Possibility of inventory write-down
The overall semiconductor industry is seeing high inventory levels, as a slowdown in end demand has left chip companies with a lot of unused inventory. As chip companies’ inventories remain high, falling memory prices are not encouraging them to buy memory chips. This kind of demand environment has put memory prices in a free fall.
To add to the gloomy demand environment, the US ban on Huawei imposed on May 15 cut a major source of demand for memory chip makers. Huawei is a major customer of Micron (MU), and the ban saw Micron stop shipments of all products to the Chinese company. This change affected Micron’s fiscal 2019 third-quarter revenue by $200 million. The chip maker also wrote down $40 million worth of inventory it had made specifically for Huawei, as those chips couldn’t be sold elsewhere.
On Micron’s fiscal 2019 third-quarter earnings call, CFO Dave Zinsner stated that he didn’t expect any more inventory write-downs. The company is reducing its production to give itself some time to sell its inventory. It’s using this time to transition its facilities to advanced nodes.
Micron’s industry guidance
Micron CEO Sanjay Mehrotra retained his NAND industry bit demand growth forecast in the mid-30% range for 2019. However, he increased his DRAM (dynamic random-access memory) industry bit demand growth forecast for 2019 to the mid-teens from the low to mid-teens in terms of percentage.
According to Mehrotra, cloud customers’ inventories are improving. Micron’s cloud DRAM bit shipments have risen sequentially in the third quarter of fiscal 2019, and this sequential growth is expected to continue in the fourth quarter. However, he noted that inventory levels remain elevated for enterprise server customers.
Intel’s central processing unit supply shortage has eased, which could drive demand for PC DRAM. Moreover, Micron has secured more customers for its graphics double data rate memory.
The Huawei effect
The above improvements in demand will take time to replace the revenue Micron would have earned from Huawei, but the company will gradually reduce its inventory and won’t have to write down any further inventory.