Memory leader Micron opened semiconductor earnings season. FY23Q3 corresponds to March through May 2023.
Micron FY23 Q3 Earnings:
Revenue $3.752B, down 57% year over year, up 2% sequentially; revenue reverted to 2016 levels; FQ4 revenue guided at $3.9B, down 41% year over year, up 4% sequentially; (revenue peak was FY18 Q4 at $8.4B)
GAAP gross margin -17.8%, loss narrowed 15 percentage points sequentially; excluding inventory write-downs, adjusted gross margin ~-5.4%, last quarter adjusted gross margin was still positive, so gross margin actually declined this quarter; (gross margin peak was FY18 Q4 at 61%)
Operating cash flow $24M, down 98% sequentially, a multi-year low; free cash flow negative for three consecutive quarters; (operating cash flow peak was FY18 Q4 at $5.2B)
GAAP net loss $1.896B, prior quarter loss $2.312B, non-GAAP similar; FQ4 GAAP net loss guided at $1.466B; (net income peak was FY18 Q4 at $4.3B)
Memory and display are the most cyclical segments in semiconductors; reading Micron's earnings instills greater respect for the cycle.
Business Segments:
DRAM revenue $2.672B, down 57% year over year, 71% of revenue; DRAM bit shipments up low-teens% sequentially, DRAM ASP down 10% sequentially;
NAND revenue $1.013B, down 56% year over year, 27% of revenue; NAND bit shipments up upper-30s% sequentially, ASP down mid-teens% sequentially;
H2 DRAM/NAND bit shipment recovery expected; industry supply down in 2023; 2023 DRAM bit demand down low-single-digits, NAND down high-single-digits; supply side DRAM down sharply, NAND down slightly;
DRAM/NAND Q4 bit shipments expected to grow strongly sequentially to record highs; NAND bit shipment growth higher than DRAM; FY24 H1 similar to FY23 Q4, H2 stronger than H1.
Data center revenue up sequentially; cloud and enterprise up significantly sequentially; AI server DRAM content up 6-8x, NAND content up 3x; DDR5 DRAM share doubled sequentially, expect Micron DDR5 share to exceed DDR4 in 2024 Q1, leading industry by one quarter; high-density 1-beta 128Gb D5 uses 32Gb single die, expect 2024 Q2 ramp, significant cost reduction; shipped first 200+ layer NAND data center SSD this quarter;
2023 PC unit shipments expected down low-double-digits year over year; client DDR5 share expected to exceed DDR4 in early 2024; client SSD bit shipments hit quarterly record, driven by client SSD share gains; NAND QLC bit shipments set records for three consecutive quarters;
Graphics memory TAM long-term CAGR exceeds other segments; customer inventory normalized; 1-beta GDDR7 product to launch in 2024 H1;
Smartphone market expected down mid-single-digits in 2023; high-end demand okay; 1-beta LP5X in customer qualification; UFS 4.0 232-layer NAND sampling; integrated 16G DRAM + 512G NAND uMCP5 ramping; expect revenue growth next quarter;
Auto revenue up high-single-digits year over year, quarterly record; expect FY24 H2 demand growth; industrial showing early recovery signs, expect improvement in FY24 H2;
Earnings Call Highlights:
China revenue 25% of Micron quarterly revenue; exposure to our restrictions ~half of China revenue, ~12.5% of global revenue; minimal impact this quarter; expect larger impact in FQ4 and FQ1; future $600M investment in Xi'an, primarily assembly/test.
FQ3 inventory write-down $400M, impacting gross margin by 11 points; expect FQ4/FQ1/FQ2 to benefit $500M each from write-down reversal; production cut plan increased from 25% to 30%; FQ4/FQ1 period costs to increase $200M due to lower utilization;
Most PC and smartphone customer inventories near normal levels; some customers starting to build inventory fearing future price increases; data center customer inventories stabilizing, expect normalization by year-end;
Free cash flow negative for most of FY24; gross margin essentially bottomed now, expected to turn positive in FY24 H2; operating cash flow to grow in FY24 H2;
Current high-density DRAM mostly 128Gb; Micron 96Gb in volume production this quarter, FQ4 ramp, FY24 volume scale; 96Gb uses four 24Gb single dies, not TSV, significant cost reduction; 128Gb also planned with four 32Gb dies on 1-beta, 2024 Q2 volume; currently only HBM2E; next-gen HBM3 will use TSV, 2024 Q1 volume, significant FY24 revenue contribution; management expects future HBM share to exceed Micron's DRAM share (>23%);
In NVIDIA GH200, 144TB DRAM includes 122TB LPDRAM; today 75% of AI servers use DDR5;
EUV-based 1-gamma DRAM progressing well, expect 2025 launch;
FY24 capex to decrease further; FY23 Q4 capex only 20% of full fiscal year;
This quarter inventory $8.2B, DIO 168 days; future target to reduce to 120 days, i.e., $6B inventory;
Overall, Micron's earnings were in line with prior guidance. While the memory cycle bottom is confirmed, a V-shaped rebound the market hopes for may not materialize; recovery may be gradual. Micron gross margin may not turn positive until mid-next year. However, Micron has unique exposure (China restrictions impact starting next quarter); let's see if SK Hynix and Samsung earnings reveal more.
On HBM benefiting from AI, Micron lacks SK Hynix's first-mover advantage, but management is bullish, believing Micron can capture HBM share exceeding its DRAM share. On CXL chips, management barely mentioned it, suggesting large-scale adoption remains distant.