Micron Technology Inc. reports worst quarter in its history
Micron Technology Inc. has just announced its worst quarter in its history, recording more than $2 billion in losses in three months and its worst gross margin since the dot-com bust. However, when the extended tradingSponsored Product session ended on Tuesday, Micron’s shares were up 1.2%. So, what happened?
Could Micron’s bad quarter be a good sign for the future?
One possibility was pointed out by Citi Research analyst Christopher Danely ahead of the earnings report. He noted that the last time Micron’s gross margin was this bad, the chip maker spent over $1.30 for every $1 worth of product it sold in the most recent quarter, and it marked the bottom of a similar swoon during the 2008-’09 financial crisis. The horrible numbers suggest that this could be the bottom of the cycle again.
Micron executives agreed with this message during discussions with analysts. Micron CEO Sanjay Mehrotra stated that inventory issues, which have resulted in electronics manufacturers and other tech companies stopping to buy, had reached a peak in the quarter. The company took a $1.43 billion write-down on inventory and predicted a further $500 million needed to be written off in the current quarter.
Mehrotra also said that customer inventories were improving, and the volume of shipments of DRAM (dynamic random access memory) and NAND (flash) was expected to continue to increase on a sequential basis from now on. He added that he expected revenue growth again in the next fiscal quarter and that customer inventories should reach “relatively healthy levels” by the end of the calendar year. Market conditions remain “extremely challenging,” but Micron expects DRAM and bit shipments to continue to increase, and the supply-demand balance to gradually improve for the rest of this calendar year.
Despite the company’s optimism, some investors have voiced their skepticism. Fred Hickey, editor of the High Tech Strategist, noted that semiconductor-industry research company in Taiwan called TrendForce, said average selling prices of DRAM dropped 20% in the first quarter and predicted ASPs would still fall another 10%-15%.
Micron’s third-quarter guidance was not great, as it called for another negative gross margin and continuing losses, even as executives promised a turnaround was coming. The company had previously managed the ups and downs of the semiconductor cycle, but its commentary seems disconnected with its results. Investors are betting that the commentary suggests a strong rebound in the latter half of this year and into next year. However, if Mehrotra and co. are wrong about the bottom of the cycle, they could plunge, and the stock they are currently avoiding will only return in grander fashion.
Why is Micron still manufacturing if they’re writing down large quantities?
The memory-chip maker said on the call that the underutilization of its factories was probably at the lowest levels in company history, prompting one analyst to ask why they were still manufacturing product if they were writing down such large quantities. Micron’s Chief Financial Officer, Mark Murphy, explained that the company minimized the build of some of its products, which they could finish later, so they could maximize the cash benefits of reducing some of its manufacturing.
Conclusion
Micron’s announcement shows that market conditions are still challenging, and semiconductor prices are decreasing. Despite the bad quarterly news, the Micron CEO’s optimism suggests a strong rebound in the latter half of this year and into next year. Micron has managed the ups and downs of the semiconductor cycle before, but if the company’s executives are wrong about the bottom of this cycle, it could plunge. Only time will tell if Micron’s optimism will be founded or misplaced.
