Image source: Micron

So far, 2016 has been a difficult year for memory-chip manufacturer Micron Technology (NASDAQ:MU). The company reported its second-quarter results after the market close on March 30, posting a 30% year-over-year decline in revenue and a net loss. Guidance for the third quarter wasn't great, either, with the company expecting another loss, driven by a big drop in sales and a slumping gross margin. Here's everything you need to know about Micron's second-quarter earnings report.

Earnings rundown
Micron reported revenue of $2.93 billion, down 30% year over year and about $120 million lower than the average analyst estimate. DRAM bit sales slumped 9% sequentially during the quarter, and DRAM average selling prices plunged 10%. Micron's DRAM cost per bit actually rose 1%, although the company expects significant cost savings going forward thanks to the deployment of 20nm technology.

On the NAND front, bit sales rose 11%, while average selling prices slumped 15% and cost per bit fell by 12%. During the quarter, DRAM accounted for 54% of revenue, while non-volatile memory, which includes NAND, accounted for 37%.

The compute networking segment, which includes products aimed at PCs and servers, turned unprofitable, posting a negative non-GAAP operating margin of 5.2% on a 7.6% sequential sales decline. The mobile segment, which has been a source of profits for Micron as PC sales have slumped, also turned unprofitable, with a negative operating margin of 4.2% on a sequential sales decline of 39.7%. The embedded segment performed better, with a small 4% sales decline and a margin of 18.9%. The storage segment grew revenue slightly but remained unprofitable during the quarter.

Micron reported a non-GAAP EPS loss of $0.05, down from a gain of $0.24 during the prior-year period. This was $0.03 higher than the average analyst estimate, but it represents the first loss Micron has posted in the past few years. On a GAAP basis, Micron reported an EPS loss of $0.09. Non-GAAP gross margin dropped to 20%, down from 25% during the prior-year period, and operating expenses declined by just 5%, far slower than revenue.

Looking forward, Micron expects to report revenue in a range of $2.8 billion to $3.1 billion during the third quarter, with a gross margin between 16.5% and 19%, and a non-GAAP EPS loss between $0.05 and $0.12.

The good news and the bad news
Micron's quarter wasn't a good one, but with DRAM prices tumbling, that was to be expected. Micron's guidance wasn't as bad as it could have been, with the third-quarter loss expected to be not much worse than the second-quarter loss, although revenue guidance did come in below analyst expectations of $3.2 billion. The fact that Micron doesn't expect its result to deteriorate too much during the third quarter is the only real piece of good news for the company.

There was plenty of bad news, but one of the most important tidbits from Micron's earnings report was the severe slump in mobile revenue, and the dramatic shift from profits to losses. The smartphone market has been slowing down, but I wasn't expecting such a big decline. Last October, Gartner warned that DRAM oversupply would extend into the mobile market this year, and that seems to be exactly what's happening. The only questions left are how long will it last? And how bad will it get?

Relative to analyst expectations, Micron's results were mixed, and its guidance came up short. The company does expect to achieve DRAM cost per bit savings during the third quarter, but the wildcard will be DRAM prices. In 2012, Micron's average selling price per bit of DRAM tumbled by 45%, and there's no telling how far it will fall this time around. Micron may start to recover later this year, but there's a real risk that this downturn will last a while.

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