Micron Technology, Inc.’s (MU) Take On Its Future Business

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The chip maker’s top executives provided their future outlook for the business amid the ongoing slowdown in mobile and PC growth

Micron Technology, Inc.’s (NASDAQ:MU) outlook for the coming quarters wasn’t pretty, but well within the market’s expectations as the company continues to face headwinds from a precarious DRAM environment that is still quite a far way from stabilizing. The company’s earnings call provided an opportunity for analysts to get an insight on where the company was headed and how it expects to respond to the headwinds.

The $11 billion company’s second quarter of fiscal year 2016 earnings reported a quarterly loss after a long time. The chief reason was declining PC sales, although Micron’s mobile growth acted as a buffer for that slowdown. Now that mobile revenue has declined 40% quarter-over-quarter, the chip maker is having issues again, since even IDC statistics guide for a slowdown in mobile growth. In contrast, CEO Mark Duncan views this as a temporary setback as he expects that with the 20 nanometer DDR4 chip, designed specifically for customers who need low-power microprocessors, would be adopted quickly and memory demand would witness meteoric growth by the end of the year. However, based on the mobile growth slowdown IDC figures have guided for, DRAM chip demand would rise, at best, slowly.

One of the most highlighted problems for Micron, however, is the price for DRAM which has nearly hit rock bottom thanks to a rough combination of intense competition, surplus, and seasonal decline in demand. This has weighed on Micron’s margins, which are expected to narrow down from 20% this quarter to 16.5-19% in the coming quarter. Micron believes this pricing pressure will continue despite the company’s great cost-cuts, as indicated by lower average selling prices (ASPs). More disciplined production by competitors is a must and likely to happen soon as DRAM manufacturers like Samsung are witnessing narrowing gross margins as they register billions in operating loss.

Micron, however, is not going to take its foot off the pedal before its rivals. The company has capacity and it feels that unless the industry at large becomes more disciplined in production, it would be foolish for Micron to take the first step, unless it sees negative cash margins. Considering how hard Micron has worked to cut costs – yet forced to pay fixed costs despite the slowing production – this seems like a rational decision. However, even if other DRAM manufacturers are of the opinion, a price inflection might still be a long way off.

The chip maker’s foray into the automotive sector remains a solid investment, with an 18.9% operating margin and the promise of strong growth going forward due to the stickiness in the automotive industry. Memory demand for cars are expected to grow, and while it makes a negligible share of the company’s revenue right now, it is bound to change in the future.

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