Computer memory is one of those markets that can't grow on its own. The memory makers have to sell their stuff to system builders, gadget designers, and other downstream industries, and direct sales to end users are really quite minuscule in the grand scheme of things.
So when memory veteran Micron Technology (NYSE: MU) spends most of the conference call after a weak earnings report on comments about market conditions, you might want to pay attention if you're interested in how the likes of Dell (Nasdaq: DELL), Apple (Nasdaq: AAPL), and Hewlett-Packard (NYSE: HPQ) are thinking about their inventory management these days.
Demand
Mike Sadler, Micron's vice president of worldwide sales, noted that strong orders from computer systems builders are driving up the demand for DRAM modules -- Micron's mainstay business line -- to the tune of 30%, quarter by quarter. But an industrywide oversupply dating back to last year is still hurting selling prices, so the volume growth leads to fewer gross-margin dollars anyway. Yeah, the world is gearing up for Microsoft's (Nasdaq: MSFT) latest and greatest operating system with heftier hardware, but everyone saw that one coming and cranked up the supply lines -- a bit too far.
Sadler also said that camera sensors and flash memory are back in demand, after handset makers burned through their excess inventories of those parts. He's "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 industrywide output growth rate."
He later clarified that the slowing sector output projection comes mostly from talking to customers and listening to public statements from competitors like SanDisk (Nasdaq: SNDK) and Imation (NYSE: IMN). Investor Relations VP Kipp Bedard added that the company looks at shipment reports on steppers -- an important piece of the semiconductor manufacturing process -- as a market barometer. He said that an unnamed supplier shipped 80 of these devices two quarters ago, and only 50 last quarter. The projection for next quarter is just 30 units.
Thanks for the good news
CEO and habitual daredevil Steve Appleton is facing a tough market today, making the Lexar acquisition look like a smart diversification move. If no one else is making gadgets out of Micron memory, then by golly, Micron will! But it's too small of an operation to add much to the business' overall finances today.
So this company is still in trouble, but it's talking up the prospects for its sector as a whole. That translates into good news for the guys a bit closer to the final consumer, as it's increased demand at the end that's driving the improvements for Micron and its rivals. On an even larger scale, that means increased consumer spending on nonessentials like computer systems, high-end cell phones, and digital music players. And that's a positive sign for the entire economy.
In other words, sorry about the bad news, guys, but thanks for the good news!
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Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure will make your day, every day.
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