Shares of Micron Technology (Nasdaq: MU) are down about 4% this morning after a disappointing first-quarter report. As it turns out, SMART Modular Technologies (Nasdaq: SMOD) was the canary in the memory chip mine, and other memory maker stocks should have suffered when that company unveiled its warning signs last week.
Micron's sales fell 9.7% compared with the previous quarter to land at $2.25 billion. The cost of generating that swooning revenue remained relatively fixed, which obviously leads to terrible margins across the board. Its $0.15 of earnings per diluted share is half of what Micron brought in the previous quarter.
But I'm still painting way too rosy a picture. That profit includes a $200 million license payment from Samsung in October. Back that out and adjust for tax effects, and you get roughly a $0.01 pro forma loss per diluted share. Samsung does have to send a few more payments Micron's way in the near future, but none as large as the first one and certainly not enough to count it as a part of normal operations.
The cash flow situation isn't much better. The $732 million of operating cash melts away quickly when you take out that $200 million windfall and then apply $570 million of capital expenses to arrive at a mildly negative free cash flow total.
Unit sales were up as always, but DRAM prices imploded to the tune of 23%. That's quarter over quarter, not year over year. Flash memory chips are in very high demand, but their average price also fell a drastic 15%.
So SMART Modular's pricing problems in Brazil really weren't localized to South America or to SMART alone. And once again, the market is failing to treat this news with an appropriate level of respect. I understand if SMART was punished enough already, so the lack of price movement makes sense there. But Spansion (Nasdaq: CODE) will probably report a similarly gloomy picture in mid-January, and that stock is feeling just fine today. Memory technologist Rambus (Nasdaq: RMBS) is hardly moving, either. Despite the strong improvement in flash memory unit demand, SanDisk (Nasdaq: SNDK) is slumping a bit, possibly because of that 15% fall in average pricing.
And then you run out of publicly traded memory specialists in a highly consolidated industry. Bottom line, I would think twice before buying Spansion today because there's an almost-certain drop coming in the next few weeks. Micron remains cheap and CEO Steve Abramson thinks he'll ride out this cyclical weakness just fine, so there might be a screaming bargain there if you believe him.
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