For memory-chip manufacturer Micron Technology (NASDAQ:MU), a turnaround remains elusive. The company reported its fiscal third-quarter results on June 30, and despite a flurry of analyst upgrades in recent weeks pointing to improved conditions in the DRAM market, the downturn that has plunged Micron into the red appears far from over.
Mixed results and terrible guidance
Micron reported revenue of $2.9 billion, down 25% year over year, and $60 million below the average analyst estimate. Non-GAAP EPS was a loss of $0.08, slightly better than the loss analysts expectated. There were some signs of improvement: Both the client-computing and mobile segments reported sequential revenue growth, and total DRAM bit sales jumped 22%. But falling prices for both DRAM and NAND continued to knock down Micron's numbers.
DRAM average per-bit selling price fell 11% compared to the second quarter, while NAND prices slumped 6%. Micron managed to cut per-bit costs for both types of memory, driven by the company's shift to 20nm DRAM and 3D NAND production. In both cases, selling prices dropped faster than Micron could cut costs. Through the first six months of 2016, DRAM per-bit selling prices have declined by 33% compared to the first half of 2015.
The client-computing segment, which includes chips that go into PCs, servers, and graphics cards, became more unprofitable during the third quarter compared to the second quarter despite slightly higher revenue. Demand from data center, cloud, and graphics customers was strong, but a flailing PC market overwhelmed these positives. Micron stated that channel prices for PC DRAM and NAND have recently improved, but that didn't help its third-quarter results.
The mobile segment was also unprofitable, posting an operating loss of $17 million on $561 million of revenue. Micron pointed to delays in product qualifications as one reason for its mobile weakness, but slowing demand for smartphones is likely also a factor.
While a rough third quarter was expected, Micron's guidance for the fourth quarter was far below expectations. The company expects revenue between $2.9 billion and $3.2 billion, which would represent growth compared to the third quarter. But a non-GAAP loss between $0.16 per share and $0.24 per share means that Micron's losses will double or triple sequentially. Analysts were expecting Micron to guide for a $0.03 per-share profit.
Along with its earnings report, Micron announced that it was initiating a cost-cutting program aimed at removing $80 million in costs quarterly. The company will reportedly eliminate about 2,400 jobs, or roughly 7.5% of its workforce.
No turnaround in sight
The optimism that drove Micron stock up prior to the company's earnings report appears to have been unwarranted. Instead of the fourth quarter marking a return to profitability, as analysts had expected, it will mark a further deterioration of Micron's performance.
DRAM spot prices have started to improve recently, but Micron CEO Mark Durcan pointed out in the company's conference call that this has yet to affect Micron's results:
When spot pricing starts moving, that's a great indicator of where the markets might go. But what has to happen, obviously, is there has to be enough liquidity in the market that it can carry through into larger volume orders associated with contract market and inventory has to burn off. And we're seeing good indications of those types of things, but we need to make sure the pudding is fully baked before we serve it.
Eventually, the oversupply situation in the DRAM market will end, and Micron will be in a position where it can cut per-bit costs faster than per-bit prices are falling. The timing is uncertain, though, and Micron could be in for a few more quarters of pain. With a slumping PC market and slowing demand for smartphones, there's no reason to believe that prices can't remain depressed for quite some time.
Micron's third quarter was about as bad as expected, but its guidance for the fourth quarter portends more pain for investors. The company's losses are moving in the wrong direction, and a repeat of the last major downturn could be in the cards. In fiscal 2012, Micron posted a net loss of over $1 billion.
Things aren't quite that bad for Micron yet, but investors should certainly be concerned.