Memory prices are on the decline, something that has adversely impacted memory maker Micron's (NASDAQ: MU) business. Last quarter, the company's revenue dropped to $5.84 billion, a 20.5% drop year over year. Earnings per share on a non-GAAP plummeted to $1.71 for the quarter from $2.82 in the same period a year ago.
The company's financial guidance is also rough, with the memory maker calling for $4.8 billion in revenue and non-GAAP EPS of just $0.85 at the midpoint of its expectations. Those are brutal drops from the corresponding quarter last year, during which Micron turned in revenue of $7.8 billion and non-GAAP EPS of $3.15.
Image source: Micron.
To get a better sense of the company's near-term business drivers and longer-term expectations, let's take a look at these three insights that the company's management provided on its most recent earnings call.
Idling some DRAM capacity
According to CEO Sanjay Mehrotra, Micron has "decided to idle approximately 5% of our DRAM wafer starts" in response to "lower DRAM demand outlook from our customers."
What this means is that the company is simply turning off 5% of its currently installed DRAM manufacturing capacity. This, Mehrotra explains, "will bring our production levels close to our view of the DRAM industry bit demand growth for calendar 2019."
The idea here is simple: It makes more sense for Micron to reduce its production capacity (and incur charges related to that capacity underutilization) than to produce product that it either won't be able to sell or will have to sell at lower prices (as increased supply marketwide should lead to overall price reductions).
"We will continue to monitor the market and take appropriate actions to ensure that our bit supply growth in calendar 2019 remains closely aligned with demand," Mehrotra said. "Looking beyond our fiscal 2019, we expect bit demand growth to accelerate as mobile and server demand improves."
Memory chip manufacturing is a very capital-intensive process, requiring significant investments in expensive, specialized tooling as well as in space. Micron had originally guided capital expenditure (capex) of $10.5 billion (give or take 5%), but brought that down to a range of $9 billion to $9.5 billion last quarter when demand showed signs of slowing.
Micron cut its capex again this quarter to just $9 billion.
"Given these changes in DRAM and NAND industry conditions, we have reduced our capex for fiscal year  and are evaluating our capex for fiscal year ," Mehrotra said during the call.
It's also worth noting that Micron explained in its earnings presentation that the capex that it'll be deploying in fiscal 2019 is "mostly for tech node transitions and cleanroom, not capacity increase."
Whenever a chip company migrates to a more advanced chip manufacturing technology, it needs to buy new tooling (and more cleanroom space) to actually produce chips using that technology. So, what Micron is trying to say here is that a large portion of the $9 billion that it plans to spend is on the equipment needed to support that migration, not to build out incremental memory manufacturing capacity. (Given that Micron idled wafer starts, planning for major capacity expansions probably wouldn't be the smartest idea.)
Banking on 5G
During the call, Mehrotra highlighted the continued increases in memory content in flagship smartphones, noting that "these next-generation premium smartphones will typically feature 8 to 12 gigabytes of DRAM and 256 to 512 gigabytes of NAND versus four to six gigabytes of DRAM and 64 to 128 gigabytes of NAND in current-generation premium smartphones."
"These trends will likely cascade to lower-tier phones as well," the executive added.
Looking ahead, Mehrotra seems quite bullish on the launches of 5G foldable phones as well as upcoming innovations in augmented and virtual reality as things that, according to him, "will drive sustained content growth for years to come and should reignite smartphone unit sales beginning in 2020."
The move to 5G, Mehrotra explains, could help its business outside of mobile, too, as "it will enable true machine-to-machine communication and accelerate data creation and analysis, which are fundamental drivers for our business."
In the near term, things are looking rough for Micron as well as the memory industry as a whole. However, the company seems to be taking some steps to cope with the poor overall market conditions. Additionally, Micron seems optimistic that these issues are temporary and that the memory markets will strengthen in the second half of the year.
Right now, it looks like investors are willing to give Micron the benefit of the doubt, as the stock rallied significantly following the company's uninspiring earnings release and guidance for the current quarter. We'll just have to see if that confidence is deserved as the year plays out.
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