9.1.22
CFO Mark Murphy Opening Statements
• Reiterating what they said early in August, inventory adjustments have spread from consumer to most memory markets, and further weakening of consumer segments. They said they will be at or below the low end of their revenue guidance for Q4-22. They will be cash flow negative in the first quarter of FY23 and will lower capital expenditures in FY-23 compared to FY-22. Bit growth will be sequentially negative in Q4 relative to Q3.
• Inventory will grow to 150 days by the November quarter. Inventories will grow in Q4-22 and again in Q1-23.
• They remain committed to the through-cycle financial performance commitments they made at their analyst day in May of this year. The company believes that memory will outgrow the overall semiconductor market in the coming years.
• The current imbalance between supply and demand is “severe”
Analyst Question and Answer
• Server segments are stronger than other segments, with enterprise being weaker than cloud, within servers. Automotive is starting to see some inventory building.
• They are seeing customers adjusting inventories up in most segments. The end demand in cloud is healthier than it is in most markets.
• Both DRAM and NAND are “unhealthy.” They expect inventory to grow on both through the November quarter. DRAM is healthier than NAND, as measured by days of inventory.
• The minimum duration they see to correct the current “severe” oversupply problem is “a couple of quarters.” That is best case. The duration after that depends on how quickly suppliers adjust as well as the macroeconomic environment. If there is an economic hard landing, they could see elevated inventory through their fiscal year 2023, which ends in late August/early September.
• The actions Micron is taking now will start to lower their production in early calendar 2023. They have started to communicate to WFE makers that they will buy fewer tools as well as moving out some of the tool delivery dates for inbound equipment.
• The CHIPS act doesn’t change their financial model. It changes their supply base. I don’t know what he means by this, because the U.S. government grants must lower their overall capital expenditures, in net.
• The company is still considering “several other” sites in the U.S. for greenfield fab expansion. The Idaho expansion was first because of synergies with the company’s R&D at the same location.
• In calendar 2022, Micron believes they will exceed the industry average for cost reductions. Forward from there, they believe they will at least match industry cost reductions.
• A “significant decline” in revenue and margin is expected in the November quarter, though he stopped short of quantifying the degree of this decline
• Beginning next year, R&D expense will be capitalized and amortized, which will be a headwind. This and one other factor may lead their tax rate to rise from high single digits to low teens percent.
Summary
Things are really bad in the memory industry, both for DRAM and NAND. Customers are seeing weak demand in all but the server segments, cloud and enterprise. Micron is building inventory and plans to continue to do so through their first fiscal quarter, which runs through the end of November. That is the shortest they believe the downturn could last – the best-case scenario. The supply reductions they have made will start to take effect in early calendar 2023. Revenue and gross margin will decline through at least the end of the November quarter. What happens after that is anybody’s guess. What I do know is the three DRAM makers are busy cutting their bit growth plans to protect the health of the market. They will also all hold inventory rather than let DRAM pricing enter free-fall. In contrast to this, two of the NAND makers have said they will outgrow the market in their bit supply in order to grow share. Micron said NAND is currently less healthy than DRAM so that may already be manifesting. As a Micron shareholder, I care more about DRAM than NAND, since it is 70% of company revenue, and an even higher percent of operating margin. I used to have some confidence predicting the duration of memory market cycles. Post-COVID, I feel much more anxious trying to time the cycle. Still, the underlying mechanisms are the same. The Pandemic made the demand picture much more complex. My view is we are going to have a hard landing recession in 2023. The DRAM makers are probably anticipating this so a lot of supply will come off to compensate. If the downturn were to last into next Summer, that would be five quarters. Historically downturns last six quarters. I’ll leave the proof up to the student. If I knew what will happen, I would have sold out my long position in January of this year.
-S. Hughes (long MU)