Micron’s Earnings: Weak Memory Demand & Low Prices Sting Stock

In addition to persistent weakness in the memory market, the temporary internal operation disruptions witnessed by Micron Technology (NASDAQ:MU) led to a 12% annual decline in its revenue in Q1 2013. Declining selling prices combined with the increasing investments in developing new technologies have put a downward pressure on Micron’s bottom line. While its gross profits increased marginally after declining for five consecutive quarters, Micron’s net operating loss expanded to $157 million compared to $82 million a year ago.

Driven by decline in DRAM and NAND product sales, Micron suffered a 7% sequential decline in its Q1 revenues. While the company remains cautious on the short term outlook, the improving demand-supply balance in the memory market provide promising long-term growth prospects. However, the low selling prices remains a cause of concern for the company. While Micron claims that memory product prices stabilized during the end of Q1, it feels it might be a bit early to forecast an upward trend in prices.

See our complete analysis for Micron here

Shift From PCs To Higher Growth Segments

While revenue from sale of DRAM products declined by 11%, the NAND revenue marked a 4% sequential decline. Micron did not divulge detailed information about the manufacturing issues in its Q1 earnings call transcript. The company blames a number of internal and external factors which temporarily disrupted its front-end and back-end manufacturing process. However, Micron claims that it has overcome all supply chain challenges and does not anticipate the problem to persist this quarter.

The ongoing consolidation in the memory market has taken some excess capacity off the market. Additionally, we feel that the improvement in macro economic conditions will help fuel demand that will reduce the huge demand-supply gap in the industry. Shifting industry capacity away from PCs to higher growth segments, such as mobile and servers, is another favorable trend which would drive future demand for memory products.

PCs have traditionally been the major buyers of DRAM and a slowdown in the PC market has considerably impacted the demand for DRAM products. While introduction of ultrathin and light notebooks and the Windows 8 launch could stimulate future demand, Micron intends to shift its focus on specialty markets such as server, networking, graphics and consumer devices.

With the slowdown in growth in the PC market and the rapid rise in global shipments for mobile devices, smartphones and tablets will be the key growth drivers in the semiconductor industry. The growing demand for mobile devices will further lead to an increase in flash memory content for such devices, fueling growth in NAND and mobile DRAM sales.

The industry is witnessing strong NAND content growth across devices with the average content in USB flash drives expected to grow at almost 50%, close to the historical growth seen in these segments.

According to iSuppli, the tablet consumption of NAND flash is estimated at 2.3 billion gigabytes (Gb) in 2011, an increase of 4 times from 476.8 million Gb in 2010, and NAND shipments for tablets are forecast to reach 12.3 billion Gb by 2014. ^[1] We estimate the total NAND flash GB sold worldwide to cross 750 billion by the end of our forecast period.

Stabilizing Selling Prices For Memory Products

The 5% increase in the average selling price of NAND Flash in Q1 2013 offset the 9% volume decline in NAND. On the other hand, the DRAM average selling prices remained low with a sequential decline of 11%. While Micron claims that the overall memory product prices stabilized at the end of the quarter, and the trend has continued so far this quarter, it might be too soon to forecast an upward trend in prices.

While the increase in NAND prices came on account of higher sales in the premium segments, persistent weakness in the PC market failed to uplift the DRAM prices despite growing demand for mobile DRAM products.

Micron’s CEO expects the rapid decline in NAND prices to ease down in 2013 as the industry witnesses increasing market consolidation and significant production cuts in the current year. With the robust growth rate in mobile devices as well as the strong NAND content growth across all devices, the future prospects of the global NAND flash market looks promising. However, we believe that intense competition amid the soft macro environment will continue to put a downward pressure on prices for the rest of our forecast period.

Q2 2013 Outlook

– Manufacturing issues have been dealt with and will not impact the current quarter earnings.

– DRAM and Trade NAND bit growth in double digits.

– ASP for Trade NAND to decline by single digit rate

– DRAM ASP to decline by high double digits rate.

– NOR revenue in Q2 2013 is expected to decline 10% sequentially.

– SG&A expense to be between $135-$145 million.

– R&D expense expected to be between $220-$230 million

– Total Capex for 2013 to be around $1.6-$1.9 billion

We are in the process of updating our price estimate of $4.65 for Micron Technology.

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1. NAND Flash Consumption in Tablets to Rise Nearly 400 Percent in 2011, iSuppli Press Release, February 11, 2011 [↩]