Micron Technology, Inc. (MU Quick QuoteMU - Free Report) reported outstanding quarterly for the second quarter of fiscal 2018. The memory-chip maker’s quarterly earnings and revenues not only marked significant year-over-year growth but also came ahead of its guided range and the Zacks Consensus Estimate.

This apart, the company’s gross margin, operating income and free cash flow reached record levels during the fiscal second quarter. The overwhelming quarterly results were mainly fueled by higher pricing for the company’s DRAM memory chips resulting from strong demand from data-center operators and automotive customers, along with a tight supply.

President and CEO of the company — Sanjay Mehrotra — noted, "Micron executed exceptionally well in the second quarter, delivering record results and strong free cash flow driven by broad-based demand for our memory and storage solutions. Our performance was accentuated by an ongoing shift to high-value solutions as we grew sales to our cloud, mobile and automotive customers and set new records for SSDs and graphics memory.”

Despite this, shares of the company depreciated 4% during the after-hour trading session. We don’t see any specific reason for this plunge as apart from the splendid last quarterly results, the company’s outlook for the current quarter remained strong, as well as industry dynamics for DRAM memory chips was positive.

Therefore, we believe this might have occurred due to profit booking by investors or a commentary by the company on its fiscal third-quarter revenue guidance.
Although the company’s outlook was well above analysts’ forecast, it mentioned that the fiscal third-quarter revenues will bear a 2% impact due to the ongoing "supplier maintenance issue" at its Taiwan DRAM facility, where short supply of nitrogen has disrupted production slightly.

It should be noted that Micron had a remarkable run in the last year. The stock has soared 122.5% in a year’s time, significantly outperforming the S&P 500’s return of just 12.7%.

Let’s now discuss the fiscal second quarter in detail.

Revenues

Micron’s revenues in the reported quarter climbed more than 58% on a year-over-year basis to $7.35 billion. Also, reported revenues were up on a quarter-over-quarter basis (up 8%). The upsurge primarily stemmed from improved pricing and strong demand environment for DRAM chips. Solid unit shipments of NAND chips also contributed to revenue growth but were partially offset by price declines.

Quarterly revenues also came ahead of the company’s guided range of $6.8-$7.2 billion and surpassed the Zacks Consensus Estimate of $7.23 billion as well.

Sales from DRAM products, which accounted for 71% of total revenues during the quarter, were up a whopping 76%, on a year-over-year basis, and 14% on a sequential basis. The company recorded upper mid-single-digit and low-double-digit rise in bit shipments and average selling price (ASP), respectively, on quarter-on-quarter basis. Strong demand from PC, server and smart-phone makers drove demand and pricing for DRAM chips.

On the other hand, sales from NAND products, which accounted for 25% of total revenues, marked 28% year-over-year growth but fell 3% quarter on quarter. The company witnessed a low-double-digit rise in bit shipments, while ASP declined in the mid-teens range.

Market share gain in the solid state drives (SSD) space, along with solid demand from the mobile and embedded markets, benefited Micron’s NAND shipment’s year-over-year performance. However, the company noted “sequential ASP decline in NAND increased in part due to a meaningful last time purchase of higher price MLC NAND in the fiscal first quarter.”

Business unit wise, revenues of the computing and networking business (CNBU) unit more surged 93% from the year-ago quarter and reached $3.7 billion. Sequentially, it marked 15% growth. Apart from a healthy pricing environment, CFO, David Zinsner, stated that this upswing stemmed from sturdy demand from data-center operators, as well as “strong demand for graphics memory with cryptocurrency mining augmenting sales for gaming applications.”

Revenues from the Mobile Business Unit (MBU) reached record level at $1.6 billion, registering a year-over-year jump of 45.5%.

Storage Business Unit (SBU) revenues came in at $1.3 billion, up 20% year over year, mainly due to elevated demand for the company’s SSD products. However, it declined 9% sequentially due to lower component sales which more than offset the benefit of higher SSD revenues. Zinsner said that “sequential revenue comparison was impacted by a mix shift within our NAND component sales.”

