Shares of memory maker Micron plunged by over 18% in the June 26 trading session, following disappointing earnings and forward guidance. Part of the reason Micron's results were worse than expected was that PC vendors slowed down their PC build activities to, in Micron President Mark Adams' words, "well below seasonally slow demand" during the first half of the year.
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In light of the large impact that a slow PC market has had on Micron's results, I'd like to dig a bit deeper into just how exposed Micron is to the PC market, the actions it's taking to diversify away from that market, and the impact such diversification has on the company's business.
PCs represent Micron's biggest market for DRAM
On the call, Adams said PC DRAM comprises the company's total DRAM revenue in the "low 30%" range. Mobile applications, such as smartphones and tablets, are in the "high 20% range," and server DRAM is in the "low 20% range." Other segments such as networking and graphics make up the remainder.
Despite Micron's exposure to other, healthier market segments, a large part of its DRAM business, which was itself 61% of Micron's total revenue in the most recent quarter, is still tied to PC sales. That means, whether investors like it or not, the health of the PC business still has a meaningful effect on Micron's financial performance.
How Micron is responding to this, and the impact on margins
According to Adams, Micron has "reduced [DRAM] output targeted at the PC segments in favor of faster-growing, more stable segments." Management indicated on the call that such segments include DRAM targeted at mobile devices (think smartphones and tablets) and cloud servers.
The good news is that these markets are healthier, as smartphones are seeing solid unit growth as well as increased per-phone DRAM content. An offset to that good news, according to CEO Mark Durcan, is that margins in areas such as mobile and cloud servers are typically lower than the PC market.
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Why is that the case? According to Durcan, in a market that's undersupplied, margins are higher in markets that are less attractive from a long-term perspective. This isn't surprising, given that the DRAM suppliers are all probably shifting production to try to capture the demand growth in higher-growth segments, leading to a more competitive pricing environment.
Additionally, during the call, Micron CFO Ernie Maddock pointed out that mobile DRAM as well as DDR4 tend to have larger die sizes than typical PC-oriented DDR3 and DDR3L memory, which increases production costs of mobile-oriented LPDDR and DDR4.
This shift is going to affect Micron's DRAM bit growth for the year
Micron had previously projected mid-teen-percentage growth in DRAM bits for the year, although management did say that "product mix adjustments including an increased mix of DDR4 and mobile DRAM could impact bit growth."
When asked about whether Micron expects to hit that DRAM bit growth target this year, Durcan said the growth will be lower as a result of a shift toward server and mobile DRAM.
However, Durcan did make a point to reiterate Micron's view that although the company's DRAM bit growth for the year would be even further below industry bit growth than previously forecast, Micron should be able to outgrow the market during calendar year 2016.
The article Here's Why a Slow PC Market Hurt Micron Technology, Inc. originally appeared on Fool.com.
Ashraf Eassa owns shares of Micron Technology,. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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