Micron Drawing 75% of Revenue From Long-Term Supply Agreements

Perfecting the use of long-term supply agreements with customers is helping Micron Technology navigate the semiconductor shortage better than its peers, said CEO Sanjay Mehrotra on an earnings call Monday for fiscal Q1 ended Dec. 2. Revenue in the quarter of $7.69 billion was down 7% sequentially from Q1, but up 33% from a year earlier, and was near the midpoint of Micron’s Sept. 28 guidance. The stock closed up 10.5% Tuesday at $90.68.

In a bid to maintain “supply continuity,” Micron draws more than 75% of its revenue from “volume-based annual agreements, a significant increase from five years ago when they accounted for around 10%,” said Mehrotra. “On the supplier side, we have entered into strategic agreements to secure supply of certain components that we need to manufacture our products. As a result of these agreements, the current tight supply of these components is expected to gradually improve for us throughout calendar 2022.”

The long-term supply agreements enable Micron to have a “much closer dialogue” with customers “on their planning, their forecast,” allowing Micron in turn “to plan our supply and the mix of supply appropriately,” said Mehrotra. Most of the agreements are “nonbinding in nature, but they do help build greater visibility, greater transparency,” and “over the long haul,” enhanced “trust and accountability,” he said. The agreements are “volume-targeted,” he said, “not generally based on pricing."

Inventory strategies “clearly vary from customer to customer,” said Mehrotra. “Given what the pandemic introduced in terms of supply chain shortages,” some customers are looking at maintaining a “strategically higher level of inventory,” while others “may also be doing it for geopolitical considerations,” he said. Micron doesn’t see customers returning soon to pre-COVID-19 inventory strategies, he said.

Though “some pockets” of customers may be carrying extra inventory, “given the current environment, customer inventory levels are in decent shape,” said Mehrotra. Micron itself is “holding a lot more inventory of raw materials, just to make sure that our supply chain has assuredness with respect to our ability to supply our customers,” he said.

Industry demand for memory and storage is broad and robust, fueled by a “growing diversity of user devices,” said Mehrotra. “Memory and storage revenue has outpaced the rest of the semiconductor industry,” he said. “We expect this trend to continue for years to come,” due to robust adoption of AI, 5G and electric vehicles, he said. “As the supply chain shortages ease during the course of 2022, that will be a tailwind for demand for us.”

Micron’s Q1 mobile revenue jumped more than 25% year over year, as mobile memory and storage demand “continues to strengthen, supported by content-hungry applications and the continued transition from 4G to 5G,” said Mehrotra. Recently introduced 5G phones had 50%-100% more memory content compared with 4G handsets, he said. Sales of 5G smartphones are forecast to exceed 500 million units in calendar 2021, and 700 million units are forecast for 2022, he said. “We expect mobile content to continue increasing as 5G phones benefit from further innovation in 5G-enabled applications.”

Though PC “end demand” remains strong, Micron's revenue in the PC sector declined sequentially “due to the PC production impact from ongoing non-memory component shortages and related customer inventory adjustments” of memory chips, said Mehrotra. “The inventory adjustment at most PC customers is now largely behind us, and we are seeing signs of stabilization in demand.” Micron expects PC unit sales for calendar 2022 to be “in line” with those of 2021, except for a skew toward enterprise PCs, “as companies invest to support hybrid work environments,” he said.