Micron: Expects HBM revenue to reach billions of dollars by 2025 (FY25Q1 conference call)

Micron (MU.O) released its Q1 FY2025 financial report (ending November 2024) after the US stock market closed on December 19, 2024, Beijing time. The key points are as follows:

Below is the summary of Micron's Q1 FY2025 earnings call. For the interpretation of the financial report, please refer to Micron: AI is hot but can't fill the "cyclical pit" .

1. $Micron Tech(MU.US) Core information review of the financial report:

2. Detailed content of Micron's earnings call

2.1 Key information presented by executives:

Business progress

Financial performance highlights

Micron achieved record revenue in Q1 FY2025, with revenue, gross margin, and EPS all reaching or exceeding the midpoint of the guidance range.

Business segment achievements

Data Center Business

Data center revenue grew over 400% year-over-year and 40% quarter-over-quarter, reaching a record level, with revenue accounting for over 50% of total company revenue for the first time.

In the solid-state drive (SSDs) sector, data center SSDs achieved record revenue, while also making new breakthroughs in market share for both data center SSDs and overall SSDs, solidifying market position.

HBM shipments exceeded plans, with revenue more than doubling quarter-over-quarter, and revenue from the largest data center customer accounting for about 13% of total company revenue.

Technology and product progress

The company's technology roadmap is progressing smoothly, with the production of the industry's most advanced DRAM and NAND nodes.

Continuous improvement of the 1-beta technology node (supporting HBM3E), with plans to upgrade to the 1-gamma technology node (using EUV) in 2025.

In NAND, maintaining technological leadership with leading G8 and G9 nodes while managing node upgrades as needed.

Market and customer dynamics

Server Market

• Due to strong AI demand and traditional server upgrade cycles, the forecast for server unit growth in 2024 has been raised to a low double-digit percentage, with continued growth expected in 2025.

PC Market

The PC update cycle is slowing down, and unit volume growth in 2024 is expected to be flat, slightly below expectations.

Due to the end of the Windows 10 lifecycle and an aging installation base, unit volume is expected to grow in the single digits percentage in 2025, with growth concentrated in the second half of the year.

Mobile Market

Smartphone unit volume is expected to grow in the single digits percentage in 2024, with low single-digit percentage growth in 2025.

AI is driving growth in mobile DRAM content, such as applications for local search and context-aware user interfaces.

Customer inventory dynamics are as expected, with shipments anticipated to be concentrated in the second half of the year.

Automotive and Industrial Market

The automotive market is experiencing slower growth in memory and storage content due to production being below expectations and changes in model structure, but there is a long-term positive outlook for growth driven by related technology applications.

Demand in the industrial market is affected by inventory adjustments, with a recovery expected in the second half of 2025.

Industry Outlook and Strategic Initiatives

Industry Supply and Demand Situation

Industry DRAM bit demand is expected to grow in the high double digits percentage in 2024, with mid double-digit percentage growth in 2025.

Industry NAND bit demand is expected to grow in the low double digits percentage (below expectations) from 2024 to 2025, due to factors including slowing growth in NAND content for consumer devices, inventory adjustments, changing dynamics in different end markets, and a recent slowdown in data center SSD purchases.

The company has taken action to adjust NAND supply, including reducing capital expenditures, slowing the transition of technology nodes, and decreasing wafer starts.

HBM Market Potential

The HBM market is expected to grow strongly in the coming years, with the total addressable market (TAM) projected to grow fourfold from $16 billion in 2024 to over $100 billion by 2030.

The company's TAM forecast for HBM indicates that it will exceed the size of the entire DRAM industry (including HBM) in 2024 by 2030.

The company has made progress in the HBM field, with products being designed into NVIDIA platforms, and the HBM market size is expected to exceed $30 billion in 2025, with the company aiming to achieve a target comparable to DRAM market share in the second half of the year, with HBM revenue expected to reach billions of dollars in 2025.

Strategic Partnerships and Investment Plans

The company has reached an agreement with the U.S. Department of Commerce to receive funding support for the construction of advanced DRAM manufacturing facilities.

