revenue is expected to reach a record high in the 2024 fiscal year, with significant growth in the 2025 fiscal year. Continued growth in AI PCs, AI smartphones, and data center AI will drive record revenue in 2025.
② HBM Products:
a. HBM3E shipments in the third fiscal quarter generated revenue exceeding $1 billion.
b. Market share of HBM in 2025 is expected to reach a level equivalent to that of DRAM. Most of the supply for 2024 and 2025 has been sold out, with prices already determined.
c. Mass production of 12-layer HBM3E products is expected in 2025, with HBM4 and HBM4E offering performance and capacity enhancements.
③ Mobile Market:
a. Unit shipments of smartphones in the natural year of 2024 are expected to grow in the low to mid-single digits.
b. Leading smartphone OEMs are introducing new AI features, expected to accelerate replacement cycles.
c. Micron's LP5X supports 12GB and 16GB AI phones for all Android Tier 1 customers, with a capacity increase of 50%-100%.
④ Automotive and Industrial Markets:
a. Revenue in the automotive industry reached a quarterly record, with production levels returning to pre-pandemic levels. Growth driven by smart cockpits and advanced driver assistance featuresb. Industrial Market: Despite short-term demand uncertainty, the long-term fundamentals and growth drivers are strong, especially with the widespread application of AI.
c. In the third quarter, the world's first Gen 4 NVMe SSD supporting the next-generation centralized computing architecture was launched.
⑤ Other Terminal Markets
PC Market: The annual PC shipment volume is expected to grow at a low single-digit rate in 2024. The end of Windows 10 support, the launch of Windows 12, and AI PCs will accelerate the replacement cycle.
AI PC Demand: It is expected that AI PCs will account for a significant portion of total shipments in the natural year 2025, with annual growth. AI PCs require higher performance and capacity SSDs, in line with Micron's high-performance 3500 SSD based on 232-layer NAND and QLC 2500 NVMe SSD products.
⑥ Technological Node Advancements:
DRAM Technology: Over 80% of DRAM storage capacity output is at the leading 1-alpha and 1-beta nodes. Pilot production of 1-gamma DRAM is progressing smoothly, with plans for mass production in 2025.
NAND Technology: Over 90% of NAND storage capacity output is at the leading NAND nodes. The next generation of NAND nodes is expected to achieve large-scale production in 2025.
Cost Reduction: Front-end costs for DRAM (excluding HBM) in the 2024 fiscal year are expected to decrease by a high single-digit percentage, while front-end costs for NAND are expected to decrease by a low double-digit percentage.
- Financial Highlights:
① Financial Performance
Revenue: Total revenue of $6.8 billion, a 17% increase quarter-on-quarter and an 82% increase year-on-year.
DRAM Revenue: Approximately $4.7 billion, accounting for 69% of total revenue.
NAND Revenue: Approximately $2.1 billion, a 32% increase quarter-on-quarter, with storage capacity shipment growth in the high single-digit percentage range and a price increase of around 20%.
② Revenue by Business Segment
Compute and Networking Business: Revenue of $2.6 billion, an 18% increase quarter-on-quarter.
Mobile Business: Revenue of $1.6 billion, a 1% decrease quarter-on-quarter, partially offset by price improvements.
Embedded Business: Revenue of $1.3 billion, a 16% increase quarter-on-quarter, benefiting from record automotive revenue.
Storage Business: Revenue of $1.4 billion, a 50% increase quarter-on-quarter, with growth in all terminal markets and record data center SSD revenue.
③ Gross Margin and Operating Expenses
Overall gross margin: 28%, an increase of over 8 percentage points quarter-on-quarter, mainly driven by price increases and product mix optimization. Excluding the impact of previously recognized inventory impairments, the quarter-on-quarter improvement reached 15 percentage points.
Operating expenses: $976 million, an increase of $17 million quarter-on-quarter, with expenditure discipline and operational efficiency helping to control costs at the lower end of guidance.
④ ProfitabilityOperating revenue: $9.41 billion, operating profit margin of 14%, a sequential increase of 10 percentage points, a year-on-year increase of 53 percentage points compared to the same period last year.
Adjusted EBITDA: $29 billion, EBITDA profit margin of 43%, a sequential increase of 6 percentage points, a year-on-year increase of 30 percentage points or $24 billion.
Non-GAAP diluted earnings per share: $0.62, compared to $0.42 in the previous quarter and a loss of $1.43 per share in the same period last year.
2.2 Micron Q&A Analyst Q&A
Q: How is the progress of HBM3E certification, and how does it compare to NVIDIA's B100? Your competitors mentioned advancing the timeline for HBM4, what is your evaluation of this?
