Micron's Profits Tumble, With More Pain to Come

Micron Technology (NASDAQ: MU) edged out beaten-down expectations when it reported its fiscal second-quarter results, but that's small consolation for investors. Prices for both DRAM and NAND chips declined more than the company expected, and elevated customer inventory levels remain a problem. Revenue and earnings plunged, and the company's guidance calls for an even bigger drop in the third quarter.

A tough second quarter

Price drops coupled with declining bit volumes wreaked havoc on Micron's results.

DRAM revenue was down 28% year over year and down 30% from the first quarter. Average selling price was down more than 20% from the first quarter, and bit shipments dropped by a low double-digit percentage.

NAND revenue was down 2% year over year and down 18% from the first quarter. Average selling price was down close to 25% from the first quarter, but bit shipments rose a high single-digit percentage.

Micron has run into trouble in multiple markets. In the data center market, CEO Sanjay Mehrotra blamed customer inventory adjustments and software optimizations at some cloud customers for weak demand. Customer inventory is expected to improve in the second half of calendar 2019, and the company expects growth to return.

In the graphics market, demand for GDDR5 memory chips has plunged thanks to excess inventory related to the bursting of the cryptocurrency bubble. Micron sees this inventory correction being completed by mid-year.

In the PC market, Micron gave no indication when it expects growth to return. Revenue dropped 25% from the first quarter, driven by weaker pricing, inventory drawdowns, and shortages of certain CPUs. The company is focused on cost competitiveness, so don't expect pricing to recover anytime soon.

An even tougher third quarter

Micron expects revenue and earnings to fall further in its fiscal third quarter. The company sees revenue between $4.6 billion and $5.0 billion and non-GAAP EPS between $0.75 and $0.95. The midpoints of those ranges represent year-over-year declines of 38.5% and 73%, respectively.

"Since our last earnings call, DRAM pricing weakened more than expected," Mehrotra said during the earnings call. :Our demand outlook for calendar 2019 has moderated, led by somewhat greater levels of customer inventory, weakening server demand at several enterprise OEM customers, and worse-than-expected CPU shortages. We believe macroeconomic uncertainty is also contributing to hesitation in buying behavior at some customers."

Micron does expect DRAM bit shipments to begin to grow sequentially in the third quarter, although the company gave no indication when prices will stop falling so quickly. Rising bit volumes don't necessarily mean the third quarter will mark the bottom of this downturn, since prices could continue to plunge fast enough to drive revenue lower for multiple quarters.

In response to weaker than expected demand, Micron is idling about 5% of its DRAM wafer starts and reducing its NAND wafer starts by 5%. The company lowered its capex estimate for 2019 to $9 billion, down from a range of $9 billion to $9.5 billion, and it's evaluating its capex for fiscal 2020.

If Micron is right that much of the excess customer inventory will be resolved by mid-year, the company's results may not get much worse after the third quarter. But that's a big if. So far, the downturn has been worse than Micron's management has expected. Take the company's outlook for a second-half recovery with a grain of salt.

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Timothy Green 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.