Micron: Punishing prices offsetting memory production efficiencies

April 5, 2007 – Cost savings from shifting to production utilizing 300mm wafers couldn’t offset plunging average selling prices of DRAM and NAND flash devices for Micron Technology Inc. The firm swung to a $52 million loss on 7% lower sales of $1.43 billion during 1Q07, even as it ramps NAND flash production at two sites in the US and ahead-of-schedule progress at its 300mm JV in Singapore.

The company said cost savings in NAND production were wiped out by nearly 30% lower ASPs, while DRAM cost efficiencies kept pace with DRAM ASP declines. CMOS image sensor sales were down during the quarter due to weakness in the mobile handset market, including production output from competitors and a trend toward lower-value handsets that don’t use sensors.

In a conference call discussing results, Micron sales VP Michael Sadler noted that the well-publicized industry semiconductor inventory supply issues, on top of normal seasonal 1Q declines, created a “reduced appetite” from customers for products such as NAND flash, low-power DRAM including pseudo-static RAM, and image sensors. He added that the company has completed development of its 50nm process and achieved initial silicon on its first 16Gbit 50nm MLC chip, which will be ramped on the heels of 72nm production at its facilities in Boise, Virginia, and Utah. The Utah 300mm NAND operations on devices previously qualified in Virginia “is on schedule and going well,” he added.

Questions during the Q&A portion of the call spanned anticipated capex adjustments, NAND and DRAM ASP trends, what’s driving memory demand, and the shifting balance of supply & demand.

Calling an analyst’s inquiry about recent price stabilizations “the multibillion-dollar question,” Sadler suggested that NAND demand “which really has not dissipated at all” has caught up with supply to stabilize prices. On the DRAM side, “we are also seeing the effect of the inventory depletion by some of our customers and it has resulted in them getting back into the buying mode again,” he said.

Prompted by a question about supply/demand balances, Chairman/president/CEO Steve Appleton said he thinks 2007 will witness strong demand thanks to content/system in the PC area, with demand bit growth “something north of 60%-65%). Anything more than that will mean that “prices are probably going to keep coming down,” he added. He projected Micron’s NAND bit growth at around 120%-140% on the supply side, matched by demand. “The industry can absorb what the output is,” added Sadler. He noted that Micron can shift from NAND to DRAM production and back again in some of its fabs in about three or four months. Appleton added that the company will continue to do so based on market fluctuations, noting that any shifts in capacity from one memory to another will be done partly in conjunction with NAND JV partner Intel.

In a research note following the call, Doug Freedman, analyst with American Technology research, said he was “encouraged” by Micron’s bullish 120%-140% bit guidance, suggesting that “NAND could be in under-supply longer than expected and rationalize the company’s aggressive move in the space.” Still, he thinks ASPs will have to fall even more to spark mass-market adoption of high-density NAND such as solid state drives, “so this could prove to be a double edged sword for Micron.”

Micron CFO Wilbur Stover noted that the company’s planned capex for FY07 remains around $4 billion, and 300mm transition and expansions in Virginian, Utah, and Singapore should be completed in the current year, with close to 100% of core DRAM fully produced on 300mm, noted Appleton. That means investments in FY08 “should see a noticeably reduced capital spending profile” that is “noticeably down from the $4 billion” allotted for this year.


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