MU • 10-K • FY 2022 • Neutral

Micron's Memory Market Dominance Tested by 46% Profit Drop Amid Cyclical Downturn

October 07, 2022 • 1 min read

TL;DR

Micron faced significant headwinds in FY2022 as revenue declined 8.4% to $30.8B amid weakening memory demand and pricing pressure. Operating income plummeted 46% to $4.5B as ASPs deteriorated across both DRAM and NAND segments. Despite challenges, the company maintained technology leadership with 1α DRAM and 176-layer NAND ramps while investing $12B in capex. Management expects continued near-term pressure but sees AI and data center demand as key future growth drivers.

Financial Performance Overview: Revenue declined 8.4% YoY to $30.8B, with DRAM revenue down 12% and NAND relatively flat. Gross margins compressed 840bps to 40.8% due to pricing pressure and higher input costs. Operating margins fell from 22.9% to 14.6% despite cost optimization efforts. Q4 showed accelerating weakness with revenue down 23% QoQ, suggesting further near-term deterioration. Memory industry cyclicality appears to be entering a deeper downturn phase.
Strategic Initiatives and Operational Changes: Micron accelerated its technology roadmap with successful 1α DRAM and 176-layer NAND volume production. $12B capex investment focused on leading-edge capacity and new Singapore fab construction. Strategic shift toward high-value markets with 64% of revenue now from datacenter, mobile, auto and industrial segments. New CXL-enabled memory solutions position company for AI/ML growth. However, near-term supply reductions of 20% planned for 2023 to address oversupply.
Market Position and Competitive Dynamics: Maintained #3 global position in DRAM with 24.8% market share, behind Samsung and SK Hynix. NAND market share stable at 11.4% but facing increased competition from Chinese players. Customer concentration risk with top 3 customers representing 31% of revenue. Technology leadership in DDR5 and 176-layer NAND provides competitive advantage, but pricing power remains limited due to commodity nature of products.
Operational Efficiency and Profitability: Cost per bit reductions of 10% in DRAM and 15% in NAND partially offset ASP declines. Operating expenses well-controlled at 14.8% of revenue despite inflation pressures. $1B cost optimization program launched to improve profitability. Inventory levels elevated at 136 days, up from 94 days, requiring production cuts. Free cash flow generation remained positive at $3.2B but down 56% YoY.
Growth Catalysts and Material Risks: AI and data center demand expected to drive 28% CAGR in HBM memory through 2025. Auto/industrial segments showing resilience with 13% growth YoY. However, PC/mobile weakness and macro uncertainty create near-term headwinds. China competition and trade restrictions pose strategic risks. Supply discipline across industry critical for market recovery. Management expects conditions to improve in second half of 2023.

Revenue

$30.8B ( YoY, QoQ in Q4)

↓ -8.4%

Gross Margin

(-840bps YoY) due to ASP pressure

↑ 40.8%

Free Cash Flow

$3.2B ( YoY) with conversion rate

↓ -56%

Operating Margin

(-830bps YoY) despite cost controls

↑ 14.6%

Growth Indicators

YoY DRAM, NAND

↓ -20%

Bit Shipments ↑+12% YoY DRAM, +15% NAND

Inventory Days 136 days (+42 days YoY)

Key Risks

Memory market downturn with extended inventory correction cycle
Growing Chinese competition and trade restriction impacts
Customer concentration risk with top 3 at 31% of revenue
Technology transition complexity and rising costs

Key Opportunities

AI/ML driving 28% CAGR in HBM memory through 2025
Auto/industrial segments growing 13% with increasing content
DDR5 and 232-layer NAND technology leadership
CXL solutions expanding datacenter TAM

Bottom Line

Micron faces significant near-term challenges as the memory industry enters a deeper cyclical downturn, reflected in deteriorating financial metrics across revenue, margins and cash flows. However, the company's technology leadership, strategic focus on high-value markets, and strong balance sheet position it well for eventual recovery. Supply discipline across the industry will be critical for market stabilization. Key metrics to watch include bit shipment growth, ASP trends, and inventory levels. The growing importance of AI and data center applications provides long-term growth potential despite current headwinds.