- The Connected Home is necessary to allow consumers to save money and time moving forward.
- Micron has already started "seeing increased DRAM demand in Connected Home segment.".
- Micron's 20nm technology, Inotera acquisition & 3D XPoint will enable it to gain more sales in the Connected Home segment.
The big question in this article hinges on whether or not the Connected Home Segment could be one of Micron Technology's (NASDAQ:MU) next growth frontiers.
"Our Industrial multi-market segment, we’re seeing good design-in activity of our M500 IT industrial SSDs and specialty DRAM. And in the Connected Home segment, we’re seeing increased DRAM demand from key set top box customers in both Asia and North America." - Micron's Second Quarter Fiscal 2016 Financial Results.
The big question stems from Ernie Maddock's (Micron's VP, Finance and CFO) remarks during Micron's Q2 2016 earnings call. He stated that Micron is "seeing increased DRAM demand from key set top box customers in both Asia and North America."
These remarks are critical for Micron because DRAM sales represent 54% of Micron's total revenues as of Q2 2016. The breakdown of DRAM sales are as follows: Mobile was in the low 20% range, the PC segment was in the mid-20% range, the server business was in the low 20% range and specialty DRAM, which includes Networking, Graphics, Auto and other embedded technologies, was in the high 20% range. Therefore, any growth driver for Micron's DRAM is paramount to the companies future.
But what exactly is the Connected Home Segment? Why does it matter? And how does Micron fit into the picture?
A "Connected Home" or a "Smart Home" is a way of providing home owners with comfort, energy efficiency and convenience. This is done by enabling appliances, lighting, heating, computers, air conditioning and others to communicate with one another. Because this is a novel and emerging concept, most homes do not have appliances and systems built into them.
This matters because as homes (people in general) accumulate more electric enabled products in their homes, the need for safety, low operating costs, efficiency and convenience becomes critical.
The connected home promises to bring the same benefits of convenience and savings of time, money and energy that technology has brought to many people for generations. According to a research from McKinsey, there are a lot of factors that indicate that non-users (people without connected devices) are more likely to switch to the connected home concept as shown below. I say this because it is likely to save them money and time. For instance, based on the diagram below, 51% and 41% of people could save money on lights and television/appliances, respectively, by having a connected home.
(Source: McKinsey: Delivering On The Promise Of Connected Homes - Is the market ready to move from niche to mainstream)
As mentioned earlier, DRAM's account for 54% of Micron's total revenues. During Micron's Q2 2016 earnings presentation, the company acknowledged that it has started "seeing increased DRAM demand in Connected Home segment."
Micron's competitive advantage in the DRAM space and in reference to the Connected Home segment will come from its 20-nanometer technology. By producing DRAM's on 20-nanometer nodes, Micron will be able to achieve cost advantages and become more price competitive.
"Internally and from our operations perspective, Micron remains focused on a few key operating priorities. For DRAM, we continue ramping 20-nanometer. This technology node will represent more than 50% of our fab bit output in the current fiscal quarter." - Micron's Second Quarter Fiscal 2016 Financial Results.
But besides producing DRAM on 20-nanometer nodes, Micron will also have more capacity to produce its DRAM by Q2 2016. In December of 2015, Micron acquired Inotera Memories of Taiwan for ~$3.2 billion.
"Today, Micron purchases 100 percent of Inotera's DRAM output, representing approximately 35 percent of Micron's total DRAM production. Inotera is expected to be fully deployed on Micron's leading-edge 20 nanometer technology by the middle of 2016. Inotera had net cash of approximately $0.9 billion U.S dollars as of its latest fiscal quarter ending September 30, 2015." - Micron's press release: Micron Technology Agrees to Acquire Remaining Interest in Inotera Memories of Taiwan.
But the cost synergies from the Inotera acquisition will only start to manifest from Q2 2016 onwards. From Q2 2016 onwards, Micron will have more capacity to produce its DRAM's cheaper. Producing DRAM's on 20nm nodes is advantageous because everything around us is being made smaller. People want more portable phones or laptops. But they want them to be faster, cheaper and more efficient.
Besides the 20nm technology and the synergies from the Inotera acquisition, Micron is also better positioned to benefit from the emergency of the Connected Home because of its breakthrough nonvolatile memory technology - 3D XPoint technology.
"3D XPoint™ technology is an entirely new class of nonvolatile memory that can help turn immense amounts of data into valuable information in real time. With up to 1,000 times lower latency and exponentially greater endurance than NAND, 3D XPoint technology can deliver game-changing performance for big data applications. Its ability to enable high-speed, high-capacity data storage close to the processor creates new possibilities for system architects and promises to enable entirely new applications." - Micron's 3D XPoint Technology.
Big data is useless if you cannot store and make sense out of it. The growth of connected devices and digital services is and will continue to generate massive amounts of data. For this data to be useful, it must be processed, stored and analyzed very quickly. 3D XPoint will help make the data more useful. The value of this information and the ability to store and process it will be of great value moving forward. And Micron 3D XPoint's ability to "enable high-speed, high-capacity data storage" will help turn the immense amount of data generated from connected devices into valuable information "in real time." Thus making the 3D XPoint an invaluable value added proposition for Micron.
Lastly, it is the aggregate of Micron's 20nm technology, the cost synergies and capacity enhancements from Micron's Inotera Memory acquisition and valuable applications of Micron's 3D XPoint to Connected Homes, that makes the Connected Home Micron's potential next growth frontier.