Key Takeaways

  • Adjusted EPS was $0.82 vs. the $0.72 analysts had expected.
  • Revenue was higher than expected
  • Micron's forecast for next quarter was positive.
  • Gross margins were slightly higher than expected.

What Happened

Micron Technology's quarterly earnings were higher than expected. The COVID-19 pandemic has driven a rise in working from home, which in turn has increased demand for memory chips to sustain the expanding digital workplace. Demand from data centers in particular, which buy higher-margin products, helped Micron's gross margins fall by less than analysts had expected. The company said its factories are working normally again, not a given for manufacturers during the pandemic, and its guidance for next quarter was positive.

(Below is Investopedia's original earnings preview, published June 25, 2020.)

What to Look for

Micron Technology Inc. (MU), one of the leading manufactures of DRAM and NAND memory chips, is getting a boost from an unexpected effect of the COVID-19 pandemic: the rise of the remote-work economy. Social-distancing measures that have forced millions of employees to work from home have helped to bolster demand for Micron's memory chips despite lockdowns on large swaths of the global economy. This demand has eased a massive industry oversupply of memory chips that's hammered prices.

Investors will be watching to see whether the positive effects of the pandemic can outweigh the negatives when Micron reports earnings on June 29, 2020 for Q3 FY 2020. Analysts currently expect adjusted earnings per share (EPS) to plunge despite healthy revenue growth.

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 currently expect the company's gross margin to fall year-over-year (YOY), though it still will be an improvement compared to the prior three quarters.

Micron's stock has significantly outpaced the broader market over the past year. Despite crashing this spring in the early months of the coronavirus pandemic, the company's shares have provided investors with a total return of 46.0% compared to the S&P 500's total return of 3.9% over the past 12 months.

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

Micron has struggled with falling earnings and revenue over the past five quarters due mainly to the industry glut of memory chips. However, the chipmaker did manage to beat analyst expectations by 21.6% when it reported earnings for Q2 FY 2020, which ended February 27, 2020. The company's 2019 fiscal year ended August 29, 2019.

Micron posted declines in adjusted EPS and revenue of 73.5% and 17.8%, respectively, for the second quarter. It marked the fifth consecutive quarter of declines for both metrics. The company noted that average selling prices for DRAM and NAND memory chips in 2019 had fallen 30% and 47%, respectively, compared to 2018 prices.

Looking ahead, Micron management said in late March that over the near term it was expecting stronger demand from datacenters due to remote work, and increases in gaming and e-commerce activity. Analysts expect revenue to rise 8.6% for Q3 FY 2020, marking the first increase in 6 quarters, since Q1 FY 2019. However, adjusted EPS is expected to fall 31.8%, continuing the streak of EPS declines.

Micron's performance is expected to be far worse for the entire 2020 fiscal year ending in late August. These results will include the two quarters roughly spanning March to August, when the pandemic's impact is expected to be strong. Analysts estimate adjusted earnings per share will slide by 62.2% on a 12.3% drop in revenue compared to FY 2019. Micron's estimated $20.5 billion in revenue for FY 2020 would be about $10 billion less than two years earlier, in FY 2018.

Micron Key Metrics
  Estimate for Q3 2020 (FY) Q3 2019 (FY) Q3 2018 (FY)
Adjusted Earnings Per Share $0.72 $1.05 $3.15
Revenue (in billions) $5.2 $4.8 $7.8
Gross Margin 32.3% 38.2% 60.6%

Source: VisibleAlpha

The decline in memory chip prices has also been weighing 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% in Q4 FY 2018 to 26.6% in Q1 FY 2020. However, this key metric rose to 28.3% in Q2 FY 2020, marking the first increase after five straight sequential quarterly declines. Analysts expect Micron's gross margin to continue to improve, rising to 32.3% for Q3 FY 2020. But it still will be down nearly six percentage points from the same quarter a year earlier. Continued improvements will depend on the strength of the global economy as it recovers from the fallout of the pandemic, and whether the pandemic-induced spike in demand for memory chips can be sustained long term.