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Is Micron Confirming Bull Market in Memory Industry?


At the annual technology conference, the biggest clue came from a Windows 7 discussion.

Credit Suisse just held their annual technology conference in Arizona this week and it provided an opportunity to listen to a number of companies pontificate on demand as they see it. One of those I was most interested in hearing from was Micron (MU), given my position in the stock.

Back in October I highlighted the structural changes that have taken place in the memory industry (DRAM and NAND flash). Those changes led me to the conclusion that there would be a bull market for memory well into 2010. With that as background, Micron's comments at the conference only solidified that belief.

The most interesting factoid came from a discussion of Microsoft (MSFT) Windows 7. Everyone remotely associated with the personal computer-supply chain has been hoping that Win 7 would be the catalyst that starts a corporate hardware refresh cycle in 2010. That may or may not happen, but what Credit Suisse and Micron are both seeing is a disproportionate shift of Win 7 sales to the 64-bit version (Windows 7 Ultimate) of the product. Micron indicated that its customers are seeing as much as a 3-to-1 shift in favor of Ultimate.

Who knows if that skew is broad-based or will last but what it means from Micron's perspective is more DRAM per box shipped. Today, the average per box is in the 2.2GB-2.3GB range whereas the recommended minimum for Ultimate is 4.0GB. That's a big jump if the trend continues.

Another area that has bucked the trend for Micron has been pricing. Their contracts were up slightly in the second half of November and are expected to be up again in the first half of December. Normally the seasonal peak in pricing would be in mid-November and you have seen that in data reported by DRAMeXchange.

Micron has seen some improvement in server and networking demand (year-end budget flush?) similar to what Cisco (CSCO) commented on last month. The company also suggested that they expect that strength to continue into calendar first quarter, based upon customer comments. The improvement seems to have received added confirmation last night in Marvell's (MRVL) results. Marvell's HDD controller and networking businesses experienced very strong demand relative to expectations.

Unlike its competitors, Micron has a much higher exposure to the server industry (~30% of DRAM revenue). Consequently, the higher margins on these parts will be quite welcome to investors.

The proponents of the "corporate refresh cycle" can't be dismissed out of hand. If there's one thing we've all learned is that the older your PC gets, the more time it takes maintaining it. Dell (DELL) and others have argued for some time that the age of the corporate installed base of PCs is well above the norm at this point. More importantly, it's running an eight-year-old operating system (Windows XP) that has been patched to death.

The economics of this problem really never change; at some point it's cheaper to buy a new box than to keep fixing issues with the old ones. Goldman Sachs just bumped up its forecast for PC unit growth next year in part on the assumption of a corporate refresh commencing. Obviously, if they're correct, it's good news for the Dells and Hewlett-Packards (HPQ) of this world, but it's an even bigger positive for Micron, particularly if DRAM per box continues to rise.

Improved pricing and demand should easily translate into much higher cash from operations in fiscal year 2010. Unlike the bulk of its competition, Micron generated $1.2 billion in cash last fiscal year (ending August). With only a limited need for capital expenditures, expect the company to start paying down debt. Initial targets are expected to be in the $450 million range in the current year. Micron currently has about $3.0 billion in debt so this will represents about 15% of total. Hopefully, it's only the first haircut.

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