Expanding manufacturing operations in Singapore, investing in advanced packaging facilities for HBM to support AI-driven demand and synergize with existing businesses, as well as supporting long-term manufacturing needs for NAND

Financial Performance

Revenue Side

Total revenue for the first quarter of fiscal year 2025 was approximately $8.7 billion, a quarter-over-quarter increase of 12% and a year-over-year increase of 84%, setting a new historical high.

DRAM revenue was $6.4 billion, a year-over-year increase of 87%, accounting for 73% of total revenue, with shipment volume growing in low double digits and prices increasing in high single digits;

NAND revenue was $2.2 billion, a year-over-year increase of 82%, accounting for 26% of total revenue, with both shipment volume and prices declining in low single digits.

Business Segments

Computing and Networking business unit revenue was $4.4 billion, a quarterly record, with a quarter-over-quarter increase of 46%;

Mobile business unit revenue was $1.5 billion, a quarter-over-quarter decrease of 19%;

Embedded business unit revenue was $1.1 billion, a quarter-over-quarter decrease of 10%;

Storage business unit revenue was $1.7 billion, a quarter-over-quarter increase of 3%.

Cost and Profit Side

Gross margin improved by 300 basis points to 39.5%, driven by higher DRAM pricing and a product mix shift towards data centers, partially offset by declining NAND prices.

Operating expenses were $1.05 billion, a quarter-over-quarter decrease of $34 million, benefiting from lower labor-related costs and ongoing strict expense control.

Operating profit was $2.4 billion, with an operating margin of 27.5%, a quarter-over-quarter increase of approximately 500 basis points and a year-over-year increase of 48 percentage points.

Adjusted EBITDA was $4.4 billion, with a margin of 50.6%, a quarter-over-quarter increase of 265 basis points and a year-over-year increase of 31 percentage points or $3.5 billion.

Tax expense for the first fiscal quarter was $333 million, with an effective tax rate of 14.1%.

Non-GAAP diluted earnings per share were $1.79, compared to $1.18 in the previous fiscal quarter and a loss of $0.95 per share in the same period last year.

Cash Flow and Capital Expenditure

Operating cash flow for the first fiscal quarter was approximately $3.2 billion, with capital expenditures of $3.1 billion, resulting in free cash flow of $112 million for the quarter.

Ending inventory for the first fiscal quarter was $8.7 billion or 149 days, a decrease of 9 days from the previous quarter.

Cash and investments totaled $8.7 billion, with liquidity of $11.2 billion (including unused credit lines), total debt of $13.8 billion, low net leverage, and a debt-weighted average maturity of 2031.

FQ2 Outlook

It is expected that DRAM bit shipments will decline quarter-over-quarter, NAND bit shipments will see a significant decline, followed by a recovery in growth, with stronger shipments in the second half of the year.

It is anticipated that Q2 gross margin will be affected by NAND industry conditions, partially offset by growth in HBM and data center DRAM, with Q3 gross margin expected to be impacted by low NAND capacity utilization

Expected Q2 operating expenses of $1.1 billion, primarily reflecting planned increases in R&D spending. Operating expenses are expected to grow in the low double-digit percentage range for the fiscal year 2025.

Expected increases in inventory dollars and inventory days in Q2 due to low shipment volumes, with improvements anticipated in the second half of the year, and DRAM inventory tightness expected to be below target levels by the end of the fiscal year.

Expected non-GAAP tax rate for Q2 and the remainder of fiscal year 2025 to be in the mid-double-digit percentage range, with a tax rate of high double-digit percentage for fiscal year 2026.

Expected net capital expenditures of $3 billion in Q2, with capital expenditures of approximately $14 billion for fiscal year 2025, focusing on investments in DRAM technology node enhancements and new factory construction, while reducing NAND capital expenditures and managing technology node transitions.

Q2 Non-GAAP Guidance

Expected revenue of $7.9 billion, plus or minus $200 million, gross margin of 38.5%, plus or minus 100 basis points, operating expenses of $1.1 billion, plus or minus $15 million, tax rate in the mid-double-digit percentage range, and EPS of $1.43, plus or minus $0.10.

The company will manage expenditures cautiously and flexibly, making disciplined investments in the DRAM sector and driving HBM growth, while reducing capital expenditures and wafer output in the NAND sector to maintain supply discipline, with expectations of achieving record revenue, significantly improved profitability, and positive free cash flow in fiscal year 2025.

