Written by Guest Contributor, Shane Neagle

While Micron Technology (NASDAQ: MU) reported adjusted revenue for its fourth fiscal quarter that beat the average analyst estimate, the company’s soft profit forecast for this quarter is what sent shares 5% lower in early Thursday trade.

Micron’s FQ4 report points toward a slower-than-previously-expected recovery in gross margins and profitability. Investors will now be looking towards 2024, where the memory industry is expected to show more significant signs of recovery. President and CEO Sanjay Mehrotra commented that smartphone and PC markets were “now at normal levels.”

Micron specializes in the production of DRAM and NAND memory chips. DRAM, which stands for dynamic random access memory, is the type of memory commonly utilized in PCs and data center servers. In contrast, NAND chips are flash memory chips employed in smaller devices such as smartphones and USB drives.

How Did Micron Perform in FQ4?

The company’s revenue plunged as much as 40% year-over-year as the memory industry undergoes one of the sharpest slowdowns in recent memory. Still, the FQ4 revenue of $4.01 billion came in ahead of the expected $3.93 billion. For the same period last year, Micron reported $6.64 billion in revenue.

On the bottom line, the company reported a loss per share of $1.07, which is in stark contrast to a profit per share of $1.45 reported for the same period last year. Analysts were expecting a loss per share of $1.18.

“During fiscal 2023, amid a challenging environment for the memory and storage industry, Micron sustained technology leadership, launched a significant number of leading-edge products, and took decisive actions on supply and cost,” said Mehrotra. 

Micron said its adjusted FQ4 losses amounted to $1.21 billion as the chipmaker managed to generate just $249 million from operations, representing a mouthwatering 93% year-over-year decline. On the other hand, the company’s adjusted operating expenses stood at $842 million.

Adjusted gross margin came in at negative 9.1%, compared to the negative 16.1% reported for the last quarter and +40.3% reported for the same period last year. 

For this quarter, the company guided for Q1 revenue in the range of $4.2-4.6 billion, which was better than the expected $4.21 billion. However, Micron foresees an adjusted loss per share of $1.07, up or down 7 cents, which is significantly higher than the expected loss per share of 88 cents.

“Our 2023 performance positions us well as a market recovery takes shape in 2024, driven by increasing demand and disciplined supply. We look forward to record industry TAM revenue in 2025 as AI proliferates from the data center to the edge,” Mehrotra added.

China Still Weighing on Results

On the margins front, Micron foresees a further contraction and sees the adjusted gross margin coming in between -2% and -6%. Speaking on the earnings call, Micron Chief Financial Officer Mark Murphy said this guidance is based on the assumption of no additional inventory write-down because of memory-chip pricing.

Back in March this year, Micron reported its largest quarterly loss on record. The company wrote off more than $1.4 billion in inventory as its sales were halved and the memory-chip market experienced a significant downturn. 

Moreover, Micron executives said that the company is still feeling headwinds from China’s cybersecurity review of its products. In June, the company issued a warning regarding a more substantial impact on its revenue due to a Chinese ban on the sale of its chips to important domestic industries. 

Micron projected that approximately half of its revenue from China-based companies is at risk, which corresponds to a low-double-digit percentage of its total revenue. Previously, the company had indicated a potential impact in the range of low-single to high-single-digit percentage.

Micron Technology became the initial U.S. chipmaker to be targeted by China. This occurred in response to Washington’s implementation of export controls on specific American components and chip making tools, with these measures put in place to prevent them from being used to enhance China’s military capabilities.

On a more positive note, the company’s executives were more positive about data center sales in 2024 as Micron races to become more competitive in this sector amid the ongoing AI frenzy. According to Mehrotra, Micron anticipates revenue from high-bandwidth memory chips designed for data centers to commence in early 2024.

The chief executive also mentioned that the company is “very much still on track for meaningful revenue, several hundred million dollars in our fiscal year 2024.” His comments come after Micron and Nvidia announced in July that the latter was incorporating the former’s HBM3 Gen2 high-bandwidth memory 1-beta DRAM chips into its AI data center products. 

The ongoing AI boom throughout the year has led to increased demand for hardware in data centers, particularly those tasked with handling the substantial data and throughput demands of AI models like OpenAI’s ChatGPT, supported by Microsoft Corp.

Following the release of the FQ4 report and guidance for this quarter, Goldman Sachs analysts weighed in positively on Micron.

“Our constructive thesis on the stock predicated on improving demand and supply discipline (i.e. reduction in Wafer Fab Equipment spending and wafer starts) remains unchanged and, as such, we would view any pullback in the stock as an opportunity to add to positions,” analysts wrote in a report.

Summary

While Micron beat analyst expectations for the fourth fiscal quarter, the company’s mixed FQ1 guidance sent shares about 5% lower. The company said it is still feeling headwinds from China after their cybersecurity agency initiated a review of Micron’s products, while the PC and smartphone markets are finally stabilizing. Even more positively, Micron expects to generate its first revenue from high-end AI memory chips in early 2024.