Remembering the Memory Maker Memos

 |  Includes: INTC, LRCX, MU, NOK, STM, WDC
by: William Trent, CFA

Last year the companies in the memory segment of the semiconductor industry were working flat out in anticipation of rising demand on the heels of Microsoft's Windows Vista release. At one point last year they accounted for a significant portion of the investments in new semiconductor equipment as well. With the memory situation now more generally recognized as a glut and more rational investment plans being put into place, some memory prices are actually rising. I decided to take a look at the recent conference calls for some of the most exposed companies to see if there is anything noteworthy to report.

STMicroelectronics (NYSE:STM) is the third-largest supplier of NOR flash memory and is combining its memory business with that of Intel (NASDAQ:INTC) into a joint venture to be known as Numonyx. Flash was not their strongest segment, partly due to temporary customer issues.

Carlo Ferro

Good afternoon, everybody. This is not frankly a particular quarter for pricing pressure on flash when including both NOR and NAND. We’re used to this kind of pressure, which is in the mid-single-digit range. What maybe is somehow peculiar, has been somehow peculiar is that the price pressure on NOR has been somehow higher than price pressure on NAND.

Carlo Bozotti

Yes, but the major issue in Q2 on flash was volume and specifically in the wireless and of course a specific customer where our presence is very important and I think that the major issue that we had was the lack of volume at this customer, or at that customer.

(Excerpt from full STM conference call transcript)

Nokia (NYSE:NOK) is the largest customer for STMicroelectronics, accounting for about 20% of sales. Last week Nokia announced they would be sending even more business to STM, and STM shares rose on the announcement. I think STM has generally been making the right moves.

SanDisk (SNDK) is one of the world’s largest suppliers of flash-based data storage products for the consumer, mobile communications, and industrial markets. SanDisk is hopeful the industry has hit bottom for this cycle.

The second quarter started under very difficult market conditions but improved markedly as the quarter progressed. April and May were characterized by excess supply, but July is coming to balance and during the distinct possibility the demand for high capacity flash products may outstrip industry wide supply in the second half of this year.

(Excerpt from full SNDK conference call transcript)

Micron (NASDAQ:MU) did not sound quite as confident - call it cautious optimism. Micron is a leading manufacturer of both DRAM and flash memory.

The major factors affecting this quarter's results were, one: significant growth in industry memory supply, which caused average selling price erosion across DRAM and NAND memory; two: noteworthy cost per megabit reductions achieved by the company for its DRAM and NAND devices, which could not keep pace with ASP declines, and three: progress made on reductions and overhead expenditures...

Despite the demand strength and encouraging signs pointing to stronger demand in the second half of the calendar year, the memory business in particular has been under profitability pressure due to persistent oversupply. Moving forward, I am optimistic about a more favorable supply/demand balance as we see the impacts of memory content expansion, new end product introductions, seasonal demand upticks, and a slowing industry-wide output growth rate.

(Excerpt from full MU conference call transcript)

Finally, I turn to one of the companies most at risk should capital spending subside - Lam Research (NASDAQ:LRCX). They sound optimistic, but I'm not so sure.

We expect that foundry shipments for Lam will be weak in the September quarter as a function of the pull-ins to June and we expect that shipments in foundry will strengthen in the December quarter. Shipments for Logic, Flash other and MPU are expected to be flat in the second half compared with the first half.

Turning to 2008, as we discussed at our Analyst Meeting last week, we believe that 50% CapEx intensity and memory is not sustainable existing 2007, and in fact the rated capacity additions has already begun to slow. The depth and duration of this reduction in capacity additions will be dictated by the actual demand environment as we go forward in the next 6 to 12 months.

Demand trends to watch here included adoption rates of major products such Vista and the iPhone, as well as, the overall demand for the broad range of other semiconductor intensive consumer digital electronic products.

As we move into 2008 it will also be important to watch the conversion of 200 millimeter memory production to 300 millimeter as memory manufactures ability to generate acceptable profits of 200 millimeter will force additional production to move to 300 millimeter.

Based on current industry dynamics, our very early assessment for calendar year 2008 is that overall wafer side equipment spending is likely to be flattish with memory spending to be down potentially 10% to 15%, and an expectation that foundry logic/other and MPU spending will increase sufficiently to offset the decline in memory spending.

(Excerpt from full LRCX conference call transcript)

Lam got 73% of its revenue from the sale of equipment to memory chip makers in the last quarter. If three quarters of the business declines 10% to 15%, for the overall business to remain flat the remainder would have to grow from 27% to 39%. Semiconductor sales growth has averaged high single-digit, and most forecasts I have seen for semi equipment over the next two years are in that range as well. I think the guidance is too optimistic.

Disclosure: William Trent owns put options against shares of Lam Research (LRCX) and has a short position in put options related to the Semiconductor HOLDRS (NYSEARCA:SMH) ETF.