Micron shows sequential gains in still-tough price climate

Electronic News, March 24, 1997

Boise, Idaho--Posting gains sequentially but still in the memory pricing pits, Micron Technology Inc. reported 2Q97 net income fell to $143 million, or 66 cents per fully diluted share, from $188 million, or 87 cents per fully diluted share, in 2Q96, but rose from $21 million, or 10 cents per share fully diluted, in the just-prior quarter. Net sales for the quarter ended Feb. 27 declined to $876 million from $996 million in the same quarter a year ago but rose from $728 million in 1Q97.

In 2Q97, the company realized total pretax gains of $205 million on the sale of subsidiary stock and an investment, including $190 million on the sale of 15,400,000 common shares of PC subsidiary Micron Electronics Inc. (MEI) for $248 million. This plus other share transactions reduced Micron ownership of MEI to about 64 percent from 79 percent.

Excluding Non-Recurring Gains

Micron's operations, excluding non-recurring gains, realized 18 cents per fully diluted share in 2Q97. Semiconductor memory operations contributed 10 cents toward consolidated net income, on net sales of $402 million in the second quarter. Gross margins on semiconductor memory products improved to approximately 32 percent in 2Q97 versus 24 percent in 1Q97 and 62 percent in 2Q96. The decline in net sales and net income for 2Q97 from 2Q96 resulted primarily from significantly lower pricing for semiconductor memory products.

Semiconductor operations increased megabit production by 55 percent in 2Q97 versus 1Q97. The 55 percent increase was due to efficiency gains achieved through shrink versions of both the 4 Meg and 16 Meg DRAM and an increase in total wafer outs, it was noted. The effect on net sales of this higher level of production was countered by an 18 percent decrease in the average selling price per megabit for 2Q97 versus the first quarter.

Unit sales of PC systems were approximately 45 percent higher in 2Q97 than 2Q96 as a result of increased name recognition and market acceptance of the company's Micron brand PC systems and continued growth of the direct sales channel. The gross margin percentage for PC systems was 18 percent in 2Q97 versus 8 percent in the same quarter a year ago; the rise was principally due to reduced component costs and increased sales of higher margin notebook systems.

Micron reported six-month net sales came to $1.6 billion, down from $2.2 billion in the same period last year. Net income fell to $163.3 million from $516.7 million in the year-earlier period.

Micron ended the quarter with cash and investment balances of $589 million. The company had no outstanding borrowings on its lines of credit and believes its cash and investment balances and cash flows from operations will be sufficient for near-term working capital and budgeted capital spending.

Dan Niles of Robertson Stephens has a "buy" on Micron shares and has raised his earnings estimates by about 16 percent, in part due to a prediction of rising gross margins.

16 Meg Pricing To Gain

"We estimate that 16 meg pricing in the quarter was about $7.75 and expect this to increase to about $8.15 in 3Q97 (May). We note that spot market pricing is about $9.50 currently, up from below $6, so we believe that this is a conservative assumption. Also, we believe that Micron's 16 meg cost of production will drop over 10 percent sequentially in May and that bit production will be up 30 percent sequentially. We believe that all of the above will lead to semiconductor gross margins increasing from 32 percent to 42 percent sequentially with overall gross margins increasing from 25 percent to nearly 30 percent sequentially.

"Based on the above, we are raising our FY97 EPS estimate from $1.07 to $1.25 and our FY98 EPS estimate from $3.00 to $3.50. We remain very bullish on the stock and continue to have a $50-$55 12-month price target on the shares. And we continue to believe that our EPS estimates are conservative."

Micron shares fell 4-1/8 the day of the report to close at 40 in composite trading, a drop of 9.3 percent. While Micron earnings were ahead of Wall Street's formal estimates, "whisper" numbers (word of mouth figures) were actually higher. This, plus general economic uncertainty about possibly rising interest rates, didn't help Micron or a number of other technology companies, which saw their shares decline.