Micron Sales Forecast encourages hope that the worst of the slump is over

(Bloomberg) — Micron Technology Inc., the largest US maker of memory chips, issued a better current quarter forecast 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 a whopping $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 an increase in job losses.

“Customer inventories are improving and we expect gradual improvements in the balance between supply and demand in the industry,” CEO Sanjay Mehrotra said in the statement. The company posted 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 is poised for a comeback after a rough patch. Over the past year, a sharp drop in consumer demand has prompted Micron’s customers to cancel orders. Instead of buying new chips, they worked through a buildup of excess inventory — a kind of scenario that has long plagued the memory industry after years of boom.

Shares of Micron rose about 1% in extended trading following the announcement. The stock had gained 19% this year on hopes that the worst of the industry’s recession was over and closed at $59.28 in regular New York trading.

The company expects a loss of approximately $1.58 per share in the current period, including a 45 cent impact related to $500 million in inventory write-downs. Analysts had expected a loss of 84 cents per share.

Phone and computer makers are facing weak consumer spending due to rising inflation. Micron’s chips, which store and help process information in such devices, are particularly vulnerable to fluctuations in demand because products from rival companies are directly interchangeable and traded as commodities.

Rapid fluctuations in the balance between supply and demand can lead manufacturers to sell the components for less than they cost to make. Although Micron shipped more computer memory chips last quarter, sales still shrank as prices dropped about 20%.

Three months ago, Micron announced cost-cutting measures, including a 10% headcount reduction and a slowdown in investment in new manufacturing. Although the revenue picture will improve in the second half of the year, profitability will remain difficult, the company said.

The Boise, Idaho-based company said Tuesday that the overall headcount reduction will now be 15%. Micron is cutting its spending on new plants and equipment by 40% this year to $7 billion, according to presentation slides on its website.

For 2023, the company expects demand to grow faster than supply. Micron foresees a transition to sequential revenue growth, saying inventory has peaked and end markets such as 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 produce more stable earnings than in previous recessions. The industry now has a small number of competitors – and they are focused more on profit than gaining market share – potentially making the field more resilient. Memory chips also have a wider range of applications than in the past.

But that claim was overturned by a unique set of circumstances: the war in Ukraine, soaring inflation, Covid disruptions and other supply chain issues.

Micron competes with South Korean Samsung Electronics Co. and SK Hynix Inc. SK — which, like Micron, is primarily memory-focused — has also suffered losses, helping to curb expansion plans. Samsung, meanwhile, has a more diversified business. It is the world’s largest smartphone maker and has other sizable divisions that allow it to remain profitable and have the cash to invest.

The pace at which profitability recovers will be determined by whether the company’s peers follow suit and reduce production to a point where supply will be below last year’s level, Mehrotra said in an interview. Other companies have taken measures to varying degrees, he said.

“The recovery can be accelerated if further supply cuts are made,” he said.

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

Showing the impact of a collapse in orders, the company is on track to lose more than $3 billion by 2023, its largest annual shortfall since first going public in 1984.

(Updates after-hours trading in the fifth paragraph and the CEO’s comments in the 15th paragraph.)

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