2.2 Q&A Analyst Q&A

Q: How do you determine if DRAM and NAND will experience seasonal or cyclical rebounds in the May quarter? What will the extent of the rebound be?

A: The FQ2 outlook is affected by inventory adjustments in the consumer market and a slowdown in purchasing in the data center SSD market. Inventory in the consumer market is expected to improve in the spring, as sales in markets such as smartphones and PCs normalize, but prior inventory backlogs have led to reduced purchases, and Q4 inventory has already improved, with further enhancements expected in Q1, driving shipment growth in the second half of the year. At the same time, given the ongoing data center construction and growing AI demand, data center storage demand is expected to recover in the second half of the year, thus the second half is anticipated to be stronger than the first half.

Q: What is the impact of low NAND capacity utilization on the current guidance and the full year? What impact will the increased HBM mix have on revenue in 2025?

A: The Q2 guidance reflects a gross margin decline of 100 basis points, primarily due to NAND. The NAND market is experiencing weak demand, with consumer market demand and data center SSD sales both slowing. Although there is a cost leverage effect, Q2 does not include the impact of low capacity utilization, which will start affecting gross margins from Q3 onwards. However, after Q3, business volume growth, AI-driven data center and edge growth, and favorable product mix effects (including HBM) will create conditions for gross margin expansion. Q: What is the revenue growth rate for the company in the second half of the year?

A: The growth drivers for the second half of the fiscal year include improvements in consumer market inventory, recovery in data center SSD demand, and continued growth momentum in HBM. Regarding HBM, the company's goal is to achieve HBM market share comparable to DRAM share in the second half of the year, and with good execution, it is expected to continue driving revenue growth. Additionally, the increasing penetration of AI products in the smartphone and PC markets will also contribute to the increase in shipments and revenue in the second half of the year.

Q: What changes are there in capital expenditures and how do they affect the revenue share for the entire fiscal year? What are the restrictions of the chip act on share buybacks and their impact on capital returns?

A: The company has reduced NAND capital expenditures, but DRAM spending remains at a high level. The previously guided capital expenditure as a percentage of annual revenue was around 35% (mid-30s), and it is now expected to rise to a higher level of about 38% (high-30s).

Restrictions on share buybacks and their impact on capital returns: These restrictions do not have a significant impact on the company's capital return capability, and ordinary dividends are unaffected, with expectations to continue paying and growing. In the first two years, the company can repurchase shares to offset stock compensation dilution for shareholders, and in the third to fifth years, it is unrestricted as long as certain financial and other conditions are met, which are reasonable and align with the company's operation in the interests of shareholders and stakeholders.

Q: What are the changes in HBM market share targets and the reasons for the increase in TAM estimates? What is the impact of HBM on Q2 gross margin and how does Q3 gross margin compare to Q2?

A: Reasons for the increase in TAM estimates and changes in share targets: After customer evaluations of market demand, the TAM estimate for 2025 has been raised from $25 billion to $30 billion due to increased HBM demand and production. The company previously expected to reach a target where HBM share is comparable to DRAM industry share at some point in 2025, and it is now clarified for the second half of the year. The company's HBM capacity and production growth momentum are strong, and it is expected to achieve billions of dollars in revenue by 2025, with confidence in the future development of HBM4 and 4E.

Impact of HBM on gross margin and comparison of Q2 and Q3 gross margins: The decline in Q2 gross margin was mainly affected by NAND, although DRAM business had a positive impact, the NAND market conditions are expected to improve only in the first quarter of this calendar year, and supply response costs will affect Q3 gross margin, limiting its expansion capability. However, after Q3, the market is expected to improve, and the company will have the opportunity to expand profit margins.

Q: How do you view the long-term market share of HBM? Should the DRAM market share be seen as a limiting factor?

