October 6, 2006 – Micron’s latest financials announced Oct. 5 were disappointing on the surface — EPS of $0.08 on $1.37 billion in revenues, vs. $0.14/$1.41 billion expectations from Wall Street — but a bigger concern is a potential “execution risk” with a dual-ramp from its JV with Intel, IM Flash Technologies, according to American Technology Research analyst Doug Freedman, who has downgraded his Micron stock recommendation from “Buy” to “Sell.”
“We recognize this downgrade looks like a knee jerk reaction to the earnings report,” he wrote in a research note, but pointed out the results weren’t really that bad — without one-time charges, EPS would have almost met Street expectations. The real concern is in the upcoming simultaneous ramp of two 300mm fabs for IM Flash Technologies. “We believe that the August quarter results are indicative of certain execution difficulties experienced while managing fab ramps and converting the core [IM Flash] DRAM fab.”
Freedman pointed out that Micron’s gross margins were flat while DRAM pricing has been very healthy (50% of revenues), illustrating the impact of even a small percentage of NAND on the company’s DRAM business. “The company’s 7.5 weeks of inventory is a testament to the poor execution of the fabs and loading,” he said, saying he had expected to see inventories worked down “and extra attention being paid to increased output.”
The upcoming launch of Vista may not have as much of an impact on DRAM pricing strength as many investors hope, Freedman said, predicting “a mild, but noticeable softness in 4Q06 in front of the consumer Vista launch in 1Q07.” Micron is likely to see increased output in mid-2007 from low-cost Asian DRAM specialists, he noted, and any strength in Micron’s numbers now would lighten exposure before those NAND ramp costs start piling up. “The time for MU to be blowing away numbers is right now, and if it cannot do it with the market ‘red hot,’ then when?”
Still, Freedman thinks there could be positive news, if Micron can ramp its Virginia and Utah 300mm fabs with new NAND technology while converting its Tech JV fab from 200mm to 300mm. Also, retail sales could pick up for low-cost NAND flash from Micron’s newly acquired Lexar business, as OEM channels cut back on their NAND flash consumption. And Micron still benefits from strong growth of CMOS image sensors.