The Embedded business unit reported revenues of $829 million, in line with the prior quarter. Nevertheless, the unit’s revenues jumped 41% year on year, primarily “driven by the growing industrial IoT markets, expanding factory automation, transportation and surveillance applications.”

Income and Margins

Micron’s non-GAAP gross profit registered more than two-fold year-over-year jump to $4.3 billion, while its margin advanced to 58.4% from the 38.5% reported in the year-earlier quarter. Non-GAAP gross margin also came ahead of management’s guided range of 54-58%. The impressive year-over-year improvement in gross margin was chiefly driven by sound industry pricing environment, better mix of high-value products and efficient cost management.

Non-GAAP operating expenses flared up 9% year over year and sequentially to $666 million, and came in toward the higher end of the company’s guided range of $625-$675 million. This quarter-on-quarter increase resulted from higher expenses incurred to shift its portfolio to high-value solutions, and speed up its technology and product development. Operating expenses, as a percentage of revenues, contracted 410 basis points year over year to 9.1%.

Micron’s non-GAAP operating income came in at $3.63 billion compared with just $1.18 billion reported in the prior-year quarter and came well ahead of the company’s guided range of $3.25-$3.45 billion. Non-GAAP operating margin improved to 49.4% from 25.3% reported in second-quarter fiscal 2017. Higher gross margin and reduced operating expenses as a percentage of revenues resulted in this tremendous growth.

On a non-GAAP basis, the company reported net income of $3.5 billion compared with $1.03 billion witnessed in the comparable quarter last fiscal. Non-GAAP earnings per share came in at $2.82, beating the Zacks Consensus Estimate of $2.76, as well as management’s guided range of $2.51-$2.65 per share. Earnings were also higher than the year-ago quarter’s figure of 90 cents.

Balance Sheet and Cash Flow

The company exited the fiscal second quarter with cash and short-term investments of $8.04 billion compared with $6.17 billion at the end of the fiscal first quarter. Receivables were $4.44 billion compared with $3.88 billion recorded in the previous quarter. Micron’s long-term debt increased to $7.80 billion from $7.64 billion in the prior quarter.

The company generated operating cash flow of $4.3 billion and adjusted free cash flow of $2.2 billion during the reported quarter. Capital expenditure totaled $2.1 billion in the fiscal second quarter.

Outlook

The company provided outlook for third-quarter fiscal 2018. Considering the impact of supply-maintenance issue at its Taiwan facility, Micron projects revenues at $7.2-$7.6 billion. The Zacks Consensus Estimate is pegged at $7.24 billion.

Non-GAAP gross margin is projected between 57% and 60%. Operating expenses on non-GAAP basis are likely to be $725 million (+/- $25 million) and operating income is anticipated to come in the band of $3.6-$3.8 billion.

The company expects non-GAAP earnings per share to be roughly $2.83 (+/- 7 cents). The Zacks Consensus Estimate is pegged at $2.76.

Furthermore, Micron expects its capital expenditure in fiscal 2018 to remain at the higher-end of previously guided range of $7.5 billion (+/- 5%).

Our Take

Micron’s impressive fiscal second-quarter results and encouraging third-quarter outlook signify that the DRAM boom is here to stay, at least in the near term, as demand remains ahead of supply.

However, declining NAND ASP as supply exceeded demand, remains a concern which might partially offset the benefits from improved demand and prices for DRAM products.

Nonetheless, the company believes growing adoption of SSD from PC manufacturers and data-center operators will soak the extra supply, thereby stabilizing NAND prices.

Currently, Micron flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some other similarly-ranked semiconductor stocks are Mellanox Technologies, Ltd. , NVIDIA Corporation (NVDA Quick QuoteNVDA - Free Report) and Intel Corporation (INTC Quick QuoteINTC - Free Report) .

Mellanox, NVIDIA and Intel have long term-expected EPS growth rates of 15%, 10.3% and 8.4%, respectively.

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