He Said, She Said: Someone in the Chipmaker Chain is Crazy

Something's wrong here. According to Lam Research (LRCX):

Memory segment customers in the quarter represented 78% of total systems shipments with the NAND component accounting for approximately 25% of total memory.

(Excerpt from full LRCX conference call transcript)

Presumably one of those "memory segment customers" is Micron (MU). You remember Micron - the company that said last week:

For the quarter, the company recorded a net loss of $52 million, or $.07 per diluted share. For the six months, the company recorded net income of $0.08 per share on net sales of $2.96 billion.

The major factors affecting this quarter’s results were: significant average selling price erosion across DRAM and NAND memory; sales volumes in specialty DRAM and image sensors down, largely as a result of the widely acknowledged slowdown in sales of handsets; and the company achieved noticeable cost reductions for its DRAM and NAND devices.

(Excerpt from full MU conference call transcript)

It sounds like the last thing Micron needs is more equipment to build more memory chips to sell at an even larger loss. But then again, nothing should surprise us when it comes to Micron. Furthermore, we have noted that other memory makers are in the same boat, and a bottom Micron hoped for is proving elusive. The company built too much capacity too soon, and said as much on their conference call:

Two-thirds of our forecast capital spending for ’07 occurred in the first-half of the year, and with incremental equipment financing placed in the second quarter, our debt-to-equity ratio remains quite low at 10%.

(Excerpt from full MU conference call transcript)

So with two thirds of the spending out of the way in their first half, one has to question the rally in Lam, which is based in part on their guidance for continued strength:

More specifically relative to the memory market, we continue to expect approximately $17 billion of spending for wafer fab equipment with about two-thirds of that targeted towards DRAM capacity expansion and one-third toward NAND Flash which represents approximately a 20% increase in DRAM investment and a 15% decline in NAND Flash investment year over year. The current pricing environment for DRAM and NAND Flash is generally consistent with our expectations of how industry supply/demand dynamics will play out over the calendar year.

(Excerpt from full LRCX conference call transcript)

More DRAM? When Micron is bleeding earnings and already spent two thirds of its allotment for the year? Are they nuts? In the call, that very question was asked (albeit in a more diplomatic fashion):

Jim Covello - Goldman Sachs

On the memory spending, Steve, do you think the DRAM guys are going to continue if they fall into significant loss-making in Q2 and Q3?

Steve Newberry

Well, that's a good question. I think historically you would say that they would most likely not continue to invest at necessarily the same pace that they're planning to, but the reality is I am not the best person to ask that question.

So historically they shouldn't expect more orders, but they do anyway because their customers are nuts! At least, that's the way we read it.

Long story short - between the semiconductor manufacturers, their suppliers, the investors who continue to pay up for their shares and ourselves - someone is crazy. And if it's us, we say it takes one to know one.

Comments

[Sr. Pessimist:]

NAND is huge. Believe me.

2007 Apr 14 03:26 PM

[William Trent1:]

I believe you. Unfortunately, right now the supply of it is huger.

2007 Apr 14 03:47 PM