Mellow Micron

The financial markets are scary, and amidst this turbulence, earnings season is under way. Micron (MU) reported a larger-than-expected fourth quarter loss on Wednesday. The company was affected by the oversupply situation in the DRAM and NAND markets. Semiconductor prices continued to plunge and NAND ASP declines outpaced cost reductions; as a result Micron had to write-down its inventory for $205 million. 

Q4 net loss was $344 million or $0.45 per share, down from $158 million, or $0.21 per share last year. Revenue was up slightly y-o-y and down 3% q-o-q to $1.45 billion versus analyst estimates of $1.54 billion. Excluding the $205 million inventory write-down charge and a $70 million benefit for price adjustments for NAND flash memory bought in prior periods, net loss would have been $209 million, or $0.27 per diluted share, versus analyst estimates of $0.24 per share.

For 2008, net loss was $1.6 billion on net sales of $5.8 billion. This is the seventh straight loss despite the company’s various cost-cutting measures. Micron has reduced its workforce by 3% to 23,509 employees, with the SG&A head count down 15%. It has even cut its executives’ pay by 20%. It reduced capital expenditure from $4.1 billion in 2007 to $2.9 billion and plans to further reduce capex to between $1 billion and $1.3 billion in 2009. It has delayed the IMFS fab build-out till market conditions improve. 

By segment, both DRAM and NAND revenue declined sequentially while image sensor revenue increased. DRAM sales in Q4 decreased slightly compared with Q3 due to a 5% decrease in gigabit sales. NAND Flash products sales decreased 10% q-o-q due to a 20% decrease in ASPs, partially offset by a 10% increase in gigabit sales. Sales of CMOS image sensors increased slightly on a sequential basis and accounted for 12% of revenue, versus 11% in Q3. 

Micron expects the weak demand situation to continue even through the typically strong holiday season. There is speculation that Micron may buy Infineon’s (IFX) stake in ailing DRAM maker Qimonda. As I pointed out in an earlier post, Micron should reduce its high concentration in the DRAM and NAND businesses and move towards a more differentiated product portfolio. And though Micron is slowly expanding its image sensor business, there is too much focus on the memory business for my comfort.

Micron is currently trading around $4.3 with a market cap of about $3 billion. The stock hit a 52-week low of $4.12 on September 5. For the moment, this is not a stock to touch. 

Disclosure: None

Comments

[Roy Howard:]

Micron was diversifying a couple of years ago. They were very excited about the image sensor business. Then about a year ago they started talking about spinning off or divesting the image sensor business. Months passed, nothing happened. Then they started talking about focusing on the core memory segment and getting out of non-core businesses -- which was a red flag and the beginning of a big down leg in the stock.

Gross margins in the imaging business are running at 29% (down from 35% last quarter), which puts them on par with competitor Omnivision. When you consider that gross margins were damn close to zero for Micron, the imaging business certainly does look better than memory and I think the company sees selling it as a necessary evil -- it's <20% of sales compared to the 80+% that's memory. They can't ride the stock up on it -- the imaging business just isn't big enough to sustain them. They need to sell it to fund the larger memory ops.

The real problem with Micron here is they're in an extremely capital intensive business and they're lugging a boatload of debt. They aren't getting out of the memory business. They can't expand into new markets really -- they just cut their capex dramatically and are trying to conserve cash. I think they're far more likely to continue to try to divest the imaging business to get money to sink into memory.

Your suggestion that they need to further diversify is idealistic. They can't afford it. Their stated strategy and really the only option they really have is to pare down costs and try to outlast their shakier competitors in the downturn.

2008 Oct 04 12:03 AM