Shares of memory-chip supplier Micron Technology (NASDAQ:MU) have soared since June as investors bet that the downturn in the memory-chip markets would soon end. Micron's fiscal fourth-quarter report, particularly its guidance, suggests that the pain isn't over.

Bit shipments increased for both DRAM and NAND chips in the fourth quarter, but average selling prices continued to plunge. Total revenue was up slightly from the third quarter but down 42% year over year. Non-GAAP (adjusted) earnings per share was $0.56, down nearly half from the third quarter and down a whopping 84% from the prior-year period.

Micron's gross margin is in free fall. On an adjusted basis, gross margin came in at 30.6% in the fourth quarter. That's down from 39.3% in the third quarter and down from 61.4% in the prior-year period.

The company expects its gross margin to tumble further in the first quarter of fiscal 2020 to 26.5%, plus or minus 1.5%. But this guidance includes the impact of an accounting change that makes it look a little bit better than it really is.

A Micron facility.

Image source: Micron.

Tweaking depreciation

Currently, Micron depreciates its NAND equipment over a period of five years. This depreciation expense is included in the cost of goods sold. DRAM equipment is depreciated over seven years.

Starting in the first quarter of fiscal 2020, Micron will begin depreciating its NAND equipment over seven years, as well. This will have the effect of reducing its depreciation expense by $80 million in the first quarter and by $100 million to $150 million per quarter for the rest of fiscal 2020. This reduction in depreciation expense will benefit the company's gross margin.

This change is based on Micron's assessment of technology node transitions, capital spending, and reuse rates. There's nothing wrong with what Micron is doing, but the timing does seem convenient.

Adding back that $80 million of depreciation, Micron's adjusted gross margin guidance for the first quarter would be roughly 25%. The company expects adjusted earnings per share of $0.46, plus or minus $0.07. That's already down from the fourth quarter, and it would be roughly $0.04 lower if not for the depreciation change.

The downturn continues

Accounting change or not, Micron's guidance suggests that weak pricing is still overwhelming per-bit cost reductions and any increase in bit demand. Micron's inventory is still elevated: Total inventory rose to $5.1 billion at the end of the fourth quarter, up about $200 million over the past three months. Micron expects its calendar year 2020 NAND bit supply growth to be well below that of the industry as it works through its excess inventory.

Micron is experiencing a demand recovery, but that hasn't led to a price recovery. There are pockets of supply shortages in certain areas, according to management, but that hasn't been enough to prevent prices from declining. "[T]he market remains competitive and industry inventories continue to adjust to economic and geopolitical uncertainties," said CFO David Zinsner during the earnings call.

The good news is that Micron is still profitable, something it hasn't managed in previous downturns. The bad news is that this downturn isn't over and may be far from over if economic conditions worsen. Huawei is also a wildcard: The company expects declining revenue from Huawei in the coming quarters if it's not granted licenses from the U.S. Department of Commerce.

Micron's earnings will eventually bottom out and start to recover. But the bottom isn't here yet.