Micron to release fiscal 2Q16 earnings

The semiconductor earnings season for the quarter ended December 2015 has been turbulent, with many companies reporting lower revenues. Micron Technology (MU), the third-largest DRAM (dynamic random access memory) manufacturer after Samsung (SSNLF) and SK Hynix, is set to report its fiscal 2Q16 earnings on March 30, 2016. In this series, we will analyze how the quarter has looked for the company and what to expect in the fiscal 2Q16 earnings.

According to Gartner and Micron, global semiconductor market fell by 2% YoY (year-over-year) to $334 billion in 2015, with the memory market falling by 1% YoY to $78 billion during the year.

EPS

For fiscal 2Q16, analysts estimate Micron Technology (MU) to report earnings per share (or EPS) of -$0.08. In its fiscal 2Q16 guidance, the company stated that it expects to report a non-GAAP (generally accepted accounting principle) EPS between -$0.12 and -$0.05.

Looking at the above graph, the variation in the actual and estimated EPS shows that arriving at an EPS estimate for Micron is difficult given the volatility in DRAM prices. This is because the company’s profitability depends on whether the company is able to cut its per-bit costs faster than the price falls.

Impact of DRAM prices on EPS

Prior to 2016, the DRAM industry suffered from oversupply in 2011 and 2012, and Micron saw its DRAM ASP (average selling price) per bit fall by 39% and 45%, respectively. This consecutive two years of decline saw the company report a net loss of $1 billion and an EPS of -$1.04 in fiscal 2012.

In fiscal 2014 and 2015, the company posted strong profits as DRAM prices rose due to undersupply. The undersupply occurred as a fire at SK Hynix’s Chinese fab and an earthquake in Taiwan (EWY) disrupted production while the demand for mobile DRAM increased.

From the historical data, it is clear that the DRAM price fluctuation is beyond any company’s control. In fiscal 2016, DRAM oversupply resulted from a slowdown in PC and smartphone sales, which has hit major players such as Intel (INTC) and Apple (AAPL). Despite a slowdown in demand, DRAM manufacturers are not ready to reduce their output, leading to oversupply and a steeper decline in DRAM prices.

In the next part of this series, we will explore the impact of this oversupply on Micron’s revenue.