Dave, another bit of smoke and mirrors on the earnings release.
Let's start right at the top. Literally. Literally the very
top line of the consolidated financial statements accompanying the
earnings PR 12-23-98.
I've been sitting here looking over Niles' report. There's a
discrepancy between what he attributes to semiconductor memory
products and what shows up on the 10-Q. $18.6 million to be exact.
So, is it that Niles is THAT bad? No.
Look at what he was given to work with.
From the data given on the earnings release:
SELECTED RESULTS OF OPERATIONS
QUARTER ENDED
12/3/98 11/27/97 9/3/98
Net sales (1)
Semiconductor memory products $428.1 $440.1 $372.4
Personal computer systems 352.1 445.1 307.9
Other 13.4 72.1 11.8
Total net sales 793.6 957.3 692.1
That footnote (1) reads as follows:
(1) The value of the Company's semiconductor memory products
included in PC systems and other products is included under
"Semiconductor memory products." "Other" revenue in the first quarter
of 1998 includes $60.6 million in revenue from contract
manufacturing and module assembly services, which was sold in the
second quarter of fiscal 1998.
On the surface, you'd think the first sentence is far more important
than the second in answering the question of the discrepancy. It's
not. In some respects, we get more out of the 2nd.
From the 10-Q:
SALES First Quarter
1999 1998
Net sales % Net sales %
--------- ------ --------- ------
Semiconductor memory products $ 409.5 51.6 $ 440.1 46.0
PC systems 352.1 44.4 445.1 46.5
Other 32.0 4.0 72.1 7.5
--------- ------ --------- ------
Total net sales $ 793.6 100.0 $ 957.3 100.
Net sales of "Semiconductor memory products" include sales of
$10.3 million and $12.4 million in the first quarters of 1999 and
1998, respectively, of sales of MTI semiconductor memory products
incorporated in MEI PC products. "Other " net sales for the first
quarter of 1999 include revenue of $18.6 million for test and
assembly services performed by the Company.
How about that, the discrepancy between the consolidated financial
statements accompanying the earnings release showing $428.1 mil in
net sales of "semiconductor memory products" and the 10-Q showing
$409.5 mil in sales "semiconductor memory products" for just happens
to be exactly $18.6 mil.
The 10-Q just happens to make a reference to $18.6 mil. for test and
assembly services performed by MU classified as "other".
So, when you note that $18.6 mil. has suddenly disappeared from the
$428.1 mil. in sales of "semiconductor memory products" (as given on
the earnings release) only to show up as "other" on the 10-Q AND we
get this additional clarification right underneath it that, oh by the
way, we just happened to have $18.6 mil. "for test and assembly
services", what other reasonable conclusion is there other than to
say that $18.6 million "for test and assembly services" were part of
the $428.1 in sales shown for "semiconductor memory products" in
the earnings release data?
So, for the purpose of the 10-Q Micron chose to take the $18.6
million classified under "semiconductor memory products" in the
earnings press release and classify it under "other".
Interesting.
Two directions to take it from there.
The first would be that since Micron themselves has chosen to take
the effort to specify the fact that $60.6 million in revenue from
contract manufacturing and module assembly services from the
contract manufacturing ops. 1Q'98 falls into "other", they do
understand some distinction between such things as "module assembly
services" (and let's just note that last word - SERVICES) are not to
be confused with "semiconductor memory products".
And yet in comparing the 10-Q to the earnings release
we see that a portion of revenues classified on the earnings release
as "semiconductor memory products" certainly appear to have included
"revenue of $18.6 million for test and assembly services performed by
the Company". I don't think there's any other way to read it based on the data.
So, I ask you, why would "module assembly services" (performed in
1Q'98) and "test and assembly services" (performed in 1Q'99) deserve
entirely different treatment on the same page of
financial data two columns away from each other?
On the 12-23-98 doc. module assembly services performed by the
contract ops. are treated as "other". Yet, "test and assembly
services" seem to have fallen under "semiconductor memory
products".
The fact that one may have been done by their contract mfg. ops. and
the other by MU, IMHO that's irrelevant in terms of the
classification. This is a consolidated financial statement. Either
they are "semiconductor memory products" or they aren't, right?
And it seems that whoever prepared the 10-Q would seem to not only
agree, but would also seem to have concluded that they were not
"semiconductor memory products", right? The number did move.
In fact, let's throw out this point about them having made a somewhat
similar distinction on the same document.
Why does it appear that $18.6 mil. in test and assembly services were
considered sales of "semiconductor memory products" for the purposes
of the earnings release?
Were they really "semiconductor memory products"?
And it seems that whoever prepared the 10-Q would seem to have
concluded that for the purposes of that federal filing - "no." Right?
The number did move. The number was exactly $18.6 mil. And $18.6 mil.
was exactly the amount they stated was for test and assembly services
under "other", a line that just happens to be exactly $18.6 mil.
heavier in the 10-Q than in the earnings release.
Now perhaps we will never know the EXACT nature of these "test and
assembly services" for 1Q'99, but let's give it a shot.
Who were they for?
It wasn't the contract ops. doing it for a third party; they were
sold.
So, are we to understand that Micron has a bunch of engineers in a
Winebago who traverse the country (or other countries, perhaps)
looking to perform "test and assembly services". A sort of Micron-
subsidized "test and assembly" Good Samaritan Squad?
No.
Is Micron out there performing "test and assembly services" for their
competitors?
Unlikely.
Who would these "test and assembly services" have been performed for?
I believe the following line from the 10-Q sheds some light on the
subject:
Product purchases from the JVs aggregated $46.1 million in the
first quarter of 1999. The Company performed assembly/test services
for the JVs totaling $12.9 million for the first quarter of 1999.
I think it's reasonable to infer on that basis alone that the $12.9
million stated here as "assembly test services for the JV's" is some
portion of the "revenue of $18.6 million for test and assembly
services performed by the Company".
However, let's look at it another way.
If you go back to the financial statement on the earnings release,
you will see "other" shows $13.4 million 1Q'99, $11.8 million 4Q'98
and $11.5 mil. 1Q'98 (after taking out the $60.2 for the contract
ops. 1Q'98).
They didn't have the JV's in 4Q'98 or 1Q'98, yet $11.5 and $11.8
represents some unspecified activity. I'd argue the $13.4 mil.
represents the same type of activity and more importanly, the same
general revenue level.
A noticeable pop comes on the 10-Q, when $18.6 mil. shows up under
"other", causing it to jump from the range of $11.5-$13.4 mil. to $32
mil. It is stated in another part of the documents that $12.9 mil.
went to test/assembly or the JV's. This was the first Q they had the
JV's. So, given what we have to work with, I don't think it's a
reasonable inference.
If this is line of reasoning is correct (I think it certainly makes
sense, but only MU and its auditors would know for certain), if you
are willing to believe based on the above that there seems to be a
strong likelihood that the shifting $18.6 million between the 12-23-98
document and the 10-Q includes $12.9 mil. in test/assembly services
performed for the JV's..
...then go back and look at the top line number on the consolidated
financial statements accompanying the earnings release - $428.1 mil.
net sales "semiconductor memory products".
...how sound is that number?
How sound is that when you consider how the JV's are structured? MU
BUYS their output.
Does that help answer the question as to how two separate analysts
(Dan Niles and Tom Kurlak), both with two diametrically opposed
opinions on the stock, can put out research showing that bit
shipments grew rather than declined?
I believe it does.
Does that explain how Dan Niles can states $428 mil. as
"semiconductor revenues" and the 10-Q can state them as $409.5 mil?
I believe it does.
But I'm still not a fan of the guy <g>
Good trading,
Tom |
