April 11, 2023
About the Company
Nanya is a small Taiwanese DRAM manufacturer. They produce DRAM on trailing-edge process nodes (licensed from Micron) but are developing their own more advanced, technology. Nanya has about a 3% share of the DRAM market, a distant fifth, behind Samsung, Hynix, and Micron. The top three companies control a combined 94% of the DRAM market.
I don’t own any shares of Nanya and would not buy any, because they lack the scale and the technology to be competitive in DRAM. I keep an eye on their quarterly releases as a data point on the DRAM market.
Market Commentary and Q1 2023 Performance
Revenue declines slowed again but are still terrible. Just awful. Sequential revenue was down 19.2% in Q1-23. This follows declines of 39.9% and 27.8% the last two quarters. From a year ago, revenue was down 67.8%. In the fourth quarter, the year-over-year drop was 62.8%. The company shipped fewer bits at lower prices. ASPs were down high single digits % from Q4-22 to Q1-23. This is a slowdown from the rate of decline last quarter. For the last five quarters, going back from Q1-23 from most recent to farthest back, the ASP declines have been: high single digits %, mid-20s%, low-20s%, mid-single-digits %, mid-single-digits %. From a year ago, ASPs are down low-fifties %. Bit shipments declined high-single-digits % sequentially in the quarter. From a year ago, bit shipments are down high-thirties %. Gross margin has moved into negative territory, coming in at (8.6)% in Q1. Operating margin was (44.9)% for the quarter. The company didn’t include their margin trend through time graph this quarter, the first time that has not been part of the package since I started following Nanya several years ago. I presume the results were so terrible they didn’t want another way to show them. Going back to Q1-18, the lowest operating margin the company has seen, prior to the last two quarters, was 9%, in Q4-20. This is the fifth or sixth quarter since gross margins peaked, depending on if you consider Q3 or Q4 of 2021 to be the top. They had the same gross margin and operating margin. Even with Samsung’s recent announcement that they will cut production, it will take some time for that decision to flow through to their output. That, plus all the inventory in the supply chain right now, means I see at least one more quarter before margins start to improve.
Bit Shipments and Capital Expenditures
Nanya kept up with their capital expenditures. They plan for NT$18.5B in 2023, a decline from the NT$20.7B in 2022. WFE will be less than half of this spending. In 2022 their bit shipments were down “twenties%” from the prior year. The company now expects bit shipments to decline 10% sequentially in 2023 from 2022. They will reduce production output up to 20% “dynamically” during 2023, meaning their baseline plan is down 10% year-over-year but could be higher if low prices stay longer. This is the same position they announced last quarter. The company had negative NT$8.09B of free cash flow in the quarter. Their cash balance has declined about 25% over the last two quarters. Without the scale to invest adequately in advancing technology and in new products, Nanya will continue to weaken.
2023 Market Outlook
Their outlook for the second quarter and the rest of the year is downbeat. A long list of reasons was given for why demand will continue to be weak in the first half of 2023. Output cuts by suppliers and seasonal demand increases “may favor gradual inventory digestion, and marginal DRAM market recovery in 2H’23.” Nine months ago, Nanya’s executives thought this was a temporary market correction rather than the worst DRAM downturn in fifteen years. Nobody knows anything.
- · Server Market: Enterprise cloud customers cut spending due to economic weakness. AI/5G “may improve” demand from this segment. Nanya said almost nothing here. The slowing economy is reducing consumer cloud vendor demand though enterprise cloud demand remains strong. Weak memory demand is like a virus. Eventually it spreads and infects every sector. The datacenter and automotive sectors are the last segments to catch the downturn virus in this cycle, but they will get sick. It is only a matter of time. No mention of prolonged datacenter construction like they said last quarter.
- · Mobile Market: U.S. and Korean mobile shipments are flat, and China is still weak. They are hoping for seasonal improvement in 2023.
- · PC Market: Annual PC unit shipments continue to decline though the company didn’t quantify this. Demand may improve in the second half of 2023.
- · Consumer Market: Demand for IP CAM, networking, industrial, and automotive applications are relatively healthy. I said last quarter that demand weakness is like a virus that eventually infects every sector. Automotive and industrial are the last to get sick in this DRAM downturn, though they won’t see it as bad as the rest of the market.
Analyst Call
Prepared Remarks
- · ASP declines have been slowing down recently.
- · In the quarter, they had charges for idle capacity, thus they have reduced output some.
Analyst Q&A
- · The company is yet to recognize a loss on the carrying value of inventory. This is suspect to me because their costs are certainly higher than Micron, who recorded a large write-down in their most recent quarter. They are probably working the gray areas of accounting rules to avoid a write-down.
- · Management declined to quantify days of inventory.
- · The CEO gave a soft prediction that by the end of Q2 or early Q3 would see ASPs reach their inflection point and begin to climb. Last quarter he said he hoped pricing would turn positive in Q2. He has little useful insight into future pricing.
- · When asked why their price declines in the most recent quarter have been less than their competitors, they answered that they have a more diverse product portfolio now and a much wider based of customers. Their sales are 60-70% consumer today.
- · They are dynamically adjusting their wafer output reductions week-to-week, up to 20% of their total capacity.
Summary
I said last quarter that it hit me listening to the Q4 call and reading the commentary that executives from Nanya are more clueless than the rest of the industry. Now I can’t stop seeing that when I review the company’s results. In this release and call, they pushed out when they hope the pricing recovery will start by another quarter, from the second calendar quarter of 2023 to the second half of 2023. They also took out of their investor deck the slide that shows gross margin and operating margin through time for the last five years. This is the best graph of its kind in the industry. The only reason I can see to take it out is they don’t want another reminder to investors of how bad this downturn is. Nanya didn’t take an inventory write-down this quarter, which is only possible if they are stretching accounting rules near their breaking point. I’m certain their inventory cost is higher than pricing today, were it costed accurately. Nanya’s costs are higher than Micron’s and Micron took a massive write-down in their most recent quarter. Also, Nanya declined to quantify their days of inventory. This obfuscation, along with taking out the margin graph, is just silly and tells me that the company’s management doesn’t want to reveal how bad the current industry situation. This is silly because we all know how bad it is already. Investors learn little about pricing trends in the near future from Nanya, but their results are an important data point to the current state of ASPs and demand. These both indicate the DRAM market is still oversupplied, though the rate of decline is falling. Nanya’s management gave little information on what the future may hold.
-S. Hughes (cyclical long MU)