Analysis: Micron cuts costs amid ongoing crises
It announced a 20-percent slash in salaries for top executives. As expected, the company also reduced its capital expenditure plans for fiscal 2009, claiming it would spend from $1 billion to $1.3 billion, down from a past budget of $1.5 billion to $2 billion.
The $1.6 billion net loss for fiscal 2008 came on revenue of $5.8 billion, up from $5.7 billion in fiscal 2007, when the company posted a loss of $320 million. Micron posted a fiscal Q4 net loss of $344 million, more than twice the $158 million loss posted in the same period of 2007. Revenues from DRAM and NAND flash products declined sequentially as DRAM bit volume slipped and NAND average selling price (ASP) declines of about 20 percent offset production cost reductions of about 15 percent.
The results disappointed Wall Street, which had expected a smaller loss for the quarter.
Micron claimed progress on cost reductions, but attributed the losses to market conditions. The chip memory sector remains mired in a prolonged downturn, with ASPs for both DRAM and NAND flash memory parts decreasing rapidly. Analysts had been making growth projection for NAND before the market collapsed in 2H of the year, while spot pricing for DRAMs hit a 52-week low during mid-September.
Weak DRAM sales
Micron said DRAM ASPs were relatively flat during the quarter that ended Aug. 28, and NAND ASPs slid to about 20 percent. "Since the quarter closed, NAND ASPs are down 30 to 35 percent and DRAM ASPs decrease by 15 to 20 percent," executives said.
"Because of a sharp reduction in ASPs during the last half of the quarter, Micron noted down its memory inventory by $205 million to bring it in line with estimated market value," said Ronald Foster, chief financial officer, Micron.
Analysts show bleak picture of the market. Gartner Inc. forecasts the overall chip memory market to fall by 6.3 percent this year, with NAND revenue down 10.1 percent. IC Insights Inc. sees DRAM and NAND revenue declines of 4 percent and 14 percent, respectively, in 2008.
Making things worse for Micron, demand for PCs, which had remained steady throughout the year despite economic uncertainty, appears to be waning. Dean McCarron, principal of Mercury Research, is anticipating an "unseasonable" PC growth from 0 to 5 percent for Q4. The PC market is Micron's biggest overall business segment.
During the analyst conference call after the financial announcement, Mark Adams, VP sales, Micron, said desktop PC sales show some signs of deteriorating demand as the holidays are nearing, but the notebook segment continues to be stable.
Executives said they are anticipating softer holiday season PC demand than they did originally. Micron had expected modest PC growth of up to 10 percent for the calendar Q4, but now believes demand will be flat, give or take one or two percent.
"PC demand has really gone down in the past month," said Steve Appleton, chairman and CEO, Micron. "We don't know if that's going to be sustained, but clearly I think the PCs OEMs felt like they had enough inventory risk and didn't want to carry more inventory as they move into the holiday season, figuring it would likely be weak," he added.
He noted that he was unaware if retailers would offer the cut-rate prices on PCs that have been seen in past "Black Friday" sales leading into the holiday season. "I'm not sure the price will be a useful tool to drive added unit sales and retailers may choose to play a margin game coming into the holidays," Appleton said.
Following the analyst call, Doug Freedman, who follows Micron for American Technology Research, said he was concerned about executive comments indicating that declining prices may not drive bit growth. "It's a very concerning metric," Freedman said.
Reduced overall production
Micron did not comment on the speculation that it may in all or part of troubled German DRAM supplier Qimonda AG. But Appleton confirmed that industry consolidation and DRAM production reductions such as last month's news that Hynix Semiconductor Inc. would shutter 200mm fabs and reduce overall DRAM production capacity bodes well for the industry.
He said he expects further consolidation and capacity reduction in the next two to three months. Micron executives noted that the current market environment is putting huge pressure on some of players in the space.
"I haven't seen capacity come off line in this short period at the rate we are seeing these announcements right now and at the time we are likely to continue seeing them, maybe in my history of being in this business," he added, who has been with Micron since 1983. "There are some pretty dramatic changes going on," he noted.
Appleton said most people expect DRAM production bit growth of only 35 to 40 percent next year, which would be low by historical standards and the lowest in the industry since 2003, according to data given by IC Insights. DRAM bit production increased by 83 percent in 2007, based on IC Insights, which forecasts bit volume to grow 58 percent this year.
Micron said it expected its partners to contribute about 15 percent of the $1 billion to $1.3 billion capex for 2009. "About 15 percent of the 2009 capex budget will be allocated to Micron's NAND flash joint venture with Intel Corp., IM Flash Technologies LLC," Micron said, with about 30 percent going toward subsidiary Tech Semiconductor Singapore Pte Ltd and 45 percent going toward Micron's other activities. "The planned IM Flash fab in Singapore remains delayed and will not be equipped during 2009," it added.
Micron noted that the company and its partners spent a total of $2.9 billion on capital expenditures in fiscal 2008, and $4.1 billion in fiscal 2007.
It claimed that it remains on the hook for $466 million in capital contributions to MeiYa Technology Corp., its joint venture with Taiwan's Nanya Technology Corp. "Market dynamics will show when those investments occur," the company said.
"While revenue from Micron's NAND and DRAM products declined sequentially, sales of CMOS image sensors in the fiscal Q4 increased slightly and represented 12 percent of the company's total sales for the quarter," Micron said. "The company's CMOS image sensor unit, popularly known as Aptina, will begin operating as a wholly owned Micron subsidiary as of Oct. 3," it added. Micron intends to look for a private equity deal to spin the unit off as a public company.
Adam said Micron continues to see growing demand for its more expensive DDR2 SDRAM products and expects wide adoption across computing platforms through the end of the year and 2009.
- Dylan McGrath