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Will Restructuring Push Micron Back to Profitability?

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Expected cost savings from restructuring

In the previous part of this series, we saw that following the footsteps of its memory partner Intel (INTC), Micron Technology (MU) has resorted to restructuring to improve its margins amid declining prices.

As part of its restructuring initiative, Micron would only focus on critical projects and cut 2,400 jobs.

All these changes are likely to reduce the company’s quarterly expenses by $80 million in fiscal 2017. About half of this reduction would be visible in the cost of goods sold and the other half in operating expenses.

However, the company would have to bear a restructuring charge of $70 million, most probably in fiscal 4Q16. The company would fund the restructuring from its $5 billion cash reserve.

Micron’s CEO, Mark Durcan, has taken the responsibility for the company’s declining profits. He took a $2 million pay cut in 2015 when the company’s profits fell by 5.3% YoY (year-over-year). He also volunteered for a 5.5% cut in his total compensation.

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Would these savings return Micron to profitability?

It is difficult to say whether an $80 million cost reduction would be able to bring the company into the green. Profits are a function of price and the cost of DRAM and NAND. Micron can control its costs, but price is where uncertainty prevails.

Micron expects to attain cost leadership in the memory market by transitioning to 20nm and 1X node for DRAM and 3D Generation 1 and Generation 2 for NAND.

Many research firms forecast an undersupply to occur in the NAND space by the end of 2016. They also noted an improvement in DRAM oversupply as Samsung (SSNLF) and SK Hynix lowered their DRAM output. If this forecast materializes, both cost and price would work in Micron’s favor and push the company back to profits.

If this forecast fails to materialize, Micron could face immense pricing pressure in the 3D NAND space as Samsung, Intel, Toshiba (TOSBF), and SK Hynix all are ramping up production of 3D NAND. If the demand does not improve, a condition of oversupply could occur and companies could jump into a price war to sell off their inventory.

Next, we will look at the DRAM market scenario and its impact on Micron.

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