A: We achieved over $100 million in revenue from HBM3E in the third quarter, which has improved our overall gross margin and DRAM gross margin. We remain focused on achieving hundreds of millions of dollars in HBM revenue in the 2024 fiscal year and billions of dollars in revenue in the 2025 fiscal year. We are confident in our HBM products and continuous yield improvement, which is a key priority for us. Any complex new product or technology node like HBM will always have a process of yield improvement, and the team is very focused on this.
Looking ahead to 2025, we remain confident in achieving our goal of HBM market share consistent with the DRAM market share at some point in 2025. Once again, Micron's HBM3E product has been recognized by customers to have 30% lower power consumption than competitor products.
We expect to expand and diversify our customer base within the 2025 timeframe. For HBM4, we have a strong roadmap and are confident in our capabilities to maintain a technical leadership position in HBM4 and HBM4E.
Q: You mentioned that the growth in NAND storage capacity demand will be in the high single digits, around 20% last quarter, has there been any changes in the past few months? Everyone believes that AI development will help the NAND business, so why isn't the growth in NAND storage capacity demand higher?
A: There is actually not much difference between the CAGR we shared this time and last time. This is because we revised the base year of the CAGR this time, using 2023 as the base year. It is the larger base in 2023 that changed our outlook for the overall CAGR.
But you are absolutely right, we also emphasized that data center SSD is a good driver of demand growth. I will give you some specific data. The growth in NAND demand in areas such as data centers, automotive, and industrial sectors is faster than the CAGR we shared. Growth in client, mobile, and consumer sectors is slightly slower. However, these slower-growing sectors also have prospects for average capacity growth. As I gave you examples, AI PCs and AI smartphones are driving content growthWe have taken a conservative approach in this regard. We will continue to evaluate the average capacity growth in smartphones and PCs.
Q: You mentioned a 3x wafer consumption ratio for HBM compared to D5. How does increasing stack height and improving yields affect this ratio? Overall, is 3x still the operating assumption for 2025? Please elaborate on the advantages and disadvantages of this ratio.
A: I believe that for HBM3E, 3x is the operational guideline. This has taken into account the larger wafer size of HBM3E, the overall product expectations in terms of performance and packaging, as well as the mature yield expectations for 8-layer stacking and logic chips. As we increase yields, we will certainly benefit from cost reductions. However, the mature yield ratio of HBM3E is approximately 3x that of D5.
With the advancement of HBM4, the wafer consumption ratio will increase, exceeding 3x. As HBM3E transitions from 8-layer stacking to 12-layer stacking, the mature yield of 12-layer stacking will be slightly lower. This is inherent in the nature of yield work. However, the operational guideline remains at 3x for HBM3E, with HBM4 exceeding 3x, including assumptions for mature yield.
Q: You mentioned that the 2025 fiscal year may set a sales record, why can't it set a gross margin record? What are the pros and cons of next year's gross margin? For example, with a year-on-year sales growth of $5 billion or $10 billion, how would we adjust our model from a gross margin perspective?
A: Although specific guidance for the 2025 fiscal year has not been provided, we can discuss incremental improvements. Gross margin guidance between the third and fourth quarters increased by 600 basis points, primarily being price-driven, while the product mix also had a substantial impact on gross margin expansion. Gross margin in the November quarter continued to increase by several hundred basis points, in addition to price factors, the increased product mix in the fourth quarter also played a role, mainly including high-value products such as HBM and high-capacity DIMMs. It is expected that prices will continue to rise in the 2025 fiscal year, with the favorable impact of the product mix increasing. Strong performance in data centers in the third and fourth quarters is expected to continue. Additionally, the replacement cycles for smartphones and PCs, as well as the increase in AI-related content, will drive growth in the first half to early 2025. On the supply side, there is structurally low industry capacity, with decreasing inventory trends, and it is expected that inventory will be close to target levels by the end of the 2025 fiscal year. The trade ratio of HBM will also affect gross margin. Overall, a high-value product mix (including HBM, high-capacity DIMMs, SSDs, etc.) will have a positive impact on gross margin. The company has a leading advantage in technology, products, and manufacturing operations, and is well prepared for the 2025 fiscal year.
Q: Does the company have yield issues with HBM3E? What contribution does the gross margin of HBM make to the overall company's gross margin? What are your views on profitability for the second half of 2025 and the full year 2025?A: The company's production in HBM3E is on track, achieving over $100 million in revenue in the first quarter. It is expected to reach hundreds of millions of dollars in revenue in the 2024 fiscal year, tens of billions of dollars in the 2025 fiscal year, and to have a market share equivalent to DRAM in 2025. Production assumptions have been taken into account, and efforts will continue to increase production. HBM contributes to both overall and DRAM gross margins. DRAM gross margins are typically higher than the company's overall gross margins, mainly due to lower NAND gross margins. HBM will help sustain the expansion of gross margins in 2025.
