Micron Issues Ugly Guidance, Slashes Capital Expenditure Forecast

The market had already been baking in some bad news for memory specialist Micron (NASDAQ: MU), shares of which were down about 47% year to date heading into its Dec. 18 earnings report, but it seems that investors weren't pessimistic enough. As of this writing, Micron stock has lost another 9% following its filing.

On the surface, the report doesn't seem all that bad -- the company's earnings per share (EPS) was actually $0.02 ahead of consensus estimates and revenue only missed analysts' consensus by $90 million. In the context of $7.91 billion in sales for the quarter, that's not a big deal, right?

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The problem is that the company's guidance for the current quarter was well below what analysts expected. Let's take a closer look.

Outlook missed by a mile

Micron issued revenue guidance of between $5.7 billion and $6.3 billion for next quarter (the second fiscal quarter of 2019). That was well below analyst estimates of $7.34 billion, which already contemplated a slight year-over-year decline in sales.

To get a sense of how disappointing that outlook is, at the midpoint of the range -- that's $6 billion -- Micron's revenues stand to decline nearly 18.4% year over year.

From an EPS perspective, it's also ugly. Analysts were expecting the company to guide to around $2.44 in EPS, down about 13.5% from $2.82 in the prior-year quarter. Micron's actual guidance is $1.75 in EPS, give or take $0.10. This means that at $1.75, Micron is indicating to investors that earnings per share is poised to plunge almost 38%.

Diving a little bit deeper into the guidance, Micron has advised investors to expect gross margin for the coming quarter of between 50% and 53% and operating expenses of $800 million, plus or minus $25 million. In the year-ago quarter, Micron's gross margin was 58.4% of revenue on a non-GAAP basis, and research and development expenses, together with selling, general, and administrative expenses (SG&A) totaled $719 million.

Revenue is set to decline significantly year over year, expenses are on the rise (naturally, as increasingly sophisticated technologies require more effort to develop), and gross margin is falling under pressure as NAND and DRAM prices are coming down.

Put bluntly, analysts were already expecting "bad" and Micron delivered "worse."

Down comes capital expenditure

Micron is a chip manufacturer and, fundamentally, chip-manufacturing companies need to spend significantly on capital expenditures (CapEx) each year so that they have the manufacturing capacity in place to produce chips to meet expected demand.

Unsurprisingly, Micron reduced its CapEx guidance from $10.5 billion, give or take 5%, to a range of $9 billion to $9.25 billion. The company also noted in its earnings presentation that, with respect to CapEx, it would "continue to remain flexible to respond to market conditions."

What's important to understand is that CapEx planning is tricky. If a company doesn't build out enough capacity to meet demand, then it could find itself losing business to competitors because it simply can't supply the needed chips. At the same time, if a company overspends on CapEx and builds out more capacity than it needs, it can wind up either cutting prices in a bid to move its product or reducing the utilization rates of its manufacturing plants. Neither situation is conducive to maximizing profitability.

Given how Micron's business seems to be trending, cutting CapEx seems like the right move at present for the chipmaker.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.