A: The company focuses on achieving HBM share comparable to industry DRAM share in the second half of 2025. Currently, HBM is showing good momentum, with shipments to the second-largest customer, and a third major customer will be added in Q1. The performance advantages of the products will help gain market share and premium pricing, and the company will continue to leverage product advantages to expand market share

Q: The HBM TAM for the calendar year 2025 is estimated to increase from $25 billion to $30 billion while maintaining market share, but with fixed prices and quantities, and yield improving. In simple terms, if three months ago it was believed that HBM revenue in the second half of 2025 would be $5.5 billion - $6 billion, should it now be considered to be $6.5 billion - $7 billion?

A: Specific HBM revenue figures were not provided, only that it will reach billions of dollars in 2025, and the company aims to achieve HBM market share comparable to the industry DRAM share, while emphasizing the long-term potential of HBM, which is expected to become a market exceeding $100 billion by 2030, with 2028 being four times that of 2024. The company will seize market opportunities to drive products into high-profit areas.

Q: When upgrading from HBM3E 8-high to 12-high, the trade ratio (cost-performance trade ratio) will increase, and when moving to HBM4, the chip size will be larger, and the trade ratio will also increase. So, from the perspective of pure yield reset during these transitions, will there be a negative impact on gross margin? Or do you think the transition will be smooth and will not affect gross margin?

A: The trade ratio for HBM3E is about 3, and it will be higher for HBM4, which is the situation for the entire HBM industry. From 8-high to 12-high, product complexity increases, and 12-high will have its own yield improvement process, but the experience from 8-high will be beneficial for the subsequent process. The company team has performed excellently in improving product yield, and I believe they will also do well in yield improvement from 8-high to 12-high. From 8-high to 12-high, each chip's capacity increases by 50%, providing opportunities for customers to increase content on GPUs and accelerators, continuously enhancing the overall HBM value.

Q: Regarding DRAM, if next year supply equals demand and there is excess inventory, how will the market perform? Additionally, you mentioned that high-end DRAM and HBM or cutting-edge edge DRAM and HBM perform well. Can you define what cutting-edge edge is and what percentage of the market it occupies? What will happen if the rest of the market remains oversupplied?

A: The company currently expects total DRAM inventory to be below target levels, with tight supply in cutting-edge edge nodes (such as HBM, LP5, DDR5). The industry supply will still be tight in 2025, and the increasing demand for HBM will put pressure on the supply of non-HBM products in cutting-edge edge. The overall DRAM industry is healthy, and the company expects to achieve billions of dollars in revenue in fiscal year 2025 from HBM, high-density DIMM, and LP5 solutions, which are important for AI applications. HBM and LP5 will synergistically promote AI development, with most production concentrated in cutting-edge edge nodes (such as the current 1-alpha and 1-beta nodes) In 2025, the 1-gamma node will begin to be enhanced.

Q: As part of the company's business, how will the non-leading-edge DRAM market regain health?

A: The company's supply mix is shifting towards products that meet market demand, producing more focused leading-edge products while strictly managing capital expenditures and supply growth to maintain market health.

Q: What is the competitiveness of Chinese competitors in the DDR5 and LP5 markets, and what is Micron's response strategy?

A: For the remainder of fiscal year 2025, the LP4 and DDR4 product mix accounts for about 10% of the business and will continue to decline in the future. Chinese competition is mainly in the low-end consumer market, while the market is shifting towards high-performance products. The high-end market, such as data centers, has higher quality requirements for products. Micron focuses on the high-end market with leading technology and advanced product roadmaps, driving the product mix towards high-profit areas.

Q: You mentioned that high-capacity enterprise SSDs will replace nearline HDDs in the coming years. I know this has been your long-standing view. Are there any recent factors that might accelerate this trend? You mentioned that the company's NAND front-end costs are expected to decrease in the low double-digit percentage range for fiscal year 2025, similar to peers in the hard disk drive industry. So I would like to know if there have been any recent changes considering this dynamic?

A: The company works closely with customers. The advantages of SSDs in terms of performance, power consumption, footprint, and cost are continuously improving their total cost of ownership, and they will replace HDDs in the future. AI is an important driving factor. For example, this year, the demand for data center SSDs is strong, and the future requirements for SSDs in terms of performance, power consumption, and footprint in data centers will drive this trend, which is expected to become more pronounced in 2027 and beyond. The company's NAND front-end cost reduction for fiscal year 2025 is expected to be in the low double-digit percentage range, similar to peers.

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