Q: There will be a significant increase in capital expenditures in the 2025 fiscal year. With over half of the capital expenditures allocated to greenfield investments in the United States, what are the expectations for storage capacity supply growth in the 2025 fiscal year or calendar year? Will the supply growth be consistent with the demand CAGR for DRAM and NAND?
A: While we will not provide specific revenue guidance for 2025, we can confirm that there will be a significant increase in capital expenditures in the 2025 fiscal year. Guidance for the third quarter to the fourth quarter has been raised from $21 billion to $30 billion, and capital expenditures will continue to increase in the coming quarters. Regarding supply growth, constrained by storage capacity production, inventory levels are expected to decrease, approaching target inventory levels by the end of the 2025 fiscal year. Supply growth will be consistent with the demand CAGR.
Q: Regarding the company's guidance on HBM revenue and market share in the 2025 fiscal year, the expected HBM market share consistent with DRAM. How do you view the situation of market suppliers? Will this number change in the coming years? The forecasting method for the total market size and its impact from competitor certification.
A: It is expected that the storage capacity growth CAGR for HBM will exceed 50% in the coming years, which is a strong growth driver. In the coming years, increasing the mix of HBM will continue to have a positive impact on financial performance, including gross margins. Supplies for 2025 are already sold out, prices are set, demonstrating a strong position to achieve the HBM market share goal consistent with the DRAM market share. Plans to ship to a broader customer base next year. HBM is a complex product, and the customer certification process is resource-intensive, involving not only us but also customers. Our products have a 30% power advantage and high quality, which has been recognized by customers. High engagement in certification gives us confidence in the HBM plan.
Q: Your competitors mentioned the industry's capital expenditure run rate and suggested that changes in industry architecture may not be as capital-intensive as in the past. You mentioned that a lot of capital expenditures are allocated to greenfield and HBM. Please discuss the remaining capital expenditures. Can you provide us with detailed information on the distribution of DRAM and NAND? Do you agree with Western Digital's view that the capital investment threshold for NAND will decrease in the long run?A: The company's capital expenditures are mainly focused on areas related to DRAM, especially HBM, as HBM is very capital-intensive in clean rooms, packaging, and testing equipment. Capital expenditures are mainly used to meet future needs in the second half of this century, including the construction of wafer fabs.
The capital expenditure for NAND accounts for a smaller proportion of total capital expenditure. The company holds a strong position in NAND technology and continues to shift its product portfolio towards higher value solutions. In terms of NAND, it will maintain high discipline, strictly control capital expenditures, prudently schedule technology node transitions to better manage the compound annual growth rate of storage capacity.
These measures are aimed at maintaining good supply discipline, aligning supply growth with demand growth, and prudently managing capital expenditures. Overall, capital expenditures in NAND are significantly smaller, but will maintain high discipline to ensure supply growth matches demand. For NAND, technological transitions are sufficient to meet demand growth, without the need for new clean rooms or greenfield wafer fabs, which are necessary for DRAM. The trade-off ratio between HBM and standard DRAM is also a factor that requires the construction of new greenfield wafer fabs.
Q: Will signing long-term contracts miss out on price increase opportunities? Is there flexibility in contract pricing? What impact does the Taiwan earthquake have on the current quarter?
A: Long-term contracts help to work more closely with customers in supply and pricing discussions, as well as coordinate technology roadmaps, product roadmaps, and supply timing. Long-term contracts help build close relationships with customers and support record revenue and significant profit improvement by 2025. From a supply, demand, and financial perspective, long-term contracts position the company well. In addition, the Taiwan earthquake has no substantial impact on the current quarter.
Long-term contracts not only help us work more closely with customers in supply or pricing discussions, but also assist in technology roadmaps, product roadmaps, and supply timing. They are very helpful in building close relationships with customers. You can see that we are targeting record revenue by 2025, which of course leverages some of the contracts we have already signed. We also point out significant profit improvement. I think we are well positioned in these contracts, not only in terms of supply and demand, but also financially. The Taiwan earthquake has no substantial impact on the current quarter.
Q: The impact of enterprise SSD gross margin on overall NAND gross margin
A: Micron's strong demand for data center SSDs has a positive impact on the overall NAND gross margin. The company's 232-layer NAND AI SSD storage capacity shipments have tripled, primarily for AI data center applications. Data center product revenue in the third quarter increased by 50% quarter-on-quarter, including a strong data center SSD roadmap.
Q: Certification and market share sustainability of next-generation PCIe Gen5 SSDs
A: Micron is working with customers to certify next-generation PCIe Gen5 SSDs, and specific shipment timing is not currently discussed. A strong product portfolio ensures market share sustainability. The growth momentum of data center SSDs will contribute to increased data center revenue by 2025, including products such as HBM and high-density DIMMsThe storage business department achieved operating profit in this quarter.
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