Previously, we saw that Micron Technology’s (MU) fiscal 2019 second-quarter revenue guidance indicates that the memory industry is entering a cyclical downturn in which memory prices fall. The biggest impact of a cyclical downturn is the company’s bottom line. As memory suppliers cannot control the prices, they look to reduce their production cost to remain profitable.
In the last downturn, DRAM (dynamic random access memory) prices fell faster than Micron’s manufacturing and operating cost, which pushed the company into losses. Learning from its past experience, the company reduced its cost significantly by transitioning to the cost-effective nodes in the two-year cyclical upturn.
Micron’s non-GAAP (generally accepted accounting principles) gross margin fell 240 basis points sequentially but rose 360 basis points YoY to 59% in the first quarter of fiscal 2019. Of the 240-basis-point decline, 120 basis points were due to underutilization of 3D XPoint facility and another 50 basis-point decline was due to the impact of China (FXI) trade tariffs, which the nation implemented in retaliation to the United States tariffs. The remaining gross margin decline came due to a 6% sequential decline in revenue.
However, Micron’s YoY growth in gross margin was a result of its transition to the cost-effective 1X DRAM and 64-layer 3D NAND (negative AND). In light of the falling demand, Micron has reduced its fiscal 2019 capital expenditure to improve its margins. Despite this cut, the company will continue to invest in advanced, cost-effective technologies. It plans to transition to 1Y DRAM and 96-layer NAND in fiscal 2019, which could help it reduce production costs on a YoY basis.
Gross margin guidance
For the second quarter of fiscal 2019, Micron expects to report a gross margin between 50% and 53% as falling memory prices and declining revenue puts pressure on its margins. The company expects to mitigate ~90% of the impact of China trade tariffs in January 2019 when the tariff rate is expected to increase.
Next, we will look at Micron’s operating profits.
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