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Micron beats earnings estimates nearly threefold

In the first report from a PC industry notable since Intel's profit warning last week, the direct computer seller reports strong PC sales and earnings per share of 24 cents.

Micron Electronics today posted robust earnings that roughly tripled expectations, a surge primarily caused by sales in its memory division.

For the fourth quarter of its fiscal 2000, ended Aug. 31, Micron, which is mostly known as a PC manufacturer, posted earnings per share of 24 cents, compared with the 9-cents-per-share consensus forecast of analysts polled by First Call/Thomson Financial. Analysts had earlier projected 8 cents per share, then raised their estimate by a penny late last week.

Revenue for the quarter was $500 million, compared with $333 million for the same quarter a year earlier. Net income came in at $23 million, compared with $14 million, or 14 cents per share, a year ago.

The earnings report will likely revive the debate over the health of the PC industry in the wake of Intel's warning that the chipmaker's sales will be lower than expected.

In some ways, Micron's results provide data for both sides of the argument, in what one analyst called an "oddball year." On one hand, Micron saw PC shipments climb 36 percent from the preceding quarter and 29 percent year over year, figures that indicate PC demand remains strong.

"It's been a tough, challenging road to turn the company around, but it's clear we've made definite progress," said Micron chief executive Joel Kocher. "All three areas (PCs, Web hosting and memory) did grow double digits in the percentage from the third quarter."

Sales, he added, will be solid in the foreseeable future. "Our business, just looking at the numbers, bears it out."

On the other hand, price erosion weakened the potential effect of the growth. Micron saw revenue from PCs grow by only $14 million, from $270 million to $284 million, a five percent increase from the same period a year ago. Last year's fourth quarter also represented a decline in revenue for Micron from the same quarter a year before.

The lion's share of Micron's revenue gains came from its SpekTec divsion, which sells memory.

Gartner analyst Kevin Knox said Micron's fourth quarter is a good sign. "The PC market is still healthy," he said. "Micron, particularly, hit on a segment that is growing rapidly, which is small business."

Using Micron as a measure of the PC sector's health is a bit tenuous, as the company closed its quarter nearly a month before Intel's profit warning boosted concerns over slowing PC sales growth. But Micron's strong memory sales, along with PC stability, is a significant sign of sales resiliency, said PC Data analyst Stephen Baker.

"We haven't seen any indications third quarter was any different than anyone expected it was," he said. "We also don't think there's any reason to think fourth quarter won't be good as well."

PC Data projects retail PC sales growth of between15 percent to 20 percent during the fourth quarter.

Other analysts, however, have noted that demand in Europe, a market Micron largely does not participate in, has been lagging, while contract manufacturers have complained of lower-than-expected orders.

Two years ago, about half of Micron's business came from consumer PC sales, Kocher said. "We made a decision that long term we could not compete effectively direct to consumers."

Since partnering with the retailer Best Buy, through which Micron sells systems on store shelves as well as build-to-order kiosks, PC sales have improved. The fourth quarter was the first time in 11 quarters that Micron has posted year-on-year sales gains.

For all of fiscal 2000, Micron posted net sales of $1.56 billion, up from $1.43 billion for fiscal 1999. Excluding $10 million in third-quarter special charges, net income rose to $48 million, or 50 cents a share, compared with $37 million, or 38 cents, for fiscal 1999. Including special charges, Micron posted net sales of $42 million, or 43 cents per share, for fiscal 2000, compared with analyst projections of 35 cents a share.

PC sales for the fourth quarter were the strongest in the company's history, largely spurred by Micron's VelocityNet Direct retail business. While the Nampa, Idaho-based PC maker historically has sold PCs directly, it started selling systems through retail kiosks earlier this year. Micron offers PCs through Best Buy, Staples and RadioShack of Canada. The retail sales business jumped 83 percent from the third quarter to the fourth.

The PC business posted net sales of $284 million, up from $270 million for the year-ago quarter and $246 million for the third quarter. While retail operations spurred growth, they also tapped margins because of the greater cost associated with store sales than with direct sales. Gross margins dropped to 11.1 percent from 13.1 percent in the preceding quarter and 17.6 percent a year earlier.

Micron's HostPro business, which offers Internet access and Web hosting services, rose 63 percent from the third quarter to the fourth. Net sales increased 12.2 percent to $11.4 million between those two periods.

The hosting operation had 931 co-located or dedicated servers at the end of the fourth quarter, with hosting accounts up 11 percent and hosting revenue up 17 percent from the third quarter.

Micron's SpecTek operation, which markets DRAM , posted record net sales of $205 million, up from $63 million a year earlier and $114 million during the third quarter. While the average selling price of memory fell 28 percent, a 351 percent increase in megabits shipped boosted gains. Still, SpecTek gross margins fell to 35.50 percent from 46 percent a year earlier and 37 percent in the third quarter.

Kocher said that Micron's memory business, which he described as the "resident cash cow," benefited "from a very dramatic upscale in DRAMs in the last six months."