Micron's "big hemorrhage" may not be a bad thing.

On the morning of March 29, 2023, Beijing time, Micron (MU.O) released its Q2 financial report for the 2023 fiscal year (ending in February 2023) after the US stock market closed. The key points are as follows:

Overall performance: "Big loss" rare in 20 years. Micron Technology's Q2 2023 revenue was $3.693 billion, a year-on-year decrease of 52.8%, slightly lower than the market expectation ($3.73 billion). The significant decline in revenue was mainly due to the downturn in the storage industry. The company's Q2 2023 net profit was -$2.312 billion, a year-on-year decrease of 202.2%, indicating a significant loss. This is mainly due to the large amount of inventory deductions carried out by the company this quarter.
Business unit situation: All storage products are declining across the board. DRAM and NAND account for more than 95% of the company's revenue, and both businesses have declined by 50% this quarter. This is mainly due to the overall weak demand in the storage industry, which has caused a significant drop in the prices of DRAM and NAND products, thereby affecting the revenue of the company's business units.
Outlook for the next quarter: Q3 2023 operating revenue is expected to be $3.5-3.9 billion (a year-on-year decrease of 57.2%), and the market consensus expectation is $3.715 billion. The gross margin for the quarter (GAAP) is expected to be between -25.5% and -20.5%, with a slight increase in gross margin compared to the previous quarter.

Overall, Dolphin believes that Micron's financial report this time is as expected.

First of all, the market has already lowered its expectations for the company in view of the downturn in the storage industry. In terms of revenue, the company is basically in line with market expectations. As for the sudden collapse of the gross profit margin, this is mainly due to inventory deductions, and the market may choose to "forgive" this in the end. Therefore, overall, the financial report should be considered normal without being "frightened" by the numbers.

What the market is more concerned about is the company's expectations for the future. Although the company will continue to lose money next quarter, it can be seen that there are signs of improvement. The company's revenue guidance for the next quarter is $3.5-3.9 billion, which is basically stable. The gross margin guidance is expected to be between -25.5% and -20.5%, with an increase of more than 10 percentage points compared to the previous quarter. Overall, the company's expectations are also expected to improve as the business bottom-out.

Combining the financial report and industry situation, Dolphin believes that:

Industry perspective: The storage industry may have bottomed out. The gross profit margin of the company this quarter was negative, and even with the $1.4 billion inventory deduction added back, it was only about 5%. The storage industry itself has a cyclical nature, and now that the gross profit margin has fallen to about 5%, it has basically bottomed out.
Company perspective: Effective inventory disposal. Judging from the current prices of storage products, it is difficult to improve the gross profit margin from the price end in the next quarter. The higher expectation of a 10 percentage point increase compared to the previous quarter mainly comes from the reduced inventory deductions. This also reflects the company's great effort in inventory deductions this quarter, which may gradually improve towards the future. Overall, there are signs that the company is bottoming out in its business. Looking at it from an investment perspective, the company's stock price has risen by 18% since the beginning of the year, partly due to the overall valuation increase of Nasdaq, and also includes some market expectations for the company's improvement.

However, from this Micron earnings report, it seems that the release of the large inventory reserve will allow the company to quickly digest its inventory and streamline its operations. With storage prices having dropped to the industry's break-even point, there is limited room for further decline. With storage having hit bottom, after the clearance of inventory from industry companies, the industry is expected to recover more quickly.

Here is Changhai Dolphin's specific analysis of Micron's earnings report:

I. Overall Performance: Huge Loss Due to Inventory Reserve

1.1 Revenue

Micron's total revenue for the second quarter of the 2023 fiscal year was $3.693 billion, a 52.8% year-on-year decrease, slightly lower than market expectations ($3.73 billion). The sharp decline in revenue this quarter was mainly due to the significant decline in the company's core DRAM and NAND businesses. In a climate of declining demand in the storage industry, weak downstream demand directly affected product prices and loading capacity.

1.2 Gross Margin

Micron's gross margin for the second quarter of fiscal year 2023 was -$1.206 billion, a huge loss not seen in almost 20 years. This quarter's gross margin rate was -32.7%, a significant decrease.

At first glance, this was due to operating costs exceeding revenue in this quarter. But in fact, this was due to 1) the frequent decline in storage product prices, which led to the company's profitability narrowing, and 2) the company made some inventory reserves this quarter, which also affected the company's gross margin rate.

