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Micron’s Earnings Hit by Surplus Customer Inventory

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Micron’s customer inventory

Micron Technology’s (MU) fiscal 2019 earnings have been hit by excess customer inventory, forcing it to report weak fiscal 2019 second-quarter guidance.

The company saw reduced demand from two of its key customers, Intel (INTC) and NVIDIA (NVDA).

On Micron’s fiscal 2019 first-quarter earnings call, CEO Sanjay Mehrotra stated that the company’s customers had decided to build up excess inventories, as DRAM (dynamic random-access memory) prices had continued to rise for two straight years.

As supply picked up in the second half of 2018, customers started to bring down their DRAM inventories. Customers didn’t buy any more from Micron, thereby negatively affecting its revenue. Mehrotra expects customers’ inventory corrections to take a couple of quarters.

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Micron’s strategy to tackle customer headwinds

Micron aims to tackle these customer inventory headwinds and remain profitable by reducing its output and managing its own inventory according to the demand environment. Mehrotra stated that if needed, the company would carry over its NAND (negative-AND) inventory, as the demand for this product is elastic (sensitive to price). Higher inventory and elasticity could trigger NAND demand and boost revenue.

In the DRAM market, customers are consuming the inventories they’ve built up. Memory chip makers are maintaining disciplined supplies and reducing their DRAM outputs. Mehrotra expects DRAM demand to pick up in the second half of 2019 as memory demand remains strong in the cloud, client, enterprise, and graphics end markets.

Micron’s guidance for the second half

Lower customer inventory, a reduction in DRAM supply, and stronger demand from customers could boost memory chip demand in the second half of 2019. At this point, Micron is expected to capitalize on its DRAM inventory. Mehrotra stated that it would leverage its inventory to improve its profitability.

Mehrotra provided this outlook even after admitting that the US-China (FXI) trade war had brought forth demand uncertainty. Some analysts disagree with him, stating that the trade war has slowed economic demand and has created a significant amount of uncertainty. In such an uncertain demand environment, any long-term forecast, such as Micron’s guidance for the second half of the year, is subject to change according to new developments.

Next, we’ll look at Micron’s industry outlook.

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