Micron sales forecast gives hope the worst of the slump is over

(Bloomberg) — Micron Technology Inc., the largest US maker of memory chips, issued a better guidance for the current quarter than some analysts had feared, raising hopes that the worst of a brutal industry slump may be over .

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Revenue will be up to $3.9 billion in the fiscal third quarter, the company said in a statement Tuesday. That compares to an average analyst estimate of $3.75 billion. The company also announced increased job cuts.

“Customer inventories are getting better and we expect a gradual improvement in the industry’s supply-demand balance,” Chief Executive Officer Sanjay Mehrotra said in the statement. The company delivered second-quarter earnings that were in line with its forecasts “in a challenging market environment,” he said.

The forecast suggests that the memory chip market may be poised for a comeback after a rough patch. Last year, a sharp drop in consumer demand prompted Micron’s customers to scale back their orders. Instead of buying new chips, they’ve been working their way through a pile of excess inventory — the sort of scenario that has long plagued the memory industry after boom years.

Micron’s shares rose 1.7% in extended trading following the announcement. The stock had gained 19% this year on hopes the industry’s worst downturn was over, to close at $59.28 in regular New York trading.

The company is forecasting a loss of approximately $1.58 per share for the current period, which includes a 45 cent impact related to $500 million in inventory write-downs. Analysts had estimated a loss of 84 cents per share.

Phone and computer makers are grappling with weak consumer spending fueled by rising inflation. Micron’s chips that store and process information in such devices are particularly vulnerable to fluctuations in demand because products from competing companies are directly interchangeable and traded like commodities.

Rapid swings in the balance between supply and demand can cause manufacturers to sell the components for less than their manufacturing cost. Although Micron shipped more computer memory chips last quarter, sales still shrank as prices fell about 20%.

Three months ago, Micron announced cost-cutting measures, including a 10% reduction in its workforce and a slowdown in investment in new manufacturing facilities. While the sales picture will improve in the second half of the year, profitability will remain difficult, it said.

The Boise, Idaho-based company announced Tuesday that total workforce reductions will now total 15%. Micron is reducing its spending on new plants and equipment by 40% this year to $7 billion, according to presentation slides posted on its website.

For 2023, the company expects demand to grow faster than supply. Micron is forecasting a move to sequential sales growth, saying inventories have peaked and end-markets like smartphones and PCs are shrinking less than feared. Micron’s data center unit bottomed out in the second fiscal quarter, it said.

Mehrotra has argued that the company would deliver steadier earnings than in previous downturns. The industry now has a small number of competitors — and they’re more focused on profits than gaining market share — potentially making the field more resilient. Memory chips also have a wider range of uses than before.

However, this thesis was shattered due to a number of unique circumstances: the war in Ukraine, a surge in inflation, disruptions from Covid and other supply chain issues.

Micron competes with South Korea’s Samsung Electronics Co. and SK Hynix Inc. SK — which, like Micron, focuses primarily on memory — has also suffered losses, causing it to slow down its expansion plans. Samsung, on the other hand, has a more diversified business. It’s the world’s largest smartphone maker and has other sizable divisions that allow it to remain profitable and have the money to invest.

The pace at which profitability recovers will be determined by whether the company’s competitors follow its lead and reduce production to the point where supply grows less than demand this year, Mehrotra said in an interview. Some companies have joined Micron’s actions, others have not, he said.

“The recovery could be accelerated if more supply cuts are made,” he said.

In the three months ended March 2, Micron’s revenue fell 53% to $3.69 billion. The company was down $1.91 per share excluding certain items. That compares to a median estimate of a loss of 63 cents a share on revenue of $3.75 billion.

The company is showing the impact of a slump in orders and is on track to lose more than $3 billion in 2023, its largest annual deficit since its initial public offering in 1984.

(Updates CEO’s comments in paragraph 15.)

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