Dolphin believes that Micron's inventory reserve during the industry downturn can help the company emerge from its predicament. If the $1.4 billion in reserve this quarter were added back, the company's gross profit this quarter would be around $200 million, corresponding to a gross margin rate of 5.25%. Although it would be positive, the gross margin rate would also have dropped sharply to around 5%. Since there is a cycle in the industry, companies and the industry will not suffer losses in the long term. Returning to a gross margin rate of around 5%, in fact, also indicates that the storage industry has already reached its bottom.

1.3 Operating Expenses

Micron's operating expenses for the second quarter of the 2023 fiscal year were $1.019 billion, a 3.4% year-on-year decrease. The total operating expenses were relatively stable depicting rigid characteristics. Due to the significant decline in revenue this quarter, operating expenses increased significantly, reaching 27.6%. Among them, the breakdown of costs is as follows:

1) Sales and administrative expenses: In this quarter, it was 231 million US dollars, a year-on-year decrease of 12.2%. The sales and administrative expense ratio was 6.3%, a year-on-year increase of 2.9pct, mainly due to changes in revenue. Sales expenses have a certain relationship with revenue performance. They have decreased somewhat this season, while administrative expenses are relatively rigid. In terms of absolute value, the company has begun to take cost control measures this quarter.

2) Research and development expenses: In this quarter, it was 788 million US dollars, a year-on-year decrease of 0.5%. Research and development expenses are the largest source of operating expenses for the company, and the research and development expense ratio in this quarter reached 21.3%. As a technology company, the company attaches greater importance to research and development capabilities. From an absolute value perspective, the company's research and development expenses have also begun to decline this quarter. Mainly in the case of an industry downturn, the company's performance pressure has affected investment in research and development.

1.4 Net profit situation

Micron Technology recorded a net loss of US$2.312 billion in the second quarter of the 2023 fiscal year, a year-on-year decrease of 202.2%, with a sharp decline in net profit margin to -62.5%.

The company's performance this quarter collapsed mainly because the company made a certain inventory reduction calculation. However, if the $1.4 billion inventory reduction calculation is added back, the company still has a $900 million loss, which is further expanded from the loss in the previous quarter. Inventory reduction calculations can accelerate inventory clearance for the company, but performance will still be eroded to some extent during the calculation process.

II. Business breakdown: Storage products, across the board decline

From the previously deep dive into Micron Technology by Dolphin Jun, "Micron: Has the storage chip giant survived the winter?" The company's largest source of revenue comes from storage chips. From the latest financial report, DRAM and NAND are still the company's most important sources of revenue, accounting for nearly 98% when combined. Therefore, the main changes in Micron's business are mainly seen in the DRAM and NAND businesses.

2.1 DRAM

DRAM is the company's largest source of revenue, accounting for more than 70%. **However, the company's DRAM business revenue was only US$2.722 billion this quarter, a year-on-year decrease of 52.4%. This is mainly due to continuously falling product prices in the case of sluggish demand. DRAM

From the price of DRAM, there has been a continuous downward trend recently. Taking DDR4 16G (2G * 8) 2666Mbps as an example, the market average price of the product was around $7.5 in the same period last year, but it has now dropped to below $4 in this quarter. DRAM products have all experienced different degrees of decline in the past year, and referring to the changes in the revenue of companies' DRAM business, it can be seen that the main reason for the decline in the same period compared to the previous year is the price.

2.2 NAND

NAND is the company's second largest source of revenue, accounting for 20-30%. However, the company's NAND business revenue in this quarter was only $885 million, a year-on-year decrease of 54.8%. Although NAND has less impact on the company's performance than DRAM, the revenue decline in this quarter still directly affected the company's revenue situation.

Looking at the price of NAND in the past, it has also shown a downward trend in the past year, but the overall decline is smaller than that of DRAM. Combined with the more than 50% decline in NAND business, the decline in NAND business is not only due to price decline, but also due to a part of order reduction.

This actually also conforms to what was mentioned in the previous depth of Dolphin, that the low market concentration of NAND, the market changes will have a greater impact on shipments.

The above is an interpretation of Micron's second quarter report. Dolphin will track whether there is relevant interpretation in the company's performance conference call about the specific outlook for the next quarter and the industry.

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