Micron Technology Inc. (NASDAQ: MU) is starting 2014 with a boatload of good news for shareholders in terms of its latest financial performance and outlook for the year ahead. The semiconductor manufacturer’s recent quarter results trumped analysts’ average estimates with sales more than doubling year-over-year and gross profit margins surging 7 percentage points sequentially, an extraordinary performance for a company that’s still midway through the integration of a major acquisition and several other strategic but potentially disruptive programs. By far the best news from the company’s assessment of its performance, however, was the declaration by CEO Mark Durcan that its outlook for the entire memory market is “very favorable.”
Memory makers may indeed be on the cusp of one of the best times in recent memory for the market segment. Inventories are tight across the industry and still declining, production is in check and manufacturers are in no hurry to add new plant capacity, which means the danger of oversupply that in the past dogged the industry is now remote. As a result, average selling prices are either firmer or swinging upward and, finally, recent merger and acquisition activities that have thinned the ranks of suppliers means the days of rabid price-driven competition for market share may also be in the rearview mirror.
The industry as a whole benefitted from a confluence of events that finally helped put a bottom in the precipitous drop all memory manufacturers suffered for years. Memory suppliers began consolidating the market over the last five years with many of the latest actions happening in 2013. Micron itself led the M&A charge by buying Elpida Memory, one of the market’s biggest suppliers. It also tidied up partnerships with other vendors, including taking an additional 24 percent stake in Rexchip Electronics of Taiwan, helping it mop up extra manufacturing capacity – the transactions boosted Micron’s overall capacity more than 90 percent in only 18 months, according to company president Mark Adams. Finally, a fire at a major fab owned by Hynix lopped off additional capacity temporarily and the effects are still being felt in tighter inventories, noted Durcan.
“The fire at Hynix Wuxi fab last fall coupled with what was a healthy supply-demand situation from beforehand is resulting in significant reduction in inventory across the DRAM supply chain, in particular for the PC and mobile segments,” the Micron CEO said in a presentation to analysts on Tuesday. “Our belief is that this tight and further declining inventory situation coupled with balanced long-term production and demand continue to drive healthy market conditions. Beyond 2014, we expect industry capacity to remain relatively stable.”
Micron isn’t likely to bring online new manufacturing capacity anytime soon. The company wants plant capacity utilization to rise higher not only at its facilities but across the industry before it would contemplate adding to existing infrastructure. With manufacturers trying to boost profitability it’s a fair bet that buyers at OEMs and EMS providers as well as retail purchasers of memory sticks and related storage goods may see rock bottom prices disappear for these products. Micron executives said they want to see improved profitability, even lower or more stable plant capacity and stronger demand conditions before increasing capital spending on new facilities.
“For Micron, any potential decision to add capacity in DRAM is not just about current profitability levels, which, while good, are still below the long-term average that we believe justify the significant investments in R&D and process technology required in the business,” Durcan said. “In addition to attractive long-term returns on the existing asset base, we would need to see a fundamental and significant upward shift in this demand consistently above approximately 40 percent compared to the current CAGR in the low 30% range before it would make sense for us to bring on additional wafer output.”
Micron can take improving profitability off their check list. In the fiscal 2014 first quarter Micron reported net profit of $358 million, or 30 cents per share, versus a net loss of $275 million, or 27 cents per share, in the comparable year-ago quarter. Revenue for the three months ended Nov. 28, 2013 rocketed to $4 billion, boosted by the Elpida and Rexchip acquisitions, from $1.8 billion in the first quarter of fiscal 2013. Its gross profit margins for the quarter surged to 32 percent, up from 12 percent in the year-ago quarter and a 7 percentage point improvement from the immediately preceding quarter.
“We feel positive about the results our team achieved in the first quarter both in topline revenue growth, operating margins as well as our strong cash flow generation,” said Adams, during the conference call. “The industry fundamentals remain solid as we are getting strong demand signals from a majority of our end-segments and industry supply in both DRAM and NAND look in balance.”