Micron Technology Inc. ( MU ) reported third quarter fiscal 2014 earnings (excluding the impact of the Micron Memory Japan, Inc. acquisition and other one-time items) of 79 cents, easily beating the Zacks Consensus Estimate of 71 cents per share. Earnings improved significantly from 4 cents in the year-ago quarter primarily due to higher revenues and improving PC DRAM pricing environment.
Micron's revenues in the quarter increased 71.8% on a year-over-year basis to $3.98 billion and surpassed the Zacks Consensus Estimate of $3.88 billion. The substantial increase in revenues could be mostly attributed to improving pricing environment in PC DRAM products, positive market conditions as well as an encouraging operating performance.
However, DRAM products revenues were slightly down on a sequential basis, primarily due to reduced pricing in both cost per bit and ASPs (average selling price), which decreased in a range of low-single digit. Nevertheless, the company witnessed stable product prices and shift in demand from mobile and computing to server products.
NAND Flash products revenues decreased on a sequential basis due to a shift towards solid state drive (SSD). Moreover, ASPs and cost per bit remained flat sequentially. Both client and enterprise SSDs revenues increased above 50% compared to the last quarter. It is worth mentioning that Micron witnessed stable pricing in NAND chips.
The computing and networking business witnessed strong demands primarily due to a favorable pricing environment. Better-than-expected demand for desktop refreshes and notebooks are the primarily factors driving PC DRAM performance. Networking DRAM pricing improved sequentially aided by favorable product mix and strong demand.
During the quarter, Micron unveiled its new SSD, MX100, to meet the growing demand for personal storage and also to cater to the media and entertainment market.
Buoyed by a solid top-line performance and a favorable product mix, Micron's gross profit increased from $556.0 million in the year-ago quarter to $1.37 billion. Gross margin came in at 34.4% versus 23.9% a year ago, primarily boosted by higher revenues.
Selling, general and administrative (SG&A) expenses increased 37.1% year over year to $174.0 million. Research and development (R&D) expenses came in at $349.0 million, 54.4% higher than the year-ago quarter.
Micron reported operating income of $839.0 million, which significantly improved from $149.0 million reported in the year-ago quarter, primarily due to lower operating expenses as a percentage of revenues. Operating expenses, as a percentage of revenues, decreased 428 basis points on a year-over-year basis.
Micron recorded non-GAAP net income (excluding the impact of the Micron Memory Japan, Inc. acquisition and other one-time items) of $913.0 million or 79 cents compared with $43.0 million or 4 cents in the year-ago quarter.
The company exited the third quarter with cash and short-term investments of $4.26 billion compared with $4.50 billion in the previous quarter. Receivables were $2.71 billion compared with $2.83 billion in the previous quarter. Micron's long-term debt decreased to $4.14 billion from $4.32 billion in the previous quarter.
Cash generated from operations was $1.46 billion, up from $1.39 billion in the previous quarter. Capital expenditure was $576.0 million compared with $565.0 million in the previous quarter. Micron repurchased shares worth $150.0 in Jan 2014 and $99 million during the quarter.
For the fourth quarter of fiscal 2014, Micron expects revenues in the range of $4.0 billion to $4.2 billion. The Zacks Consensus Estimate is pegged at $4.1 billion.
Micron expects DRAM ASPs to be flat for the forthcoming quarter. Projected bit cost is expected to be down in low single-digit, whereas bit growth is expected to be up in low-single digit, all sequentially. The main factors impacting the DRAM guidance for the upcoming quarter are positive DRAM market conditions and stable DRAM volumes.
NAND ASP is expected to be down in low to mid-single-digit sequentially. Bit costs are expected to be flat, whereas prediction bit growth is expected to be up in low to mid double digit.
Management expects SG&A expenses to be in the range of $175 million to $185.0 million in the fourth quarter of fiscal 2014. R&D is expected to be in the range of $355 million to $365.0 million.
We are encouraged by Micron's strong third-quarter fiscal 2014 results. Both the top and bottom lines increased year over year and surpassed the Zacks Consensus Estimate. The results were primarily boosted by higher revenues and an improving PC DRAM pricing environment. Going forward, the acquisition of Elpida and Rexchip (now known as Micron Memory Japan, Inc. and Micron Memory Taiwan Co., Ltd., respectively) will benefit Micron's share in the memory market. Moreover, Micron provided a modest guidance for the forthcoming quarter.
Micron is also positive about its product launches and growing demand for its products, particularly SSD products. The company is also optimistic about supply/demand balance for DRAM and NAND memory chips in 2014, which should support prices. According to management, demand for DRAM and NAND is expected to increase 30% and 40%, respectively, over the long term. We believe that this demand scenario is also a positive for the company.
Additionally, the Elpida acquisition also brought Apple Inc. ( AAPL ) on to the customer roster, which is a positive for future growth.
However, it may not be easy for Micron to capture share from SanDisk Corp ( SNDK ) a key player in the NAND space. Nevertheless, with support from Apple and Intel Corp. ( INTC ), its prime NAND customers, the situation could be in Micron's favor going forward.
Currently, Micron has a Zacks Rank #1 (Strong Buy).
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